WKYT Investigates | Kentucky’s sales tax changes

FRANKFORT, Ky. (WKYT) - Some big changes in Kentucky’s laws mean that people will be paying more for many services starting January 1.

Related coverage:

House Bill 8, which became law after the General Assembly overrode the governor’s veto, adds 35 different categories of services that will be subject to the state’s sales and use tax starting at the beginning of the year.

The new law, in addition to making several other changes, expands the sales and use tax base to include the following services (as long as the provider exceeded $6,000 in gross receipts in 2021 or 2022):

photography and photo finishing services
marketing services
telemarketing services
public opinion and research polling services
lobbying services
executive employee recruitment services
website design and development services
website hosting services
facsimile transmission services
private mailroom services
bodyguard services
residential and nonresidential security system monitoring services
private investigation services
process server services
repossession of tangible personal property services
personal background check services
parking services
road and travel services provided by automobile clubs
condominium time-share exchange services
rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties and other short-term social events
social event planning and coordination services
leisure, recreational and athletic instructional services
recreational camp tuition and fees
personal fitness training services
massage services, except when medically necessary
cosmetic surgery services
body modification services
testing services
interior decorating and design services
household moving services
specialized design services
lapidary services
labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold in that transaction including service calls and trip charges
labor to repair or alter apparel, footwear, watches or jewelry when no tangible personal property is sold in that transaction
prewritten computer software access services.

The changes are part of a broader shift in strategy when it comes to the state’s taxes and revenue. Previous changes in 2018-19 added more services to the sales and use tax base. And HB 8 has also created conditions to incrementally cut - and potentially phase out - the state’s income tax. It triggered a 0.5% drop to 4.5% starting January 1.

(Republican lawmakers have said that they would like to take it a step further by taking a vote in the 2023 short session to cut the tax rate down to 4% starting in January 2024, according to multiple reports.)

[More information via Kentucky Lantern: Republicans poised to cut Kentucky income tax again based on revenue boom that could be fleeting]

Several states in recent years have shifted away from income taxes to more consumption-based taxes. But overall across the country, income taxes are responsible for roughly 40% of state revenues, while sales taxes make up a little less than 30%, according to Dr. David Agrawal, associate professor with the Martin School of Public Policy and the Department of Economics at the University of Kentucky.

“We’ve seen basically that the base-broadening efforts by states have not really kept up with the shift from goods toward services,” said Dr. Agrawal. “These are different taxes, and they have different distributional implications. And those are all kind of political and policy decisions that in part the economics literature can shed some light on, but they also involve important judgments by our citizens and politicians in terms of what their values are.”

A fiscal analysis completed for HB 8 estimates:

a $530 million drop in revenue for Fiscal Year 2022-23 from the income tax changes
a $1.074 billion drop in revenue in FY 2023-24 from the income tax
a positive of $57.8 million in FY 2022-23 from the expansion of the sales and use tax
a positive of $149.7 million in FY 2023-24 from the sales and use tax.

That is an estimated net negative of $1.3965 billion for the biennium.

Supporters have touted the state’s current billion-dollar surplus and a belief that the changes will make the state more competitive with its neighbors and more attractive to outside businesses and individuals to come here.

Yet evidence in other states shows, Dr. Agrawal said, that those impacts are often minimal, and the theory for moving away from income tax to a consumption tax does not fully apply in this case because Kentucky taxes only a portion of consumption.

“It’s just a big unknown. We’re just not sure how it’s going to be, you know?” said Kyra, a tattoo artist at To the Grave Tattoo Co. in Lexington’s Hamburg Pavilion.

Kyra’s industry is included in one of the nearly three dozen services that will be subject to the 6% sales tax. (Body modification services subject to the tax include tattooing, piercing, scarification, branding, tongue splitting, transdermal and subdermal implants, ear pointing, teeth pointing and other modifications “not necessary for medical or dental health.”)

Yet Kyra and other workers told WKYT’s Garrett Wymer that by late November they still had not been notified that they would be subject to the tax, and felt that more should have been done to warn them of their obligations come January 1.

They also worry that an additional cost tacked on to the price tag will cut into their business and the tips they rely on as workers.

“I know a lot of us around here, we rely heavily on our cash tips, just like anybody else like servers and things like that,” Kyra said. “That’s how we get lunch and stuff, gas in the car each week. So it’s a little scary.”

It is also bad timing for a business that already relies on people spending their disposable income. They are coming off the pandemic - when business was slower and costs for their equipment (like gloves) has been higher. Now inflation and an economy in recession mean many might not have as much to spend on things that are not necessities. Soon, customers will have to factor in tax on top of that, further capping how much they will be able to spend.

“It kind of stinks. It is a little worrisome that we’re going to get less clientele coming from that,” Kyra said. “We’ve got to feed our families too, and it’s just all around, not going to be good for anybody.”

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