Call to Order and Roll Call
The 5th meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, October 24, 2013, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Bob Leeper, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Bob Leeper, Co-Chair; Representative Rick Rand, Co-Chair; Senators Walter Blevins Jr., Tom Buford, David P. Givens, Sara Beth Gregory, Denise Harper Angel, Ernie Harris, Stan Humphries, Ray S. Jones II, Alice Forgy Kerr, Christian McDaniel, Gerald A. Neal, and Robin L. Webb; Representatives John Carney, Leslie Combs, Jesse Crenshaw, Ron Crimm, Robert R. Damron, Mike Denham, Bob M. DeWeese, Myron Dossett, Kelly Flood, Martha Jane King, Jimmie Lee, Reginald Meeks, Marie Rader, Jody Richards, Steven Rudy, Sal Santoro, Arnold Simpson, Rita Smart, Fitz Steele, Jim Wayne, Susan Westrom, Addia Wuchner, and Jill York.
Guests: Todd Hollenbach, Kentucky State Treasurer; Jane C. Driskell, State Budget Director; Tod Griffin, President, Kentucky Retail Federation; Robert Cleveland, President, Woodford Feed Company; Steve Caudill, Owner, Caudill/Wright Enterprises; James Neumann, Vice President, ValuMarkets, Inc.; Mayor Greg Fischer; Mayor Gale Cherry; Monty L. Boyd, President and CEO, Whayne Supply Company; Dr. Janet Kelly, executive director, Urban Studies Institute, University of Louisville; Richard Dobson, Executive Director, Office of Sales and Excise Taxes, Department of Revenue.
LRC Staff: Pam Thomas, John Scott, Charlotte Quarles, Eric Kennedy, Jennifer Hays, and Sheri Mahan.
Senator McDaniel moved to approve the minutes from the previous meeting as written. The motion was seconded by Representative Lee. The minutes were approved by voice vote.
Sales and use tax vendor compensation
Mr. Tod Griffin, President of the Kentucky Retail Federation, Mr. Robert Cleveland, President of the Woodford Feed Company, Mr. Steve Caudill, Owner of Caudill/Wright Enterprises, and Mr. James Neumann, Vice President of ValuMarkets, Inc. discussed sales and use tax vendor compensation. Mr. Griffin discussed 13 RS HB 440 which amended the amount of vendor compensation that a retailer could retain for collecting and remitting the sales and use tax on a timely basis. Prior to the law change, the retailer could deduct from the amount of sales and use tax due on each return 1.75 percent of the first $1,000 of tax due and 1 percent of the tax due in excess of $1,000. The total compensation could not exceed $1,500 per reporting period. After the passage of 13 RS HB 440, retailers can now deduct from the amount of sales and use tax due on each return 1.75 percent of the first $1,000 of tax due and 1.5 percent of the tax due in excess of $1,000. The total compensation cannot exceed $50 per reporting period.
Mr. Cleveland, Mr. Caudill, and Mr. Neumann expressed concerns with the lowering of the cap on vendor compensation from $1,500 to $50 per reporting period. They felt that the information shared with some legislators regarding the impact of the change did not accurately reflect the widespread impact of the lowering of the cap to $50. The gentlemen stated that the lowering of the cap negatively impacts small to medium size businesses not just big box retailers. A retailer that has annual taxable sales of more than $635,000 will see a reduction in the amount of compensation. In addition, according to a study done by PricewaterhouseCoopers LLP, the national average costs for collecting the tax is about 3 percent for all retailers.
Local option sales tax
Mayor Greg Fischer of Louisville, Mayor Gale Cherry of Princeton, and Mr. Monty Boyd, President and CEO of Whayne Supply Company discussed local option sales tax. Mayor Fischer discussed the need for new revenue streams for localities and compared Kentucky sales tax rates to those of surrounding states. He stated that there is broad based support for introducing language for a constitutional amendment allowing local option sales tax, including endorsements from the Kentucky League of Cities, the Kentucky Association of Counties, and the Kentucky Association for Economic Development, among others. He said that a February 2013 poll indicates that 72 percent of voters support the option to vote on a local sales tax constitutional amendment.
Mayor Fischer provided examples of possible annual tax revenues which could be generated if an optional local sales tax was approved. He stated that these revenues could be used for infrastructure improvements, and that in Louisville alone $60 million is needed to bring bridges, sidewalks, signs and roads up to minimum standards. Mayor Cherry provided examples of how local option sales tax revenues could help with needed improvements in Princeton.
Mr. Boyd discussed how adopting a local option sales tax could address infrastructure needs which, in turn, would improve his company’s competitiveness and have a positive effect in yearly company earnings.
Dr. Janet Kelly, executive director of the Urban Studies Institute at the University of Louisville discussed local option sales tax, providing a national overview. She said that 37 states have some voluntary tax sharing arrangements with their local governments. Thirty-two of these arrangements take the form of general retail sales tax, and 23 states have local option sales taxes structured similarly to that proposed by Mayor Fischer. The most common rate is 1 percent. In most cases, local option sales tax revenues can be used for general or specific purpose, and most require majority approval by referendum.
She provided further details on other state’s local option sales taxes, stating that most jurisdictions have exemptions and caps, such as limitations on big ticket items like vehicles. Typically, the same state agency that collects the state sales tax also collects the local sales tax, which minimizes administrative costs to the local jurisdictions.
Dr. Kelly discussed the different methods used to distribute local option sales tax. There are typically three methods used: stacked, split, and point of sale. Stacked distribution adds the county and city rate to the state sales tax rate. Split is distributed by formula based typically on population, adjusted with each national census. In point of sale distribution, revenue goes back to the jurisdiction where the transaction took place. Stacked distribution is the most common form.
Dr. Kelly discussed the potential economic impacts of local options sales taxes. She briefly discussed Kentucky’s membership in the Streamlined Sales and Use Tax Agreement and its effects on the state’s ability to implement and collect local option sales tax. She stated that sales taxes tend to be regressive, but when food, prescription drugs and utilities are exempted, the regressive effect is mitigated. She discussed the effect of a higher local sales tax rate on higher cost purchases, stating some may seek out lower tax rates across county or state borders.
Mr. Richard Dobson, executive director of the Office of Sales and Excise Taxes, discussed local option sales taxes as addressed by the Streamlined Sales and Use Tax Agreement (SST). He provided a brief overview of the SST project, stating that Kentucky is a full member state. Kentucky has received $107.0 million in payments from SST vendors since entering the agreement in October 2005. Cumulative collections for all SST member states from 2005 through 2012 are $1.3 billion. In FY13, SST filers sent more than $20.7 million in sales tax revenue to the state.
Mr. Dobson discussed the SST agreement requirements for local sales tax. Local sales tax must be administered at the state level. Registration, filing of returns, collection and distribution of tax revenues and audits would all be handled by the state if Kentucky is to stay in compliance with the agreement. To meet the terms of the SST agreement, the local tax base must be identical to state tax base, only one local sales and use tax rate is allowed per local jurisdiction, and the local tax rate must be identical from jurisdiction to jurisdiction. He discussed various types of sourcing, including destination based and origin based sourcing.
In response to a question from Senator Webb, Dr. Kelly stated that local option sales taxes could be kept in place to pay for maintenance of projects. There is no requirement to sunset the tax after a set period of time, unless the referendum language states it specifically.
In response to a question from Senator Buford, Mayor Fischer said that it is not expected that localities within multiple jurisdictions would not be able to stack multiple sales taxes. Some sort of cap would be in place.
In response to a question from Senator Givens, Dr. Kelly said most large retailers can identify sales by geographic location allowing the Department of Revenue to allocated local sales tax to the appropriate jurisdiction. Mr. Dobson stated that the department does not currently separate sales tax receipts by county or jurisdiction. Large retailers combine all sales tax receipts into one payment to the state.
In response to a question from Representative York, Dr. Kelly said that typically an enacted 1 percent local sales tax would be dedicated for a specific set of projects, not one single project.
Real property escheat pilot project
Mr. Todd Hollenbach, Kentucky State Treasurer, discussed the real property escheat pilot project. Mr. Hollenbach stated that the project was to help jurisdictions deal with abandoned property. There have been 300 properties identified, within 99 percent certainty, where the previous owners are now deceased and no heir is known. These properties have started the process of reverting ownership back to the jurisdiction and allowing the jurisdiction to sell that property. Only a few properties have completed the process. Profits from the sale of the properties have been minimal, being eroded by fees, back taxes, and liens. Local governments receive any profits first, with residuals reverting to the commonwealth.
Ms. Jane Driskell, State Budget Director, discussed the anticipated revenue from the program which was included in the 2012 – 2014 biennial budget. Estimated revenues of $7 million in FY 13 and $10 million in FY 14 were budgeted. These revenues have not been realized.
Being no further business, the meeting was adjourned at 3:15 p.m.