Understanding Kentucky Sales and Use Taxes
Understanding and complying with the sales tax requirements in the states in which you do business is absolutely essential. More states are taxing services, as well as retail sales, so no business owner can afford to be in the dark. In addition, you may find that you are liable for use taxes for products purchased out of state. This article answers some of the basic questions regarding sales tax in Kentucky.
The Kentucky statewide sales tax is 6 percent. Unlike in many states, there are are no local sales and use taxes in Kentucky. You are generally allowed a credit for sales or use tax paid in another state for tangible personal property used in Kentucky. The amount of the credit may not exceed the amount of the Kentucky tax.
In Kentucky, although the sales tax is generally imposed on a retailer's gross receipts, shifting of the tax to the purchaser is mandatory. Sales tax must be separately stated and the tax becomes a debt from the retailer to the state of Kentucky.
Absorbing the tax is not permitted. In Kentucky it is against the law to refund or offer to refund all or any part of the amount collected, or to absorb the amount of sales tax required to be added to the sales price and collected from the purchaser. As a seller, it is also against the law for you to advertise directly or indirectly that you will absorb the sales tax that is required to be added to the sales price.
The sales tax is a general privilege tax levied on the gross receipts from sales at retail of tangible personal property or on its lease or rental. Kentucky also charges sales tax on the furnishing of specified services. The services that are subject to the sales tax are the rental of transient accommodations, the furnishing of sewer services and intrastate telephone and telegraph services, and the sale of admissions.
Leases. In general, leases and rentals of all kinds of tangible personal property (except motor vehicles and property qualifying for exemptions) are subject to the sales and use taxes. Lease or rental means granting to another person a right to use or possess tangible personal property for a period of time for consideration.
Sales Tax Permits Are Required
In Kentucky persons engaged in the business of making sales at retail are required to obtain a permit. A permit is required for each place of business and is obtained by filing an application with the Kentucky Revenue Cabinet.
Many Items Are Exempt from Tax
Kentucky has many specific items that are exempt from sales tax — for example, certain prescription medications are exempt from Kentucky sales tax. You'll want to check and see if you are exempt from the sales tax.
An exemption certificate may be issued by a purchaser of a nontaxable item. The exemption certificate may be based on the type of transaction (such as a resale exemption) or on the item itself.
Kentucky Exempts Purchases for Resale from Tax
Every person selling taxable tangible personal property in Kentucky must either collect any taxes due Kentucky or obtain a certificate of resale from you the purchaser. The seller must take the certificate in good faith from a buyer purchasing the property for resale.
Requirements for resale exemption certificates. In Kentucky the exemption certificate must include the following information:
- the purchaser's signature;
- the purchaser's name and address;
- the number of the retail sales permit issued to the purchaser and
- a description of the general character of the tangible personal property sold by the purchaser in the regular course of business
Kentucky Allows Blanket Resale Certificates
A blanket resale certificate is a resale certificate that the purchaser provides to a seller from whom the purchaser makes numerous exempt resale purchases. The idea is that by providing a blanket resale certificate, both the purchaser and the seller can avoid the hassle of having to deal with a new certificate every time there is a purchase.
The blanket certificate requires the buyer to generally describe the kind of property to be purchased for resale in the regular course of your business. If you have executed a blanket certificate, the buyer is not required to execute additional certificates of resale for individual purchases. However, a new blanket certificate must be prepared when there is a change in the character of the operation.
Physical Presence Triggers Tax Liability
Kentucky does not have a statute that specifically taxes out-of-state mail order and catalogue sellers. You will be responsible for paying this tax only if you have physical presence within Kentucky. To determine if you have physical presence, ask yourself the following:
- Do I have retail facilities, a warehouse, or any office space in Kentucky? Maintaining retail or warehouse facilities will give you physical presence. Also, having an office for employees, even for business activities unrelated to mail order sales, will give you physical presence.
- Do my employees or I enter Kentucky for purposes of taking and transmitting orders from Kentucky? If your employee or independent contractor goes into Kentucky to take or transmit orders, your business may have physical presence in Kentucky. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence.
- Do my delivery vehicles frequently enter Kentucky for purposes of delivering property? Frequent deliveries in Kentucky by your trucks will give you physical presence in Kentucky.
Kentucky Allows Use of Sales Tax "Bracket System"
The following bracket system may be followed by sellers in computing the sales tax. On each sale above $1.08 the tax is to be computed by applying the 6 percent tax rate to the sales price.
|$0.01 to 0.08 ||$0.00 |
|0.09 to 0.24 ||0.01 |
|0.25 to 0.41 ||0.02 |
|0.42 to 0.58 ||0.03 |
|0.59 to 0.74 ||0.04 |
|0.75 to 0.91 ||0.05 |
|0.92 to 1.08 ||0.06 |
Claim Required to Obtain Refund of Overpayments
Any claim for refund or credit must be made by the taxpayer within four years of the due date of the return or the date the taxes were paid, whichever date is later. As a seller, you're not entitled to a refund or credit of the sales or use taxes that have been collected from a purchaser, unless the collected amount is refunded to the purchaser by you.
Kentucky Imposes Use Tax on Out-of-State Purchases
The use tax on the storage, use, or other consumption of tangible personal property in Kentucky is a complementary tax to the sales tax and most often is triggered by out of state purchases. In other words, if you have collected or paid the sales tax, then the use tax doesn't apply.
The incidence of the use tax is on the purchaser or consumer. The liability remains a debt to Kentucky until paid except when the tax has been paid to a retailer doing business in the state who has furnished a receipt confirming payment.