Several changes to Kentucky’s tax code would enhance Kentucky taxpayers’ rights and increase fairness to Kentucky taxpayers. What is fairness anyway? Fairness is described as “lack of favoritism toward one side or another” by Merriam-Webster Dictionary, “evenhandedness” by Dictionary.com, and “the quality of being reasonable, right, and just” by Collins Dictionary. Following are some such enhancements, all of which are supported and suggested by the Kentucky Society of CPAs.
Equalize Tax Assessment and Refund Interest Rates
KyCPA supports the “Return to a balanced interest rate on taxes owed to and by the Commonwealth”.
For overpayments, interest is paid to taxpayers at the tax interest rate minus two percent, but for underpayments, interest is paid to the Commonwealth at the tax interest rate plus two percent, resulting in a four percent spread to the detriment of taxpayers and in favor of the Commonwealth. For 2024, the interest rate is 7% on overpayments and 11% on underpayments.
Obviously, it would be much fairer for the interest rate to be the same for overpayments and underpayments, with the spread being zero percent. Ideally, this could be resolved immediately, but alternatively, it could be phased in over a couple of years.
Streamline Tax Appeals
KyCPA supports “Streamlin[ing] the tax appeals process by allowing taxpayers to appeal directly to the Court of Appeals (or Kentucky Supreme Court), bypassing the circuit court, for tax cases, other than real property cases”.
Every taxpayer has a right to appeal a final ruling of the Department of Revenue to the Kentucky Board of Tax Appeals, which will review the taxpayer’s appeal de novo, i.e., as though it was the first time. KRS 131.110; KRS 49.220. A taxpayer or the Department has a right to appeal to circuit court. KRS 13B.140; KRS 49.250. The county circuit court’s role is to review the KBTA’s final order, essentially functioning as an appellate court. KRS 13B.150. Either party, if aggrieved, may appeal from there to the state-level Court of Appeals, as a matter of right, but further appeals to the Kentucky Supreme Court or to the United States Supreme Court is only at their discretion.
The role served by the county circuit court and the Court of Appeals is the same and thus duplicative. Other states, like Indiana and Ohio, have much more streamlined appeal processes.
Streamlining appellate review of KBTA decisions (especially for tax cases other than real property tax cases) by bypassing the duplicative county circuit court review to go straight to the state-wide Court of Appeals at the option of the appellant would be helpful in resolving tax matters more efficiently, both from a cost perspective and a time perspective, while retaining state-wide consistency of case law. Important matters could still be heard by the Kentucky Supreme Court and the United States Supreme Court, at their discretion. Kentucky’s tax system is made better and fairer through independent and accessible review of tax issues by the KBTA and the judiciary.
One advantage of this change is that it would have zero cost to the Commonwealth.
Waiver of Interest
KyCPA supports “Allow[ing] the Department of Revenue to waive interest assessments, consistent with its existing ability to waive penalties”.
States, other than Kentucky, allow interest to be waived. Typically, a waiver is appropriate when the taxpayer relies on the state department of revenue’s advice or the delay was for the convenience of the state department of revenue.
Penalties may be waived for reasonable cause. KRS 131.175; KRS 131.180. Examples of reasonable cause may be found in the Department’s penalty regulation, 103 KAR 1:040. While not a waiver, Kentucky taxpayers are relieved of interest when relying on written advice of the Kentucky Department of Revenue in certain circumstances. Pursuant to KRS 131.081(6), “If any taxpayer’s failure to submit a timely return or payment to the department is due to the taxpayer’s reasonable reliance on written advice from the department, the taxpayer shall be relieved of any penalty or interest with respect thereto, provided the taxpayer requested the advice in writing from the department and the specific facts and circumstances of the activity or transaction were fully described in the taxpayer’s request, the department did not subsequently rescind or modify the advice in writing, and there were no subsequent changes in applicable laws or regulations or a final decision of a court which rendered the department’s earlier written advice no longer valid”. So, there is some precedent taxpayer relief from interest.
Scaling back the conditions for interest relief available to a taxpayer that reasonably relies on advice from the Department and to allow for a waiver of interest resulting from delays for the convenience of the Department would move the ball towards fairness. The latter condition would also further incentivize the Department to move protests forward efficiently.
Equalize Assessment and Refund Periods for Tangible Personal Property Taxes
KyCPA supports the “Equaliz[ation of] assessment and refund periods for tangible personal property taxes”.
The assessment of tangible personal property may be reopened by the Department within five years after the due date of the return. KRS 132.360. However, a refund must be made within two years after the date the taxpayer paid the tax. KRS 134.590. This leaves a gap of three years, which is patently unfair, as it favors the Commonwealth over taxpayers.
Equalizing the assessment and refund periods for tangible personal property taxes to the same periods as those for other taxes, i.e., four years, would increase fairness to taxpayers.
Extend the Statute of Limitations for Refunds Involving Constitutional Claims
KyCPA supports “Extend[ing] the statute of limitations for filing a constitutional challenge from two to four years”.
The general statute of limitations for assessing most taxes, like sales and use tax and corporation income tax, is four years. KRS Sec. 139.620; KRS 141.210. The statute of limitations for refunds is also four years for most taxes. KRS 134.580. This makes sense and is fair to the Commonwealth and to taxpayers.
So, why is the statute of limitations for refunds based on unconstitutional statutes only two years? Should not the statute of limitations be the same regardless of the grounds for the refund claim? Would not that be the fair approach? The statute of limitations for refunds should be the same for refunds as for assessments, regardless of the grounds of the taxpayer’s refund claim.
Continue to Reject Pay-to-Play
KyCPA supports “Continu[ing] to allow all disputed taxes to be appealed by taxpayers without the requirement of payment”.
Under KRS 49.250(2), “If the appeal is from an order sustaining a tax assessment, collection of the tax shall be stayed by the filing of a petition or an appeal to any court. Full payment of the tax or a supersedeas bond is not required to appeal an order sustaining a tax assessment.” This is the fair approach. Conversely, requiring payment or a bond as a prerequisite to appeal tax assessments is referred to as a “pay-to-play” system and is universally considered to be anti-taxpayer.
Taxpayers appeal tax assessments made by the Department because they have a good faith belief that the taxes assessed are not due. Many taxpayers are individuals or small and mid-sized businesses. Burdening taxpayers by forcing them to pay the amounts alleged to be due or to post a bond before they have been finally determined by the courts works as a de facto deprivation of taxpayers’ rights of access to the courts for the purpose of judicially reviewing a tax assessment upheld by the KBTA. It is imminently fair and good for Kentucky’s tax system to allow taxpayers both the right and the opportunity to have the courts decide whether the Department or the taxpayer is right.
“Either what we hold to be right, and good, and true IS right and good and true for all mankind under God, or we’re just another robber tribe.” King Arthur in First Knight (1995).
Taxation is essential to the Commonwealth. Kentucky cannot run without revenue. But, fairness in taxation is essential to taxpayers, their faith in the Commonwealth, and its taxation of them. An investment in fairness is an investment the Commonwealth cannot afford not to make.
This is a modified version of Mark A. Loyd’s regular column, Tax in the Bluegrass, “Protecting and Enhancing Taxpayer Rights” which appeared in Issue 2, 2024 of the Kentucky CPA Journal.
June 11, 2024
