Kentucky, often referred to as the Bluegrass State for its rich heritage in horse racing and bourbon, presents a unique landscape for business ventures. Grappling with the sales tax in Kentucky involves delving into a complex web of regulations.
This guide breaks down everything you need to know about Kentucky’s sales tax, from determining the right sales tax rates to understanding exemptions and filing processes. By the end of this comprehensive guide, you’ll be equipped to handle Kentucky’s sales tax with confidence and ease.
Sales Tax Nexus in Kentucky
When a business creates either a physical or economic nexus, it is required to collect sales tax in Kentucky.
Physical Nexus
A physical nexus means having a significant physical presence or engaging in enough activities within a state to require the collection and payment of sales tax. The factors that determine a physical nexus in Kentucky include:
- Physical Location: This includes having an office, a place for distribution, sales, or showcasing products, a warehouse or storage facility, or any other place where you conduct business.
- Inventory in the State: This covers situations where you store your products within the state, even if it’s done through a third-party fulfillment center or 3PL (like Amazon FBA) or an online marketplace.
- Employees, independent contractors, agents, or other representatives operating on your behalf.
- If a business regularly seeks orders for products, digital items, or extended warranty services from people in Kentucky and uses Kentucky-based services like banks, telecom systems, radio or TV stations, cable services, or any other local facility to take orders, communicate, or receive payments.
- Earns money from leasing or renting out physical items located in Kentucky.
- Affiliate Nexus: You could trigger a physical nexus if you have affiliates, whether they operate online or in-person, who maintain, operate, or use in Kentucky via a subsidiary or a related company, an office, distribution center, sales or sample room, warehouse, storage facility, or any other type of business location.
- Presence at Tradeshows: You must collect sales tax at Kentucky trade shows if you are present for more than 15 days within a 12-month period.
Economic Nexus
States have established regulations to collect sales tax from out-of-state sellers who meet certain revenue and/or transaction thresholds. This rule is known as
economic nexus.
Beginning July 1, 2018, the threshold for economic nexus in Kentucky is $100,000 in gross revenue or 200 transactions in the previous or current calendar year’s sales.
While the nexus criteria mentioned above generally apply to most businesses, additional methods exist for establishing sales tax nexus. To access a comprehensive list of these rules, please refer to the
governing laws for sales tax nexus requirements in Kentucky.
Kentucky Sales Tax on Goods and Services
One of the first things you need to know is whether the goods you’re selling or services you’re offering are taxable in Kentucky.
Tangible Products
Almost all goods are taxable in Kentucky, including:
- Cosmetics
- Electronics
- Clothing
- Furniture
- Jewelry
- Home Goods
- Personal hygiene
- Diapers
- Feminine Hygiene Products – Products such as pads, tampons, and menstrual cups are still taxable in Kentucky.
The goods that are exempt from sales tax are:
- Groceries – Food and grocery items are generally exempt, but items such as tobacco, alcoholic beverages, candy, prepared food, dietary supplements, soft drinks, and food sold through vending machines are not exempt.
- Bottled Water
- Production Machinery – Items used for production and manufacturing are exempt from sales tax.
- Medical Drugs and Devices – Prescription drugs and other medical devices, such as prosthetics, are tax-exempt in Kentucky.
- Agricultural Supplies – Seeds, fertilizers, and machinery used directly in farming are exempt.
Services
In Kentucky, the majority of service-based transactions, such as janitorial services and landscaping, are subject to sales tax.
However, there are specific situations where
certain services are exempt from sales tax, especially if gross receipts are under $6,000 for the first calendar year of operation if sold after January 1, 2023. If sold prior to January 1, 2023, gross receipts from the sales should be less than $6,000 in calendar year 2021, for the below services to be exempt from sales tax. Those services include:
- Photography services
- Room rental and lodging services
- Dry cleaning services
- Marketing services
- Telemarketing services
- Polling services
- Website design, development, and hosting services
- Leisure, recreational, and athletic instructional services
Software-As-A-Service (SaaS)/Digital Products
SaaS is
taxable in the state of Kentucky.
Digital products (i.e., ebooks, downloadable video content, mobile apps) are
also taxable, with the exception of digital audio-visual work.
Shipping/Handling
When delivering a taxable product to a location in Kentucky chosen by the customer via postal service or a common carrier, shipping fees are not taxed; however, if the seller personally delivers the product, these shipping charges typically become taxable. Handling charges are always subject to tax without any exceptions. In cases where a seller charges a single amount for both shipping and handling, this total fee is taxable regardless of the delivery method.
Sales Tax Permits and Licenses in Kentucky
Now that you’ve got a handle on when sales tax nexus applies and which products are taxable in Kentucky, the next important step is getting your Kentucky Seller’s Permit, also known as a sales tax permit.
Seller’s Permit
You can register for a Kentucky sales tax permit online at the Kentucky One Business Stop Portal.
Ensure you have specific information on hand when registering for a seller’s permit, including, but not limited to:
- Business Identification Information (name, address, phone number, email address)
- Business Entity Structure (sole proprietorship, partnership, corporation, LLC, etc.)
- Federal Employer Identification Number (EIN or FEIN)
- Owner/Partner/Officer Information
- Business Activity Details (description of products or services sold, sales volume, date of the first sale or the expected date to start dates)
Registration fee
There is no fee to register for a sales tax permit.
Renewal
In Kentucky, you don’t have to renew your sales tax permit.
Resale Certificate
A resale certificate is a document that allows businesses to buy products without paying sales tax on them, as long as they plan to resell those items to customers, who will then pay the tax. As a seller, you can also accept resale certificates from others looking to buy for resale.
In Kentucky, sellers use resale certificates to buy goods from their suppliers that they intend to resell. The issuance of the certificates is always done in good faith that the seller would report tax on the final sale of the items.
You can fill out
Form 51A105 – Resale Certificate provided by the Kentucky Department of Revenue after you receive your sales tax permit. You can also fill out the
Streamlined Sales and Use Tax Certificate of Exemption if you would like to get
sales tax exemption for multiple states simultaneously. If you don’t want the hassle of registering, sign up for our all-inclusive service that includes sales tax registration.
Streamlined Sales Tax (SST)
The
Streamlined Sales Tax (SST) is an initiative to simplify and standardize sales tax regulations across multiple states. Kentucky is a party to this program, meaning it follows the uniform rules and definitions established by SST.
Check with the
Kentucky Department of Revenue for the most current information on Kentucky’s participation in the Streamlined Sales Tax initiative.
Calculating and Collecting Sales Tax in Kentucky
Sales Tax Computation
In Kentucky, the sales tax is made up of only the statewide sales tax. To figure out the total sales tax for your calculation, you’ll need to add up the rates for the state, county, and city (if applicable) where your transaction occurs. Use TaxHero’s Kentucky Sales Tax Calculator to compute for sales tax.
Here’s an example. Suppose an out-of-state seller satisfies the economic nexus criteria in Kentucky and sells to a customer in Louisville, KY, with a ZIP code of 40214. In that case, the seller has to charge the customer a total sales tax, which can be broken down as follows:
 |
SALES TAX FORMULA |
RATE |
| State: |
Kentucky |
6.00% |
| County: |
Jefferson |
N/A |
| District: |
Third District |
N/A |
| City: |
Louisville |
N/A |
| Combined Sales Tax Rate = |
6.00% |
|
Origin-based vs. Destination-based
When making in-state sales, it is important to determine if you are located in an origin-based or destination-based state to figure out what rate to charge for sales tax.
Kentucky is a
destination-based state, meaning sales tax is determined based on the buyer’s location. That means for a Kentucky-based seller, sales tax is generally based on the location of the buyer when selling within the state.
For out-of-state or remote sellers, the sales tax rate is always determined by the buyer’s location. For instance, if you’re selling a product from California to a customer in Louisville, Kentucky, where you have nexus, you’d apply Louisville’s sales tax rate to that sale.
To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.
Filing and Remitting Sales Tax Returns in Kentucky
The next step after collection is filing and remitting your Kentucky sales tax returns. Filing and remittance can vary in frequency, typically monthly, quarterly, or annually.
It’s crucial to keep accurate records of your sales and tax collections and adhere to the filing schedule set by the state to remain compliant with Kentucky’s sales tax regulations.
Due Dates
In Kentucky, the due date falls on the 20th day of the following month. For instance, sales tax collected in January is due by February 20th for monthly filers.
However, if this day is a holiday, weekend, or in the rare occurrence of a natural disaster, the deadline is typically extended to the next business day. For instance, if you’re a monthly filer and filing sales tax for the month of April, and the May 20th deadline falls on a holiday or weekend, you’ll have until May 21st, the following business day, to submit.
Filing Sales Tax Returns
To file your sales tax return for Kentucky, a few options are available:
- File online through the Kentucky Business One Stop Portal.
- File with TaxHero – Let TaxHero take care of it so you don’t have to worry about missing a payment or return.
Timely Filing Discount
Some states offer a discount to businesses for collecting, filing, and remitting sales tax on time as an incentive to process sales taxes promptly. Kentucky’s timely filing discount amount is a 1.75% discount on the first $1,000 and a 1.50% discount on any additional amount without exceeding $50 per month.
Sales Tax Holiday
Currently, for 2024, there are no planned sales tax holidays in Kentucky.
Kentucky Sales Tax Penalties
Like in most states, sales tax is a big part of how Kentucky generates revenue. Thus, maintaining compliance with sales tax regulations is of utmost importance. Failure to do so can lead to consequences and sales tax penalties. Therefore, it is crucial always to ensure you are up-to-date in filing, collecting, and remitting sales tax to the state.
Here are the specific penalties for non-compliance with sales tax regulations in Kentucky:
- Civil penalties amounting to 2% of the total tax due for each 30 days or fraction thereof that a payment is late. A maximum penalty of 20% for tax not timely withheld, collected, or paid. The minimum penalty is $10;
- On the criminal side, offenses can be classified as felonies, depending on the severity and specific circumstances.
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