Kentucky Braces for New Sales Taxes on Sunday, July 1

Jun 27, 2018

Residents of this conservative state will begin paying a slew of new taxes next week because of a convergence of circumstances that could test voter loyalty in November.  Starting Sunday, prices for things like car repairs, tanning bed visits, veterinary care and gym memberships will jump 6 percent because of a new law passed by the Republican-controlled legislature.

On the same day, nonprofits will have to add an extra 6 percent for admission to cultural and athletic events. That includes things like tickets to the state's beloved University of Kentucky men's basketball games, according to Richard Dobson, executive director of the state Office of Sales and Excise Taxes. The change comes from a recent state Supreme Court ruling that says the Kentucky Constitution does not exempt nonprofits from state sales and use taxes.

"It's the perfect storm," Dobson said.

Companies and nonprofits have begun notifying customers by posting signs in businesses and mailing letters. That has led to some angry social media posts and confrontations with state lawmakers as they campaign in their districts, where Republicans in November will defend their majority in the House of Representatives for the first time in nearly 100 years.

YMCA of Central Kentucky President and CEO David Martorano sent a letter to members earlier this month to tell them about the new tax and make sure they understood that state lawmakers had imposed it. He said he is still getting instructions from the state on what is and is not taxable. Gym memberships, adult sports leagues and swim team meet entry fees for kids will all be taxed. But fees for child care programs and day camps won't.

Martorano noted the YMCA will have to spend more money to collect the tax, which likely will limit its reach on charity work. The YMCA offered more than $1 million in financial assistance last year to poor families who could not afford its services.

"For some Kentucky nonprofits it will clearly affect the benefit and support they will provide within your community," Martorano wrote .

Republican House and Senate leaders said they never intended to tax nonprofits, with Thayer saying the law is "being misinterpreted by the Finance Cabinet." But Dobson said the new law and the court decision left them no choice. Acting House Speaker David Osborne and Senate Majority Leader Damon Thayer said lawmakers likely would pass a law next year to exempt nonprofits from the taxes.

Republicans defend the taxes by noting they will spend the extra money on public education. They also say they cut taxes for many Kentuckians, reducing a state income tax rate from 6 percent to 5 percent.

"The mainstream media narrative is going to be how many people are mad about having to pay a tax when they take Fluffy to the vet," Thayer said. "What they are not going to report on is we cut people's taxes."

Lawmakers did reduce the income tax. But they also eliminated several state income tax deductions and expanded the sales tax to a host of new items. Those changes mean the state will collect millions of dollars more over the next year.

The new sales taxes are part of Republicans' efforts to reform the state's tax code, which they believe is outdated and does not capture the growth of Kentucky's changing economy. On Sunday, customers must pay state sales tax on things like extended warranties, bowling centers, skating rinks, janitorial services, landscaping, dry cleaning and campsite rentals.

State officials have had to issue clarifying regulations, too. For example, the law taxes "small animal" veterinarian services. The state Department of Revenue has interpreted that to mean "companion animals." That's why customers will pay a 6 percent sales tax to care for dogs and cats, but not chickens and turkeys.

A change with widespread impact is the 6 percent tax on auto repairs. The tax has always applied to parts but now will apply to the cost of labor. At David Toles Auto Pro, a local repair shop in Kentucky's capital city, many customers did not know about the impending changes.

Co-owners Toles and Jim Cantrell said they would likely put a sign on the door to tell customers about the new tax. But they didn't expect it to hurt business.

"They just, like everybody else, laugh it off," Cantrell said. "They got us again."