Tax regulations

Kentucky Tax Talk: Inside Louisville’s New Tax Regulations

This article originally appeared in Law360 Tax Authority.

When Louisville Metro Revenue Commission, or Metro Revenue, regulations were last changed, Arnold Schwarzenegger had just been elected Governor of California, the United States was on the brink of war with Iraq, and Apple had just to launch its new product, iTunes. Based on what has since changed in the world, you can only imagine how much tax policy has changed.

Metro Revenue, which imposes and administers local taxes, finally changed its current regulations for the first time in nearly two decades.

Despite significant professional license tax, or OLT, reform over the past decade, such as the creation of Kentucky’s Uniform Law for All Local Taxes, as well as changes to ordinances governing local taxation under Trusted by the Louisville-Jefferson County Metro Government, Metro Revenue regulation has remained an unchanged pillar of Louisville’s taxation since 2003.

This article explores the important additions, changes and clarifications included in the new regulations, what businesses inside and outside the Commonwealth may need to review with regards to their tax liability in the Louisville metropolitan area and how they do business in the region.

Overview of the updated regulations

Metro Revenue released an updated version of its regulations on January 1. Several elements of the regulations needed to be updated, such as the adoption of Wayfair the principles of nexus and references to uniform laws; however, it appears that Metro Revenue has made major changes, many of them unexpected, to the new regulations that could have a significant impact on a variety of taxpayers.

From family businesses to Fortune 500 companies, the new regulations could change not only whether they file or are subject to the Louisville Metro OLT, but also how they file their taxes.

It appears Metro Revenue has taken a tougher approach on a variety of nexus issues — meaning some taxpayers who have never filed OLT returns in Metro Louisville may now be subject to reporting obligations.

For example, the new regulations might have been expected to create an economic nexus threshold, as many state and local jurisdictions adopted similar policies following the 2018 U.S. Supreme Court ruling. in South Dakota v Wayfair Inc. The new regulations created a nexus threshold of 200 transactions or $25,000 of gross revenue attributable to Louisville Metro operations to subject a business or employer to OLT filing requirements.

This is a low standard given that many economic nexus thresholds are above 500 transactions and typically a minimum of $100,000 in gross receipts before nexus in a jurisdiction is triggered.

Another notable change regarding nexus in the new regulations is the creation of a physical presence standard for remote employees. The new regulations provide that an employer has a nexus in the Louisville Metro if they have a remote employee performing at least 10% of their work in the jurisdiction, or the remote employee working under Metro pay of Louisville exceeds $75,000 in the tax year.

This is significant given the number of employers who have transitioned to full-time or part-time remote employment as a result of the pandemic. Employers who may never have filed OLT in Metro Louisville and now have one or more employees working remotely in the jurisdiction will need to consider the explicit guidelines included in the new regulations.

In addition to some of the linkage implications discussed above, the new regulations also appear to have significant impacts on overlooked entities such as single-person limited liability companies. The Uniform Act, as well as nearly all local ordinances, including those of Metro Louisville, state that the calculation and administration of the OLT must follow federal methods and procedures.

For example, previously, if a married couple owned real estate through multiple disregarded LLCs in which the LLCs’ rental income and losses were all reported on the couple’s federal return, it was understood that the same method would be used to calculate the torque OLT efficiency. . The new regulations appear to explicitly state that each entity must file a separate BTA report, regardless of its overall federal treatment.

Previous regulations versus new regulations

Previous regulations gave explicit definitions of “partnership” and “corporation” which included the phrase “recognized for federal income tax purposes”, indicating that the disregarded entities were not corporations and corporations. persons subject to the BTA. Previous regulations also addressed unit business operations by expressly providing that if a licensee derives passive income from a separate legal entity as part of its unit business operations, then the licensee must report such income for the purposes of the OLT.

The new regulations eliminated the definitions of corporation and partnership and created new definitions for “business entity” and “flow-through entity”, adding the term “separate” to the new definitions – and the new regulations are now silent on the business unitary. considerations.

While previous regulations explicitly required only partnerships and S corporations to file separately, the new regulations make it clear that Metro Revenue requires all business entities to file OLT separately. Regardless of its federal treatment, disregarded entities doing business in Metro Louisville must file separate returns.

Using the example above, this would mean that each LLC that owns rental property located in metro Louisville would have to file separate OLT returns, as opposed to its owners reporting all transferable income and losses on their respective returns.

This is also important for large corporations with subsidiaries doing business in Metro Louisville. If the entity’s income and losses are included in the parent’s federal filing and the parent has already filed OLT returns, including the subsidiary’s OLT income and loss, the subsidiary will now be required to file a separate OLT statement in the Louisville metro.

Additional Notable Changes

Some other broad regulatory changes include changes to the exclusion of gross receipts from the manufacturing and distribution of alcoholic beverages – potentially affecting Louisville’s burgeoning bourbon industry, explicit recognition of a narrow interpretation the exception of the OLT link provided for in federal public law. 86-272, expanding the types of utility companies recognized as exempt and providing a family limited partnership exclusion.

The changes also include detailed examples of net income calculations, treatment of stock options as compensation, and clearer personal and executive responsibility for withholding responsibilities – to name a few – one. There is a lot to unpack.

Metro Louisville versus other Kentucky jurisdictions

While nearly every city and county in Kentucky imposes its own separate LTO, most jurisdictions governing the tax authority are similar. Most jurisdictions simply operate under their respective OLT ordinance as well as uniform laws, all of which have similar language.

Metro Louisville, being the largest jurisdiction in the state, has historically been among the minority of jurisdictions that have created detailed regulations to aid in the administration of its LTO. However, given the many additions and examples included in the new Metro Revenue regulations, the Louisville OLT is likely administered differently than any other OLT in the state.