Much has been written in recent months concerning Kentucky’s failing public pension system. No doubt, the state’s leaders will come up with a plan that will alter the system in a fair and equitable manner. No matter what the leadership does in an effort to cure the pension system’s problems prospectively, however, it will not be enough to address the system’s current multi-billion dollar deficit.
Curing that deficit will surely require changes to Kentucky’s tax regime. Most published comments on the subject of Kentucky tax reform concern changing tax rates and broadening the tax base. While such changes may prove to be necessary, there is another, more fundamental and universal change, that should be considered – speed up tax payments to the state.
Broadly speaking, all taxes levied by Kentucky are remitted to the state in one of two ways: (1) by the party deemed the taxpayer under the applicable statute, which may be called “direct” taxes, or (2) by the party required by the applicable statute to collect the tax from the taxpayer and remit it to the state, which may be called “trust fund” taxes. Regardless of the category, the deadline for remitting taxes to the state is governed by statute, as modified in some cases by regulation.
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Many of the statutes that specify the deadline for tax payments were enacted at a time when paper returns and payment by check were the norm, with submission of returns and tax payments by United States mail also standard. In 1994, the General Assembly took a step to modernize Kentucky’s tax payment system by enacting a statute that requires that certain taxes, primarily trust fund taxes, be remitted by electronic fund transfer. The 1994 law did not, however, modify the time by which taxes are to be remitted, such matter being left to the applicable taxing statutes.
Given modern technology, we should not continue to allow the party responsible for collecting such taxes to hold them for as long as the statutes presently allow. Likewise, there is no reason not to accelerate the deadline for paying direct taxes. While in some cases the deadline for making direct tax payments may be entwined with corresponding federal tax payment rules, that is not the usual case.
In the case of the sales and use tax, under the current statutes, taxes collected in one calendar month are not required to be remitted to the state until the 20th day of the next succeeding calendar month. For example, if a retailer collects sales tax from the purchaser on Sept. 1, the retailer need not remit that tax to the state until Oct. 20. I’ll leave it to the reader to consider what the retailer might do with that money – money that belongs to the state.
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If I were king, I would require the party that collects the sales or use tax to remit the tax electronically by midnight Frankfort time of each Sunday during the calendar year. Exceptions could be provided for “small” and perhaps “medium” retailers. When one considers that many large retailers collect millions of dollars of Kentucky sales and use tax every year, requiring prompt payment of those taxes would provide a substantial economic benefit to Kentucky, with the burden of timely remittance falling equally on every retailer doing business in Kentucky.
Similar to the collection and remittance of sales and use taxes, an employer who withholds Kentucky income tax from an employee’s wages during one calendar month is not required by statute to remit those taxes to the state until the 20th day of the succeeding calendar month. Again, if I were king, I would require every Kentucky employer to remit withheld income taxes within a few days after they are withheld, and no less often than twice monthly.
Existing statutes allow unnecessarily delayed payments of other trust fund taxes, including “U-drive-it” taxes, cable television taxes and racetrack admission taxes. Given current technology, there is no justification for allowing the collectors of these taxes to hold them for more than a few days after collecting them.
Under current law, property taxes on real estate do not become due and payable until Dec. 31 of the year of the assessment, with discounts provided where the tax is paid by Nov. 1. Given the current state of technology, there is no reason not to accelerate the entire real estate property tax process so as to require that such taxes be paid several months earlier than under present law.
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Kentucky’s corporation income tax and individual income tax systems generally parallel the federal income tax system. Thus, Kentucky income taxes and tax returns typically are due on the same schedule as the corresponding federal taxes and tax returns. While changing applicable due dates will require care, given the state of technology, there is no reason why Kentucky’s statutes cannot be changed to require prompter payment of these taxes. Accelerating the applicable payment dates by as little as 30 days would create substantial additional revenue for the state.
Kentucky’s legislators may find it difficult to adopt meaningful tax reform for fear of adversely impacting their constituents, not to mention their political lives. Nevertheless, anyone with a lick of sense has to realize that the millstone that is the public pension deficit is not going to go away without real effort. Accelerating the payment schedules of Kentucky’s various taxes is a logical, practical and necessary first step in achieving that goal.
James Nitsche is a tax lawyer with the firm of Wyatt, Tarrant & Combs.
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