Overview of Kentucky Sales and Use Tax

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July 24, 2018

A. History of Kentucky Sales and Use Taxes

Kentucky first implemented a sales and use tax in 1934. Apparently the citizens of the Commonwealth had little interest in paying the tax because it was repealed in 1936. In 1960 Kentucky again adopted a sales and use tax. The 1960 law gives us the basic framework for today’s sales and use tax. The original rate of tax was 3% rising to 5% in 1968 and finally to 6% in 1990.

B. Imposition of Sales Tax – KRS 139.200

A tax at the rate of 6% is imposed upon all retailers for gross receipts derived from:

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(1) Retail sales of tangible personal or digital property;
(2) The rental of any room, lodgings or accommodations;
(3) Sewer services;
(4) Admissions with the most notable exclusion being race track admissions;
(5) Prepaid calling services;
(6) Communications services; and
(7) Distribution and transmission of natural gas except that used for residential purposes.

C. Sales Tax Definitions

Retailer – KRS 139.010(27). “Every person engaged in the business of making retail sales or furnishing any services included in KRS 139.200.” Also includes any person making more than two (2) retail sales in a twelve (12) month period.

Retail sale – KRS 139.010(28). “Any sale, lease, or rental for any purpose other than resale, sublease, or subrent. Sale – KRS 139.010(30). “The furnishing of any services included in KRS

139.200 and any transfer of title or possession, exchange, barter, lease or rental, conditional or otherwise, in any manner of by any means whatsoever, of tangible personal property or digital property for a consideration. . .” Person – KRS 139.010(19). “Includes any individual, firm, copartnership, joint venture, association, social club, fraternal organization, corporation, estate, trust, business trust, receiver, trustee, syndicate, cooperative, assignee, governmental unit or agency, or any other group or combination acting as a unit.”

Tangible personal property – KRS 139.010(33) – “Means personal property which may be seen, weighed, measured, felt, or touched, or which is an any other manner perceptible to the senses and includes natural, artificial, and mixed gas, electricity, water, steam, and prewritten computer software.”

Digital Property

Beginning August 1, 2009 the sale of digital property is subject to tax. (KRS 139.200(1)(b))

Digital property includes any of the following which is transferred electronically:

1. Digital audio works;
2. Digital books;
3. Finished artwork;
4. Digital photographs;
5. Periodicals;
6. Newspapers;
7. Magazines;
8. Video greeting cards;
9. Audio greeting cards;
10. Video games;
11. Electronic games; or
12. Any digital code related to this property. KRS 139.010(8)(a)

Digital property does not include digital audio-visual works or satellite radio programming. KRS.010(8)(b)

Digital audio visual works is defined as:

1. A series of images that impart motion, with sound, if any.
2. Includes movies, motion pictures, musical videos, new and entertainment programs and live events.
3. Does not include video greeting cards, videos games and electronic games. (KRS 139.010(8)(b) & (4)).

Finished artwork means final art that is used for actual reproduction or for display purposes. KRS 139.010(9)(a)

Finished artwork includes:

1. Assemblies;
2. Charts;
3. Designs;
4. Drawings;
5. Graphs;
6. Illustrative materials;
7. Lettering;
8. Mechanicals;
9. Paintings; and
10. Paste-ups. KRS 139.010(9)(b)

D. Imposition of Use Tax

KRS 139.310 – “An excise tax is hereby imposed on the storage, use, or other consumption in this state of tangible personal property and digital property. . . at the rate of 6% of the sales price of the property.”

E. Use Tax Definitions

Storage - KRS 139.010(32). “Includes any keeping or retention in this state for any purpose except sale in the regular course of business or subsequent use solely outside this state of tangible personal property or digital property purchased from a retailer.

Use – KRS 139.010(36). “Includes the exercise of any right or power over tangible personal property or digital property incident to the ownership of that property, or by any transaction in which possession is given, except that it does not include the sale of that property in the regular course of business.”

F. Sales v. Use Tax

The difference between sales and use tax is very important. The burden of taxation (the party that pays the tax) is on the seller for sales tax. The burden of taxation is on the purchaser for use tax. Additionally, the seller may be liable for use tax if they have nexus with Kentucky, but your author has never seen Kentucky try to collect use tax from a seller. Following are several types of situations giving rise to either sales or use tax, assume a Kentucky purchase in each example:

(1) Out of state sales location---out of state shipment – Use Tax
(2) Out of state sales location (nexus because seller has an in state location, but it is not part of the transaction) – out of state shipment – Use Tax
(3) In state sales location --- out of state shipment – Use Tax
(4) In state sales location – in state shipment – Sales Tax.

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