The first meeting of the Interim Joint Committee on Transportation was held on<Day> Tuesday, August 7, 2001, at 10:00 AM, in Room 149 of the Capitol Annex. Senator Virgil Moore and Representative Hubert Collins, Co-Chairs, both presided over the meeting. Representative Collins called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Virgil Moore, Co-Chair; Representative Hubert Collins, Co-Chair; Senators Charlie Borders, Paul Herron Jr, Daniel Kelly, Daniel Mongiardo, Albert Robinson, and Richard Sanders Jr; Representatives Eddie Ballard, Larry Belcher, John Bowling, Denver Butler, Mike Denham, Jodie Haydon, Jimmie Lee, Paul Marcotte, Charles Miller, Lonnie Napier, Marie Rader, William Scott, Jim Thompson, Tommy Turner, and Mike Weaver.
Guests Appearing Before the Committee: Mr. Cliff Linkes, Deputy Secretary, Mr. Jim Roberts, Deputy Commissioner, Department of Vehicle Regulation, and Ms. Sue Perkins, Branch Manager, Division of Traffic, Transportation Cabinet; Ms. Charlotte Quarles, Director, Division of Tax Policy, and Mr. Gary Morris, Revenue Cabinet; and Mr. Ronnie Pryor and Mr. Bill Eric, Tricon in Louisville, Kentucky.
LRC Staff: Kathy Kackley, John Snyder, and Rose Mack.
Chairman Collins introduced Mr. Cliff Linkes, Deputy Secretary and Ms. Sue Perkins, Branch Manager of the Division of Traffic, Department of Highways, Transportation Cabinet, who gave a brief overview of the demonstration project for dual logo signage authorized by 2001 Senate Joint Resolution 52. According to Ms. Perkins, the Transportation Cabinet submitted a letter to the Federal Highway Administration (FHWA) on April 27, 2001, requesting permission to conduct a dual logo demonstration project. FHWA approved Kentucky’s request in late July 2001. The following conditions were suggested in the request for the demonstration project:
(1) That each brand would have an actual logo instead of word messages on the signage; and
(2) That each sign would contain logos for the same service, such as only food logos on one sign, instead of mixing the services, such as food and gas on one sign.
Ms. Perkins said that the Transportation Cabinet requested and received a six-month period to develop the demonstration project prior to putting it into place. During this development stage the Cabinet has contracted with the University of Kentucky to conduct two surveys, a human factor survey to see drivers’ reactions to the signs and a survey of customers in businesses where the dual signs are located to see if the signs made a difference in their choice of service. These two surveys and the evaluation of the demonstration project will take place over a two-year period to determine the success of the dual logo signage. Ms. Perkins said that the Cabinet might experiment with mixing services on the signs in the future.
Chairman Collins asked if a business had fuel service and a wrecker service in the same building, would they be able to advertise on one sign or would it require two signs. Ms. Perkins responded that the business would be able to advertise on the fuel service sign only, because wrecker service is not one of the categories involved in the demonstration project. She stated that the four categories for the demonstration project are food, gas, lodging and camping, and tourist attractions.
Senator Albert Robinson asked if a person sold food and fuel, would they qualify for advertising on two signs. Ms. Perkins said that currently the business would only be allowed to advertise on one sign, and that a decision has not been made as to which sign they would be allowed to advertise on. She said that is a question that needs to be addressed.
Senator Robinson questioned if dual services would be listed on one sign. Ms. Perkins said currently, no; however that is a future possibility if the Transportation Cabinet determines it would not cause any major safety concerns. She said that the logos have to be large enough for motorists to see without the signage taking away from their driving ability and concentration. Senator Robinson responded that he hoped those individuals providing dual services would be allowed to advertise on two or more signs.
Senator Richard Sanders asked about the mile limit from the interchange to the location of the business. Ms. Perkins says that limit, according to federal regulations, is three miles, and if there is not a business within three miles, then the mileage is increased in increments of three miles up to 15 miles. She said that 15 miles is the standard for Kentucky. Senator Sanders expressed his concern for the Park City exit located on Interstate 65, where the Mammoth Cave National Park’s boundary extends to the 15 mile boundary requirement. Because local businesses are located further than 15 miles from the interchange they are unable to advertise on the interstate highway logos.
Representative John Bowling asked when the demonstration project would be announced. Deputy Secretary Linkes responded approximately six months after the project evaluation by the University of Kentucky. Ms. Perkins stated that it would take approximately six months to develop the program prior to the placement of any signs, and then another two full years for the surveys to be completed.
Representative Bowling asked how the businesses were notified of the demonstration project. Ms. Perkins said the Transportation Cabinet contacted the National Council of Chain Restaurants and the National Restaurant Association. Representative Bowling suggested the Cabinet contact the Kentucky Restaurant Association. Ms. Perkins replied that the Cabinet planned on talking to the Kentucky Restaurant Association.
Representative Bowling asked if the demonstration project is successful, how long would it take to petition the federal government to broaden the program. Ms. Perkins responded that the only experience that the Transportation Cabinet has had with this type of project is the Fifth Legend Logo Program and that took about three years for the program to become a national standard.
Representative Bowling asked what the cost is for advertising on a sign. Ms. Perkins said $600, per direction. Representative Bowling indicated that he was concerned with the double charging for one space on a sign, since two businesses would be sharing the same space. Ms. Perkins responded that this has been discussed at length. She said that Kentucky Logos, the company who provides the signs, remits back to the Transportation Cabinet $1,201 per year per big mainline sign; and then they remit back six percent of their total receipts to the Transportation Cabinet. Therefore, Kentucky Logos has to rent out at least three spaces on a sign before they make any money. Ms. Perkins also pointed out that Kentucky’s advertising cost is one of the lowest five in the United States and that the Cabinet has to be careful in negotiating the advertising cost for the signs because of the precedent that might be set.
Chairman Collins reminded the Transportation Cabinet officials that not only did they need to keep the logo company in mind when negotiating advertising costs but that they also needed to keep the businessperson in mind as well.
Senator Charlie Borders asked if two different types of businesses housed under one roof could advertise on the appropriate service signs and not be limited to advertising only under one category. Ms. Perkins replied that the businesses would be able to advertise on the signs individually.
Chairman Collins asked who would make the decision as to whether or not a business can advertise. Ms. Perkins said that the criteria is in the federal regulations, including minimum number of hours of operation, cleanliness of facility, availability of drinking water, etc.
Chairman Collins recognized Mr. Ronnie Pryor and Mr. Bill Eric of Tricon in Louisville, Kentucky, who asked to address some of the questions posed by the committee members.
Mr. Eric pointed out that Tricon and Yorkshire Global Restaurants, which is based in Louisville, are very interested in the demonstration project. He said one of the company’s major competitive thrusts was to combine their restaurants under one roof, such as Kentucky Fried Chicken/Taco Bell, Pizza Hut/Taco Bell, and Long John Silver’s/A&W. He pointed out that there are other companies following the same trend, such as Subway/Baskin-Robbins and Wendy’s/Tim Horton’s. According to Mr. Eric, this is a strategic direction of the quick service restaurant industry, but due to federal regulations, there are not enough advertising spaces available. He continued that being able to advertise two businesses on one space increases advertising capabilities. According to Mr. Eric, both Maryland and Georgia are currently involved in a signage project and the state of Tennessee’s legislature has asked the state Department of Transportation to undertake a similar demonstration project. He commented that Louisiana and North Carolina are also considering similar projects.
Mr. Pryor said he feels that combining two or more businesses under one roof is a commonsense approach to consumer demand. He voiced a concern that it would probably be 2004 before the actual results of Kentucky’s demonstration project would be reported and that it is his hope that it will not take three years for the results of the demonstration project to be available.
At this time, Chairman Moore assumed the chair. He said that recent economic studies clearly show that Kentucky needs more trucking companies. Over the past several years, goods manufactured in Kentucky have increased more than 100 percent; and distribution technology has changed in that same time from stocking items in warehouses to “just-in-time” deliveries, where manufacturers take components off of a truck and immediately onto the assembly line.
Chairman Moore said that Kentucky is the home of the major north south and east-west truck routes in the nation. He said with “Auto Alley” manufacturing, Kentucky is in the center of that industry by being within a day’s drive of well over two-thirds of the nation’s markets. Senator Moore noted that trucking registration has declined 23 percent at the same time that manufacturing has dramatically increased, and Kentucky is clearly losing out on the economic power of the trucking industry.
Chairman Moore said that a lesson learned from this drain on the state of Kentucky is that the legislature must ensure that taxes do not drive the businesses away. He said, that the General Assembly must make sure Kentucky’s tax structure is competitive with sister states to keep the economy strong and growing and that Kentucky is the only state that collects a sales/use tax on interstate equipment.
Chairman Moore introduced Ms. Charlotte Quarles, Director of the Division of Tax Policy in the Revenue Cabinet, who discussed taxation issues related to the trucking industry. In regards to the application of the motor vehicle usage tax to the trucking industry, the major points in Ms. Quarles’ presentation were:
(1) Kentucky imposes a six percent motor vehicle usage tax on the “retail price” of all motor vehicles purchased for use on Kentucky’s highways.
(2) Prior to 1998, the tax, in the case of new trucks, was based on six percent of 81 percent of the total manufacturer’s suggested retail price (MSRP). In the case of used trucks, the tax was based on six percent of 90 percent of the average retail price as published in the prescribed price reference manual.
(3) In an effort to bring fairness to the valuation of motor vehicles, House Bill 74, enacted in 1998, changed the valuation procedure to base the tax on six percent of the total consideration given rather than on book value.
(4) The savings to owners of all new vehicles as a result of House Bill 74 were estimated in 1998 to be $2 million annually. Perhaps more than any segment of the vehicle population, owners of trucks licensed for over 55,000 pounds benefited from this change. Since manufacturer’s MSRPs are, in many cases, tens of thousands of dollars more than the actual cost, under the old MSRP-based system, the owner was required to pay a greater amount of tax.
(5) The taxation of trucks engaged in interstate commerce for the motor vehicle usage tax and the question as to whether trucking companies locate outside of the state in order to avoid the tax is an important issue that has been around a long time. Under the International Registration Plan (IRP), owners of vehicles engaged in interstate commerce may choose to register their vehicles in any state in which they have a physical presence, regardless of miles driven in any state. As a result, some vehicles registered in Kentucky are subject to the motor vehicle usage tax, while competitors (even Kentucky residents) who may drive as many miles or more in Kentucky, escape the tax by legally registering through IRP in a state that does not impose a tax similar to Kentucky’s motor vehicle usage tax. Surrounding states exempt trucks engaged in interstate commerce and licensed for over 55,000 pounds from any tax similar to the motor vehicle usage tax. Efforts have been made in the past year to address this problem.
(6) The Motor Carrier Advisory Committee was created by the General Assembly in 1990 to advise the executive and legislative branches on issues regarding industrial expansion, promotion of motor carrier development, and improvement of motor carrier taxation and regulation methods. The committee is comprised of the Secretaries of the Transportation and Revenue Cabinets, Speaker of the House and President of the Senate, and nine industry representatives appointed by the Governor. The motor vehicle usage tax issue is a matter of frequent discussion by the committee.
(7) Bills have been proposed in almost all legislative sessions since 1990 to exempt trucks with a licensed weight of over 55,000 pounds from the motor vehicle usage tax.
(8) The Kentucky Commission on Tax Policy, in its 1995 report, recommended that all trucks over 26,000 pounds be exempted from the motor vehicle usage tax. As part of the recommendation, the revenue would have been replaced by a two-cent increase in the gasoline and special fuels taxes, including diesel fuel.
(9) Governor Patton, in his “Revenue Fairness and Recovery Program”, proposed in the 2000 Session to eliminate the motor vehicle usage tax on trucks engaged in interstate commerce and licensed for over 55,000 pounds.
(10) Based on Calendar Year 2000 receipts, exempting trucks engaged in interstate commerce and licensed for over 55,000 pounds from motor vehicle usage tax, would result in a revenue decrease of approximately $5.5 million annually. If the exemption were expanded to include all trucks licensed for over 55,000 pounds, whether used in interstate or intrastate commerce, the revenue decrease would be approximately $8.1 million annually. Expanding the exemption to 26,000 pounds licensed weight and all commercial vehicles engaged in interstate commerce would result in a revenue decrease of approximately $19.5 million annually.
(11) Semi-trailers and trailers are not subject to motor vehicle usage tax, because they are not motorized vehicles and are exempted from sales and use tax as well.
(12) For FY 2000, there were 2,370 commercial vehicles exempted from motor vehicle usage tax by virtue of being owned by businesses located in Enterprise Zones. The tax exempted from the commercial vehicles registered by Enterprise Zone businesses was approximately $3.2 million.
Chairman Moore inquired as to when the Motor Carrier Advisory Committee last met. Mr. Jim Roberts of the Transportation Cabinet responded that the Advisory Committee met in June, 2001 in conjunction with the Kentucky Motor Transport Association Conference at Lake Barkley and that the Advisory Committee will most likely meet again in November, 2001 at the Highway Safety Summit Conference.
Ms. Quarles provided the following information regarding the application of Kentucky’s sales and use tax to the trucking industry:
(1) Motor vehicles licensed for highway use are subject to the motor vehicle usage tax rather than sales tax. Sales tax law has provided an exemption for semi-trailers and trailers since 1978.
(2) The trucking industry’s main exposure to Kentucky’s sales and use tax is related to the purchase of repair parts and supplies used to maintain the operation of the truck fleet. There is also a provision in KRS 139.470 that grants a common carrier an exemption for its purchase of parts and supplies that are shipped outside the state as cargo via the purchasing carrier for use by the carrier in its business as a common carrier. However, the parts and supplies purchased by a carrier for immediate installation and first use in Kentucky are subject to Kentucky sales tax.
(3) The following is a breakdown of how surrounding states treat the trucking industry:
(a) Illinois provides an exemption for rolling stock used in interstate commerce on a regular and frequent basis. The exemption applies to vehicles, parts, and supplies.
(b) Indiana provides an exemption for property used directly in rendering public transportation of persons or property. The exemption applies to vehicles, parts, supplies, and various other property classifications for both interstate and intrastate carriers.
(c) Missouri provides an exemption for motor vehicles licensed for a gross weight of 24,000 pounds or more or trailers used by common carriers solely in the transportation of persons and property in interstate commerce. The exemption also includes repair parts and other materials.
(d) Ohio provides an exemption for motor vehicles used primarily for transporting property by a person engaged in highway transportation for hire. The exemption includes vehicles and repair parts for both interstate and intrastate carriers.
(e) In Tennessee, there is no general exemption on repair parts for common carriers. There is an exemption for a purchasing carrier transporting property out of Tennessee for use by the carrier in its business as a common carrier. This exemption is similar to the language in Kentucky tax law. Vehicles and trailers used primarily in interstate commerce are exempt.
(f) Virginia provides an exemption for property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle or railway for use directly in the rendition of public service. This exemption applies to parts and other property used in interstate and intrastate commerce by common carriers, but not contract carriers. The exemption for vehicles applies to motor vehicles with a gross vehicle weight rating or gross combination with a rating of more than 26,000 pounds.
(g) West Virginia provides an exemption from tax on vehicles weighing more than 55,000 pounds and Class C and Class L semi-trailers, full trailers, pole trailers, and converted gear. There is also an exemption for repair parts and other property consumed by the transportation industry in interstate and intrastate commerce.
(h) In summary, the six surrounding states provide a broad exemption for vehicles and other property purchased by common carriers. Tennessee applies sales tax to purchases of repair parts for common carriers in a similar manner to Kentucky.
Chairman Collins asked if the surrounding states charge a sales tax. Ms. Quarles responded that the other states treat their vehicles in their sales tax law as other tangible personal property and then allow an exemption for most of the tax.
Chairman Collins asked what Tennessee’s sales tax rate is. Ms. Quarles stated that Tennessee’s current sales tax rate is six percent. Ms. Quarles went on to say that all of the surrounding states also have a local sales tax, which they are exempting along with the state tax. Chairman Collins then asked if the trucking companies were refunded the sales tax. Ms. Quarles replied that the sales tax is exempted, not refunded.
Chairman Collins asked if the surrounding states charge a sales tax on commercial vehicles. Ms. Quarles said that any vehicles over 55,000 pounds used in interstate commerce are exempted with the exception of Kentucky.
Chairman Collins asked if ad valorem taxes are paid on the vehicles. Ms. Quarles said that the Revenue Cabinet would be glad to put together a report comparing the taxes charged by the other states.
Next, Ms. Quarles discussed the apportioned vehicle property tax, which is filed on a return on or before April 15 each year by all interstate motor carriers that operate in interstate commerce partially within Kentucky. The tax is levied using an aggregate rate against values calculated based on information submitted with these returns, and billed centrally. Taxpayers are given 45 days from the date of the billing to pay the tax. The Revenue Cabinet distributes the location portion of the receipts to the various taxing districts.
Senator Daniel Mongiardo asked how the surrounding states gain income from the trucking industry if they exempt the industry from the various taxes. Ms. Quarles answered that the states are receiving income because an industry is located in your state, there is a certain turnover of dollars from wages earned and wages spent for taxable items.
Senator Mongiardo asked if most states have higher fuel tax rates than Kentucky. According to Ms. Quarles, Kentucky’s fuels tax is fairly low compared to the surrounding states.
Next Ms. Quarles discussed the motor fuels tax, which is imposed on a licensed dealer who is either a wholesaler or a refiner or a large gasoline retailer, who then recovers that tax through the sales price of his product. However, the Revenue Cabinet’s records do not reflect the number of gallons that the trucking industry is purchasing, so there is no way to compute exactly how much tax is being paid by the industry in this area.
In regard to the application of corporation income and license taxes to the trucking industry, a motor carrier is subject to Kentucky’s corporation income and license taxes if the motor carrier is a corporation that is organized under the laws of Kentucky, has its commercial domicile in this state, owns or leases property in this state, or has payroll (employees) located in this state. A motor carrier that is not incorporated or domiciled in Kentucky is not subject to corporate income and license taxes if its only activity in Kentucky is having vehicles driving through the state. The vehicles of a motor carrier must make deliveries or pickups in Kentucky in order to be subject to these taxes. In Tax Year 1998, 200 corporations paid $8.5 million in corporate income taxes and $651,000 in license taxes to the state of Kentucky, which goes into the state’s General Fund.
Representative Mike Weaver asked how a company that is located in Kentucky and does all their business in Kentucky would be able to have their trucks licensed in another state to avoid particular taxes. Mr. Gary Morris, a consultant for the Revenue Cabinet, replied that if it is a corporation, a company is still subject to the corporation income and license taxes since their business is located and being conducted within the state of Kentucky.
Chairman Collins asked if a vehicle that just drove through the state and did not make any purchases, pickups, or deliveries would be subject to any taxes. Mr. Morris replied that they would not be subject to any taxes collected by the Revenue Cabinet, but they would be subject to the highway use tax that is administered by the Transportation Cabinet.
Representative Jodie Haydon commented that the real issue is tax reform or tax modernization, and that until the legislature deals with an overall reform of Kentucky’s tax system, there are going to be inconsistencies and unfair advantages and disadvantages for individuals and businesses. He said that there are two reasons why there needs to be tax reform—simplification of the tax code and fairness to the people of Kentucky.
Chairman Moore introduced Mr. Jim Roberts of the Transportation Cabinet who made a presentation on the road fund taxes imposed on the trucking industry. Mr. Roberts provided the members with a handout that included a rate chart for surrounding jurisdictions showing registration rates and fuel tax rates, scenarios using a truck at 80,000 pounds and a truck at 32,000 pounds operating interstate over a two-year period, and scenarios using same type vehicles operating intrastate only over a two-year period.
Senator Sanders asked Mr. Roberts about the transponders that are located on I-65 and I-75 by the truck stops. Mr. Roberts responded that the transponders are used by certain companies to enable those trucks to bypass the weigh scales if they have not made any stops from one weigh station to another within the state. He said that there are certain criteria that a company must meet before they are allowed to use the transponders. Mr. Roberts noted that the transponders are used in conjunction with the “Advantage I-75” program.
Representative Weaver and Senator Dan Kelly inquired about how the surtax and weight distance taxes are collected. Mr. Roberts explained that both taxes are self-reporting, meaning that the companies report the taxes on a return after the miles have been traveled.
Chairman Moore asked Mr. Roberts to provide the Committee with a report showing the total cost of operation of the tax collection agency in the Transportation Cabinet that deals with the self-reporting taxes in order to make a comparison of the amount of taxes collected and the expenses involved in collecting the taxes.
Representative Mike Denham asked if the Transportation Cabinet or the Revenue Cabinet had presented the information in today’s presentation to the Special Subcommittee on Tax Reform. Senator Sanders responded that the presentations are scheduled for the August 23, 2001, meeting of the Subcommittee.
Senator Kelly commented that Mr. Roberts’ presentation shows that Kentucky’s fuel tax is low compared to surrounding states. Senator Kelly then asked about auditing of the trucking industry by the state. Mr. Roberts said that every state is required to audit a certain percentage of truck fleets and that they can audit any fleets that the state considers potentially problematic.
Chairman Moore announced that the next meeting of the Interim Joint Committee on Transportation was scheduled for September 4, 2001. There being no further business before the Committee, the meeting was adjourned at 12:01 p.m.