Cheryl A. Ganim, CPA, Barnes Dennig
Companies in border-states like Ohio and Kentucky often have locations and serve customers in both states. Companies may find themselves with identical purchases or sales transactions with the same vendor or customer that are treated differently for sales tax purposes depending on whether the transaction takes place in Ohio or Kentucky. The savviest of finance departments may be taken by surprise to find out their company is on the hook for sales tax payments they collected from their customers but remitted to the wrong state, for inadvertently overpaying sales tax on exempt items, or for purchasing taxable services or goods but not paying use tax. Being assessed under audit for four or more years of sales and use tax, in addition to being charged interest and penalties, is a painful and costly (but avoidable) way to comply with the sales tax rules. Obtaining refunds from the state is challenging, consuming time and resources.
There are steps companies can take to implement best practices for sales and use tax compliance. Accounting systems can be automated to mark vendors as ‘taxable’ or ‘exempt,’ with the caveat that there may be exceptions to this rule. Finance and sales employees can be educated on taxable versus exempt sales, and provided with a simple decision tree specific to the business. Sales tax training is available to update employees on basic rules and law changes. Reverse sales tax audits can help companies discover sales tax positions that are more favorable (refund opportunities) or sales tax positions which should be corrected (exposure). An annual review of internal sales and use tax policies and relevant tax law changes is recommended.
Some of the notable differences in sales and use taxation between Ohio and Kentucky are shown below.
- A nonprofit or tax-exempt entity’s exemption certificate is allowed to “pass-through” to contractors for Ohio jobs. Kentucky does not allow the nonprofit’s exemption status to pass through to the contractor, so the nonprofit should purchase the materials directly for Kentucky jobs or Kentucky purchases. This distinction becomes even more important for contractors to track when a vendor has Ohio and Kentucky locations. Materials the contractor purchases from Ohio locations are tax exempt, while materials purchased from Kentucky store locations are taxable to the contractor.
- Ohio building maintenance, janitorial services and landscaping by vendors who have $5,000 or over in sales of that service during the calendar year are taxable. Kentucky building maintenance, janitorial services and landscaping are not taxable. Sales of services are typically exempt unless specifically designated as taxable in both Ohio and Kentucky.
- The installation of soft surface (carpet) into realty in Ohio is never considered a construction contract – it is a retail sale of carpet for which the customer pays Ohio sales tax (barring another exemption). The installation of soft surface (carpet) in Kentucky is a construction contract, therefore the contractor pays the sales or use tax on the materials.
- In general, sales to repairers of materials, which they use incidentally in rendering their services, is exempt in Ohio, but sales of the same materials to repairers in Kentucky are taxable.
- Certain materials used to carry out contracts with public utilities in the rendition of a public utility service, including natural gas, electric, all forms of telecommunication systems and cable television providers are exempt in Ohio. The public utilities sales tax exemption does not apply in Kentucky.
- Information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission are taxable in Ohio but exempt in Kentucky.
- Ohio transactions between affiliated corporations having a parent-subsidiary relationship are ordinarily subject to the sales tax in the same manner as transactions between unrelated parties. However, Kentucky sales tax is not imposed on transfers of property where ownership remains substantially unchanged (IRC Section 351 Property Transfers). Such transfers are exempted as occasional sales.
- The taxability of cloud computing or Software as a Service (SaaS) is an evolving area in all states. In Ohio, certain cloud-based applications and related services are taxable as an automatic data processing service. Kentucky has not issued specific guidance on the taxation of cloud computing or SaaS. Kentucky applies the sales tax to all prewritten software, including software that is sold as a tangible product, and software that is downloaded.
The Streamlined Sales and Use Tax Agreement (SSUTA) is an effort between the states to simplify and modernize sales and use tax administration to reduce the burden of tax compliance. Both Ohio and Kentucky have passed legislation to conform to the SSUTA. Ohio is an associate member, achieving substantial compliance with the terms of the agreement, while Kentucky is a full member in compliance with the SSUTA laws, rules, regulations and policies.
Interstate commerce is the norm versus the exception, so investing the time to understand the sales tax requirements at the outset will pay off in the end.