I. 2025 Legislative Update
The Kentucky 2025 regular legislative session saw a number of important tax law changes.
Income Tax Rate
House Bill 1 reduces the individual income tax rate from 4% to 3.5% for taxable years beginning on or after January 1, 2026. For taxable years beginning on or after January 1, 2027, the income tax rate may be reduced after the Office of State Budget Director reviews the reduction conditions for the 2024-2025 fiscal year and reports to the Interim Joint Committee on Appropriations and Revenue whether the reduction conditions were met. If the reduction conditions were met, the General Assembly may take action to reduce the rate for the taxable year beginning January 1, 2027. The Office of State Budget Director is to implement an annual process to review and report future reduction conditions until the income tax rate is 0%.
Confirmed Bullion Sales Tax Exemption
The 2024 House Bill 8 (“2024 HB 8”) made gold, silver, platinum, and palladium bullion exempt from sales tax, effective August 1, 2024. The Governor attempted to line-item veto the exemption. But, in Ky. OAG 24-06, the Attorney General opined that the Governor’s veto was invalid and without effect. (May 20, 2024).
House Bill 2 (“HB 2”) voids the Governor’s line-item veto in 2024 HB 8 and gives people who paid the sales and use tax an avenue to seek a refund, interest, and attorney’s fees and costs.
Tax on Cannabis-Infused Beverages
House Bill 775 (“HB 775”) imposes a tax in the amount of $1.92 per gallon of cannabis-infused beverage on the use, sale, or distribution by sale or gift of cannabis-infused beverages. The manufacturer selling or transferring cannabis-infused beverages to non-distributors and non-retailers or other person selling or transferring cannabis-infused beverages to distributors, retailers, licensees, or consumers must pay and report the tax by the 20th day of the month after the transfer of the cannabis-infused beverage. The distributor shall also pay and report the tax by the 20th day of the month after the transfer of the cannabis-infused beverage to the retailer or consumer in Kentucky. Lastly, HB 775 also imposes an 11% wholesale sales tax on cannabis-infused beverages.
End of Court Deference to State Agency Interpretations
Senate Bill 84 follows the national trend reaffirming the court’s role in interpreting statutes. Kentucky courts will no longer defer to an administrative body’s interpretation of a statute or regulation. Rather, the courts will review an administrative interpretation de novo.
II. Executive & Administrative Updates
The Kentucky Department of Revenue (“KDOR”) has provided guidance on recent tax law changes and other administrative updates in Kentucky Sales Tax Facts (June 2025) and the Kentucky Administrative Regulations. Additional guidance may be found at TaxAnswers.ky.gov.
Tax Treatment of Non-Profits: Purchases vs. Receipts1
Recognizing that legislative amendments to sales tax law in recent years have changed the tax treatment of non-profit groups in several ways, KDOR guidance clarifies that even though an entity may be exempt from sales and use tax on certain purchases, non-profits are not exempt from tax liability on its receipts from the sale of taxable services . Except for specific school-related groups, if a non-profit or governmental entity receives more than $6,000 in receipts annually from sales of any of the newly taxable services individually or in any combination, the non-profit must register, collect, and remit sales tax.
Tariffs2
KDOR clarified that tariffs passed on to the customer as part of a retail sale are subject to the sales and use tax, regardless of whether the tariff charges are itemized. Thus tariffs imposed on manufacturers or importers that are passed to the customer as part of a retail sale are not excluded from the definition of gross receipts for purposes of the sales and use tax.
Bullion Tax Refund3
KDOR instructed taxpayers to file bullion sales and use tax refund claims with the retailers, instead of filing a refund suit as provided by HB 2. Taxpayers may request refunds from the retailers that the taxpayers transacted with, each of whom may have a specific refund request process. The retailers may then use Form 51A209, Sales and Use Tax Refund Application, to apply for the refunds from KDOR. KDOR will not process refund requests received from the consumer.
Qualified Data Center Projects4
The minimum capital investment required for the qualified data center project sales and use tax exemption under HB 775 is based on the county’s population. The sale and use tax exemption is for “data center equipment,” which is defined broadly to include routers, monitoring and security systems, computer software, fiber optic cabling and network equipment, and other tangible personal property necessary to operate a data center. However, the term does not include building and construction equipment and materials that are to be permanently incorporated, electricity, or administrative office equipment.
Qualifying Attractions5
The incentive for up to 50% of the sales and use tax generated by certain sales at “qualifying attractions” may be applied for 60 days prior to the scheduled attraction. A “qualifying attraction” is a series of live performances or certain exhibitions that are held at a qualifying venue over at least 2 days, hosted by a sponsoring entity working with a facility operator, with at least 60,000 people in attendance. KDOR will allocate half of the approved incentive refund to the sponsoring entity and the other half to the facility operator.
Interstate and Foreign Commerce6
Sales and use tax applies where tangible personal property is either located in Kentucky at the time of its sale or subsequently produced in Kentucky and then delivered to the purchaser in Kentucky. Interstate commerce is not presumed where the purchaser or the purchaser’s representative receives possession of the property or first uses the taxable services in Kentucky—even if the property is subsequently transported or sent out of Kentucky for use out of Kentucky.
However, gross receipts from sales are not subject to the sales tax if pursuant to an agreement, the seller delivers the tangible personal property to a place outside Kentucky and the property is not to be returned to Kentucky. Similarly, sales tax does not apply if a shipping company takes possession of the property on behalf of the purchaser for delivery outside Kentucky and the property is not to be returned to Kentucky.
But the use tax shall apply to sales consummated outside Kentucky where the tangible personal property or digital property is delivered to the purchaser in Kentucky or is used, stored, or consumed in Kentucky.
Repairers and Reconditioners7
A repairer or reconditioner of tangible personal property is classified as a retailer of tangible personal property sold and services provided. However, KDOR delineates between taxable and nontaxable services provided by such repairers and reconditioners. Taxable services are those where the repairer or reconditioner install or apply the tangible personal property or digital property sold. Thus, where the tangible personal property or digital property is sold in conjunction with the installation or application of the property sold, both the sale of the property and the service provided are subject to the sales and use tax. However, if the tangible personal property or digital property sold is not subject to the sales and use tax, then the installation or labor charge is also not subject to the sales and use tax. Nontaxable services are those where the repairer or reconditioner only install or apply the tangible personal property or digital property. Thus, where only the installation service or labor charge is provided, the repairer’s or reconditioner’s service is not subject to sales and use tax.
Motor Vehicle Body Shops and Retailers8
Motor vehicle body shops are classified by KDOR as retailers of tangible personal property sold and services provided. Accordingly, motor vehicle body shops are subject to similar rules as repairers and reconditioners of tangible personal property. Taxable services are those where the motor vehicle body shop installs or applies the taxable repair parts sold. Thus, where a motor vehicle repair shop sells and installs a repair part, it must collect sales and use tax on both the sale of the repair part and the service provided. However, if the property is not subject to the sales and use tax, then the installation or labor charge is also not subject to the sales and use tax. Nontaxable services are those where the motor vehicle body shop only install or repair the property. Thus, where only the installation service or labor charge is provided, the motor vehicle body shop is not subject to sales and use tax.
Extended Warranty Services9
If extended warranty services, including optional services, maintenance, or extended warranty contracts, which were part of a sale of taxable tangible personal property were sold before July 1, 2018, such sales were not subject to sales and use tax if the service charge was separately itemized. Now, effective retroactively to July 1, 2018, such sales are subject to sales and use tax, regardless of whether the service charge is separately itemized, subject to the sales for resale tax exemption.
Similarly, charges by an entity or third-party to perform the repair work are not subject to the sales and use tax, provided that the repair parts are covered by an extended warranty service agreement or contract.
Machinery for New and Expanded Industry10
The regulations now provide that the exemption from sales and use tax to machinery applies to equipment necessary to the installation of the machinery which are (1) incorporated into plant facilities or licensed premises or (2) replacement for existing machinery used in manufacturing or industrial processing. For such machinery and appurtenant equipment to fall under this exemption, the regulations require that it must be “intimately involved in production”. Notably, separately itemized labor charges associated with the application, installation, repair or maintenance of tangible personal property used directly in manufacturing or industrial processing are exempt from sales and use tax.
Partial Exemptions for Energy and Energy-Producing Fuels11
To qualify for the partial exemption from the utility gross receipts license tax for energy and energy-producing fuels, consumers shall submit Form 51A109, Application for Energy Direct Pay Authorization, and send a copy to their suppliers. An Energy Direct Pay Authorization will not be issued where the cost of taxable energy or energy-producing fuels consumed in “manufacturing, processing, mining, or refining and any related distribution transmission, and transportation services” is greater than 3% of the previous year’s cost of production. If the energy or related services costs exceed 3% of the cost of production, taxpayers shall estimate the sales and use tax liability and report and pay the estimated tax in 12 equal installments.
III. Trends to Watch
A. Local Tax Uniformity
Kentucky has historically been dependent on taxes based on income but has recently moved away from income-based taxes to become more competitive. However, this competition might be undermined by the prevalence of occupational license taxes on wages and net profits imposed by local tax districts in Kentucky. With hundreds of local tax districts in Kentucky imposing occupational license taxes and the trend toward hybrid work and remote work, the burden of preparing multiple tax returns and filing in multiple tax districts has increased markedly. Not surprisingly, business taxpayers, especially small businesses, face major challenges in trying to comply with local occupational license taxes in Kentucky. Kentucky may consider enacting legislation to promote local tax uniformity in future years, such as centralized collection of local taxes.
B. Limited Liability Entity Tax
Kentucky’s limited liability entity tax (“LLET”) imposes a tax on every business that is protected from liability by the laws of the state, including corporations, LLCs, S-Corporations, limited partnerships, and other types of businesses.[12] The LLET has been a subject of discussion over the past few years and legislation has been introduced to provide targeted relief or full repeal. During the 2024 session House Bill 55 (HB 55) was introduced to sunset the LLET for taxable years beginning on January 1, 2025, and House Bill 120 (HB 120) was introduced to limit LLET’s application only to entities with gross receipts of $100,000 or more. Both bills died in committee. The General Assembly may continue to evaluate Kentucky’s LLET in future years and consider changes similar to HB 55 and HB 120, or alternatives such as shifting the LLET’s minimum fee to the annual organization fee paid to the Kentucky Secretary of State.
C. Continued Reduction of the Individual Income Tax Rate and Expansion of Sales Taxes to Services
Kentucky has joined a growing number of states seeking additional tax revenue by expanding its sales tax base to services. Kentucky has reduced its individual income tax in recent years (currently at 3.5%) and has sought to fill the gap in revenue by looking to services on which it can levy its sales tax. Kentucky greatly expanded the number of services subject to sales tax effective January 1, 2023, however, there was no similar expansion during the 2025 Legislative session. Kentucky may seek to continue reducing its individual income tax rate by further expanding the list of taxable services in future years.
D. Property Tax Assessment Reduction Opportunities
As interest rates have greatly risen over the last year and both residential and commercial real estate values have declined relative to their upward trend of the last several years, there may be opportunities for certain property owners to seek a reduction in their property tax assessments. Property owners may wish to review recent sales of comparable properties to see if their current assessment is in line with the market. Kentucky property tax season begins in May, so property owners should begin reviewing their assessments now.
E. Pass Through Entity Tax Election
During the 2023 legislative session, the General Assembly enacted legislation that provided for a refundable pass-through entity tax credit equal to 100% of the entity owner’s proportionate share of the tax paid based on the pro rata share of the owner’s income from the entity. With the SALT cap deduction under the Tax Cuts and Jobs Act (“TCJA”) set to expire December 31, 2025, the General Assembly may reevaluate Kentucky’s Pass Through Entity Tax election in future years.
IV. Select Case Updates
Lowe’s Home Cntrs, L.L.C., v. Montgomery Cnty. Prop. Valuation Admn’r, No. 2024-CA-0307-MR (Ky. App. Aug. 22, 2025) – Property Valuation Appeal
Taxpayer owned real property in Montgomery County, Kentucky. In 2020, Taxpayer appealed the Property Valuation Administrator’s (PVA) assessment of its property, which was based on data from 2008. Pursuant to KRS 49.220(5), while the PVA’s assessment is entitled to a presumption of validity, this presumption disappears once the taxpayer presents competent rebuttal evidence—here, expert testimony and analysis from Lowe’s. The burden then shifts to the PVA to support its assessment with substantial evidence. The Court of Appeals held that the Boad of Assessment Appeals and the Circuit Court improperly required Lowe’s to prove its case during the prima facie phase and failed to shift the burden to the PVA once Lowe’s presented its expert evidence. Furthermore, the Court found that the PVA’s reliance on decade-old, unadjusted cost approach without annual revaluation or depreciation was unsupported by substantial evidence, and that the PVA’s expert’s use of leased property comparable for an owner-occupied, non-leased property was fundamentally flawed. Accordingly, the Court reversed the Circuit Court and remanded the case for further consideration consistent with the opinion.
Dep’t of Revenue v. Hale, Inc., 707 S.W.3d 522 (Ky. App. 2025) – Sales and Use Tax Food Exemption
Hale, Inc. d/b/a Lotsa Pasta (Lotsa Pasta) is a small café and grocery store that sells pre-packaged food items. Lotsa Pasta also made in bulk and packaged food items like salads and spreads in its kitchen. During audit, KDOR determined that salads and spreads made and packaged by Lotsa Pasta were subject to sales tax because KDOR took the position that such items were not exempt grocery items but rather taxable “prepared foods” under KRS 139.485. On appeal, the Court of Appeals found that while Lotsa Pasta’s self-packaged food items come within the category of “prepared food” because Lotsa Pasta combines ingredients together before packaging the final food item for sale, the Court also found that Lotsa Pasta was engaged in a food manufacturing business, which would thus exclude the “prepared foods” manufactured by Lotsa Pasta from the statute’s definition of “prepared food.” Because the f food items were not for immediate consumption, they were exempt from sales tax.
The authors’ law firm represents Lotsa Pasta in this action.
LWAGLVKY 1 LLC c/o Walgreen Co. v. Jefferson Cnty. Prop. Valuation Adm’r, No. 2024-CA-0302-MR (Ky. App. Dec. 13, 2024), discretionary review granted, No. 2025-SC-0015 (Ky. 2025) – Property Valuation
The Supreme Court of Kentucky granted discretionary review of lower-court rulings that upheld Jefferson County’s real property tax assessments on several Walgreens-occupied stores—valuations that averaged two to three times those of similar nearby retail properties. The Property Valuation Administrator (PVA) used a “drugstore valuation formula” that capitalized each store’s above-market contract rent under long-term triple-net leases, effectively valuing the leased-fee interest rather than the fee-simple estate. Walgreens contends that this methodology (1) violates state and federal equal-protection guarantees by singling out Walgreens-leased properties as a separate class of real estate, (2) conflicts with Kentucky precedents requiring uniform valuation at fair cash value and use of market, not contract, rent, and (3) lacks substantial evidentiary support. Although the lower courts agreed that the PVA singled out Walgreens in valuing Walgreens-leased properties using the “drugstore valuation formula,” the Kentucky Board of Tax Appeals, Jefferson Circuit Court, and Court of Appeals all affirmed the PVA.
The authors’ law firm represents Walgreens in this action.
Dep’t of Revenue, Fin. and Admin. Cabinet v. Carriage Ford, Inc., No. 2022-CA-0231-MR (Ky. App. July 14, 2023), discretionary review denied, No. 2023-SC-0448-D (Ky. Mar. 6, 2024) – Motor Vehicle Usage Tax Refund
Carriage Ford is an Indiana car dealership that sells cars to Kentucky residents. Carriage Ford paid Kentucky’s motor vehicle usage tax for Kentucky customers. In 2015, the Indiana Department of Revenue audited Carriage Ford and found Carriage Ford owed Indiana sales tax for cars sold to Kentucky residents but who took possession in Indiana. Carriage Ford paid the Indiana taxes and requested a refund from KDOR for MVUT on those same purchases; KDOR denied the refund on the basis that Carriage Ford’s customers would be entitled to any refund, if available. The Court of Appeals affirmed the Franklin Circuit Court which held that Carriage Ford was entitled to a refund pursuant to KRS 134.580 because it was the person who paid the tax on behalf of its customers, and by paying the sales tax to Indiana, Carriage Ford had essentially paid tax twice on the same transaction. The Supreme Court of Kentucky denied discretionary review on March 6, 2024.
The authors’ law firm represents Carriage Ford in this action.
Dunn v. Solomon Found., Nos. 2022-CA-0399-MR and 2022-CA-0401-MR (Ky. App. Apr. 28, 2023), aff’g, No. 21-CI-00191 (McCracken Cir. Ct. Oct. 12, 2021), discretionary review granted, Nos. 2023-SC-0235 and 2023-SC-0236 (Ky. Oct. 18, 2023) – Religious Exemption
The Solomon Foundation (Solomon) is a Church Extension Fund for the Restoration Movement church financially supports this cause through investments, loans, and other financing transactions. Solomon owns a Church Property in McCracken County, leased to local churches, and sought a property tax exemption as a religious institution under Section 170 of the Kentucky Constitution. The McCracken PVA denied the application, asserting that the same institution of religion must both own and occupy the property, and, that Solomon is not a religious institution. The Court of Appeals affirmed the McCracken County Circuit Court and held that Solomon is a religious institution and that the subject property is “owned and occupied” by “institutions of religion” and therefore is entitled to the tax exemption. Both PVA and the Department of Revenue, which intervened at the Circuit Court, sought discretionary review, which the Supreme Court of Kentucky granted on October 18, 2023. The case is currently pending before the Supreme Court.
The authors’ law firm represents The Solomon Foundation in this action.
O’Neil v. Solomon Found., No. 2019-CA-1619-MR (Ky. App. Apr. 28, 2023), aff’g, No. 19-CI-01991 (Fayette Cir. Ct. June 14, 2024) – Property Tax – Administrative Procedure
The Kentucky Court of Appeals affirmed a circuit court judgment dismissing The Solomon Foundation’s declaratory judgment action on procedural grounds, finding that once the foundation pursued administrative relief through property tax appeal procedures, the taxpayer was required but failed to exhaust its administrative remedies prior to filing suit in the circuit court.
The authors’ law firm represents The Solomon Foundation in the appeal to the Court of Appeals.
Grand Lodge of Kentucky Free & Accepted Masons v. Plummer, No. 2023-CA-1080-MR, 2024 WL 2983182 (Ky. App. June 14, 2024), discretionary review granted, 2024-SC-0410 (Ky. Mar. 12, 2025)– Property Tax
The case is an appeal from the Kenton Circuit Court’s judgment affirming the ad valorem tax assessments of the residents of Spring Hill Village, a retirement community owned by a tax-exempt entity, Grand Lodge of Kentucky Free and Accepted Masons. The Court determined that “[t]he residents… are non-exempt lessees who must pay ad valorem tax on the rights they obtain…. [T]he value of the leasehold is calculated by ‘subtracting the fair market value of the land as a whole if sold subject to the lease from the fair market value of the land as a whole if sold free and clear of the lease.’” Id. at *4 (internal citations omitted) (emphasis added by Grand Lodge). The case is currently pending before the Kentucky Supreme Court on discretionary review.
Dep’t of Revenue v. Ralcorp Frozen Bakery Prods., Inc., 2023-CI-00193 (Ky. Franklin Cir. Ct. Jan. 27, 2024), on appeal, No. 2024-CA-0114-MR (Ky. App.) – Manufacturing Machinery Exemption
Ralcorp, a bulk manufacturer of food products, operates a food manufacturing plant in Louisville, Kentucky, where it produces items like frozen pancakes and biscuits for major restaurants and retailers. Ralcorp asserted that the machinery it uses for palletizing, shrink wrapping, and labeling food products and necessary to comply with federal and state laws should be considered part of “machinery actually engaged in manufacturing,” which would make it eligible for a lower state tax rate and local tax exemption for tangible personal property tax purposes. The KDOR disagreed.
The KBTA concluded that the manufacturing process includes palletizing and labeling, as the products are not considered saleable until these steps are completed. The Franklin Circuit Court affirmed, explaining that the test is not whether the manufacturing process ends when the product can be eaten, but when the product is ready for sale. The Circuit Court found that palletization and labeling were necessary steps for Ralcorp’s manufacturing process, which ends when the packaged products are packed on pallets, secured with shrink wrap, and labeled with an SSCC barcode, as the customers will not accept the product until these steps have been completed.
KDOR appealed to the Kentucky Court of Appeals, where briefing is underway.
City of Hazard v. Commonwealth, No. 23-CI-82 (Franklin Cir. Ct. May 14, 2024), on appeal, 2024-CA-0629 (Ky. App.)
The City of Hazard sued the Commonwealth of Kentucky arguing that KRS 91A.400, which allows a limited number of small cities to impose restaurant taxes, is arbitrarily restrictive and based on outdated city classifications, thus unconstitutional. The Franklin Circuit Court initially ordered KRS 91A.400 be severed and Hazard, and other similarly situated cities, be added to the list of eligible cities. KRS 91A.400, as initially amended by the Court, could be read to authorize any city to impose a restaurant tax. The Court subsequently limited the scope of the relief to Hazard and did not require the statute be severed. The Commonwealth appealed to the Court of Appeals arguing that Hazard lacks standing since a court cannot provide the relief Hazard seeks and, in the alternative, that KRS 91A.400 is rationally related to legitimate state objectives.
September 3, 2025
1Kentucky Sales Tax Facts (June 2025) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%202025%20-%20Jun.pdf).
2Kentucky Sales Tax Facts (June 2025) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%202025%20-%20Jun.pdf).
3Kentucky Sales Tax Facts (June 2025) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%202025%20-%20Jun.pdf).
4Kentucky Sales Tax Facts (June 2025) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%202025%20-%20Jun.pdf).
5Kentucky Sales Tax Facts (June 2025) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%202025%20-%20Jun.pdf).
6103 KAR 30:190.
7103 KAR 27:150.
8103 KAR 27:230.
9103 KAR 27:150; 103 KAR 27:230.
10103 KAR 30:120.
11103 KAR 30:140.
12KRS 141.0401; see also Corporation Income and Limited Liability Entity Tax, Kentucky Department of Revenue (available at https://revenue.ky.gov/Business/Corporation-Income-and-Limited-Liability-Entity-Tax/Pages/default.aspx).
