One-Two Punch Leaves Kentucky Non-profits Off-Balance
Effective July 1, 2018, Kentucky’s House Bill 487 implemented sweeping changes to Kentucky’s sales tax regime. Many things that were not taxable before the changes became taxable, including things like facility/event admission fees, campground rental, pet care services, and much more. This broad legislation turned Kentucky’s sales tax landscape on its head by adding so many new taxable transactions into the sales tax base.
Just a few months prior to this legislation, the Kentucky Supreme Court issued a surprising decision in Dep’t of Revenue v. Interstate Gas Supply, Inc. In this case, the Court ruled that the nonprofit tax exemption provided by Section 170 of the Kentucky Constitution applies only to property taxes, and the sales and use tax regime does not fall under Section 170 protection.
The combination of these two developments leaves many 501(c)(3) organizations with uncertainties about how to comply with the new sales tax world they’re facing. The new sales tax legislation and the court case mean that nonprofits may need to collect and remit Kentucky sales tax things like:
- Admissions to fundraising events;
- Silent auctions; and
- Certain types of memberships or programs.
While sales tax is intended to be paid by the end user or consumer, as opposed to the nonprofits themselves, the reality is that nonprofits face a difficult choice between simply charging the additional 6% on top of their current prices (raising the final price for their members/customers), versus simply absorbing the cost themselves by lowering their prices, so that their final prices for fundraising transactions remain the same. Simply tacking the tax on top of their prices risks driving some donors away, while “eating” the cost could damage the nonprofits mission by effectively reducing overall fundraising receipts. Regardless of the pricing choices nonprofits make for fundraising events, memberships, or silent auctions, nonprofits will experience increased administrative costs because they now have to register, charge, and remit sales tax on newly taxable Kentucky transactions.
The Barnes Dennig Tax Team is monitoring these developments. Please reach out if you have any questions about the issues above, and a member of the tax team will contact you.