Kansas has enacted legislation that includes tax increases and adjustments to address an anticipated $400 million budget deficit.1 Specifically, the legislation increases the state sales tax rate and amends various individual income tax provisions such as the inclusion of guaranteed payments for certain pass-through entities, tax rate changes, modification or elimination of itemized deductions and the exclusion of low-income filers from state income taxation. The legislation also increases the cigarette tax and imposes a new tax on electronic cigarettes. In addition, the legislation includes a tax amnesty program that will run from September 1 to October 15, 2015.
State Sales and Use Tax Increase
The state sales and use tax rate increases from 6.15 percent to 6.5 percent for most transactions effective July 1, 2015.2 However, there is a special transition provision for construction contractors.3 If a contractor has entered into a qualifying written binding contract before May 1, 2015 that is properly documented, the state sales tax on the contract is remitted at the 6.15 percent rate. According to the Kansas Department of Revenue, this lower rate applies to material purchases and labor service charges for qualifying contracts made after the July rate increase.4 The contractor is required to give notice and proof of the contract by July 10, 2015.5
If tangible personal property is ordered before July 1, 2015 but delivered on or after this date, the 6.5 percent rate applies even if partial or full payment is made before July 1, 2015.6 The Department's guidance on application of the rate increase also addresses leases and rentals of tangible personal property; vending machines and coin-operated amusement devices; admission tickets; dry cleaning; installation, application, maintenance and repair services; meals or catering-service contracts; membership dues; periodic charges for taxable water, gas, heat and electricity utility service and for telecommunications, cable, direct satellite television, and similar services; and room occupancy.7 The Department's guidance generally looks to when the customer receives the goods or services in question in determining which tax rate should be applied.
Individual Income Tax
Guaranteed Payments
The legislation has modified the income tax subtraction for certain pass-through entities. Guaranteed payments from business (which previously had been subtracted) are no longer subtracted and are considered as income in calculating Kansas adjusted gross income.8 This subtraction was originally enacted by legislation that exempted certain "non-wage" business income from Kansas individual income tax for taxable years beginning after December 31, 2012.9 Non-wage business income is considered income reported by LLCs, sole proprietorships, S corporations and partnerships.10
Tax Rates
The legislation freezes, for tax year 2015 through tax year 2017, the individual income tax rates at 2.7 percent for the lowest bracket and 4.6 percent for the highest bracket.11 For tax years after 2017, the corresponding rates are 2.6 percent and 4.6 percent. Prior to this legislation, the corresponding rates were planned to be 2.4 percent and 4.6 percent for the 2016 tax year, 2.3 percent and 4.6 percent for the 2017 tax year, and 2.3 percent and 3.9 percent for tax years after 2017. Also, a statute that could result in lower individual income tax rates beginning with the 2020 fiscal year provided certain state revenue levels are met has been amended.12
Itemized Deductions
For tax years beginning on and after January 1, 2015, all itemized deductions are eliminated except for the deductions for charitable contributions, mortgage interest and property taxes.13 The charitable deduction remains fully deductible up to the amount allowed as a federal deduction. However the new legislation accelerates the planned reduction in mortgage interest and property tax deductions. These reductions for mortgage interest and property taxes were to be phased in (60 percent, 55 percent and finally 50 percent) over a three-year period with the final reduction taking place in 2017. The new legislation accelerates the reductions so the total 50 percent reduction will be in effect for the 2015 tax year.
Low-Income Taxpayers
Beginning with the 2016 tax year, the legislation eliminates income tax for single filers with income of less than $5,000 and married joint filers having income of less than $12,500.14
Social Security Number Requirement
The legislation disallows all income tax credits for any individual who does not have a valid social security number (SSN) for the entire taxable year.15 This provision, however, is not applicable if the individual's spouse has a valid SSN for the entire taxable year and they are filing as married filing jointly.
Cigarette Tax and Electronic Cigarette Tax
Effective July 1, 2015, the tax on cigarettes increases by 50 cents per pack.16 This increases the tax on cigarettes from 79 cents to $1.29 per 20 pack or to $1.61 per pack of 25 cigarettes. On or before July 31, 2015, vending machine operators, wholesale dealers and retail dealers must file a report with the Director of Revenue showing cigarettes, cigarette stamps and meter imprints on hand at the beginning of July 1, 2015.17 For these cigarettes in inventory, a tax of 50 cents is imposed per pack of 20 cigarettes and 62 cents is imposed per pack of 25 cigarettes. Also, a tax of 62 cents is imposed on all tax stamps and meter imprints not affixed to cigarettes prior to July 1, 2015.
The legislation also creates a new tax on the sale of the consumable materials used in electronic cigarettes.18 The rate will be 20 cents per milliliter of consumable material and goes into effect on July 1, 2016. The tax will be imposed upon the privilege of selling or dealing in electronic cigarettes.
Property Tax Limitations
Beginning in 2018, counties and cities are required to obtain voter approval before implementing certain property tax increases.19
Tax Amnesty Program Begins September 1, 2015
The legislation enacts a tax amnesty program that will run from September 1 to October 15, 2015.20 The amnesty will apply to income, sales and use, estate, cigarette, tobacco products, liquor enforcement, liquor drink, severance and privilege taxes. For the eligible taxes and tax periods, amnesty applies to the underreporting of the tax liabilities, the nonpayment of such taxes and the nonreporting of such tax liabilities.21 Under the amnesty program, the Department may waive penalties and interest with respect to tax liabilities due and unpaid for tax periods ending on or before December 31, 2013.22 Amnesty is granted only to eligible taxpayers that during the amnesty period properly file a tax return for each taxable period for which amnesty is requested, pay the entire balance of tax due and obtain approval from the Department.23
A taxpayer will not be eligible for amnesty for any matter for which the following circumstances exist on or after September 1, 2015:
- The taxpayer has received a notice of assessment;
- The taxpayer has received a notice of the commencement of an audit;
- An audit is in progress;
- As a result of an audit, the taxpayer has received notice of a proposed or estimated assessment or notice of an assessment;
- The appeal period on an issued assessment has not expired; or
- An assessment resulting from an audit or any portion of such assessment is pending in the administrative appeals process.24
Amnesty does not apply to any matter that is the subject of an assessment that has been affirmed by a reviewing state or federal court.25 Also, amnesty does not apply to a party to any criminal investigation or to any civil or criminal litigation that is pending in any federal or state court for nonpayment, delinquency or fraud in relation to any tax imposed by Kansas. Amnesty does not apply to a matter involving corporate or individual income tax liability resulting from an audit or adjustment by the Internal Revenue Service and reported to the Department. Finally, fraud or intentional misrepresentation of a material fact in connection with an amnesty application voids the application and any waiver of penalties and interest from amnesty.26
If the taxpayer elects amnesty, the taxpayer expressly and absolutely relinquishes all administrative and judicial rights of appeal with respect to the underlying tax liability.27 No tax payment made under the amnesty program is eligible for credit or refund. The Department is authorized to promulgate rules and regulations that are necessary to administer the amnesty program.28
Commentary
Kansas Governor Sam Brownback historically has supported legislation furthering the long-term goal of the state to fundamentally alter the tax structure by drastically reducing income tax rates. The rationale for doing so was to make Kansas a more attractive state from an economic development perspective. However, as noted above, the state was confronted with a significant budget deficit that resulted from the large tax reductions enacted in 2012. The formulation of a final plan to address this budget deficit caused there to be an unusually long and contentious legislative session. Prior to the passage of this legislation, there was well-publicized disagreement between members of the legislature as well as between the governor and the legislature.
The legislation addresses the deficit by increasing the state sales tax rate, decelerating the planned individual income tax rate reductions and eliminating or reducing most of the individual income tax deductions. As a result, individuals will shoulder the burden of the tax increases. Presumably, corporate income tax provisions were not amended in an effort to retain an attractive economic business environment. The enacted changes should close the immediate projected budget deficit, but may not be adequate to address the long-term impact of the 2012 tax reduction legislation. Thus, Kansas may be forced to consider significant tax legislation in the future.
Taxpayers who believe they owe any of the Kansas taxes referenced above should consider participating in the amnesty program as a means to avoid penalties, additions to tax and interest. The Department is expected to provide guidance to taxpayers concerning administration of the program. It is important to note that the amnesty program not only eliminates penalties but also will eliminate any interest accrued throughout the applicable tax periods. Taxpayers also need to keep in mind that an election to participate in amnesty serves to relinquish all administrative and judicial rights of appeal.
The Department may issue further guidance to clarify the statutory amendments discussed above. In its notice that discusses the sales tax rate increase, the Department indicated that it would issue further guidance to explain other changes to Kansas tax laws that were made during the 2015 legislative session.29
Footnotes
1 H.B. 2109 and S.B. 270, Laws 2015, effective July 1, 2015. For further information on this legislation, see Summary of Legislation: Revenue Enhancements and Other Provisions; Senate Sub. for H.B. 2109, as amended by House Sub. for S.B. 270, Kansas Legislative Research Department, June 2015.
2 KAN. STAT. ANN. § 79-3603; Notice 15-02, Kansas Department of Revenue, June 22, 2015.
3 KAN. STAT. ANN. § 79-3695.
4 Notice 15-02, Kansas Department of Revenue, June 22, 2015.
5 KAN. STAT. ANN. § 79-3695.
6 Notice 15-02, Kansas Department of Revenue, June 22, 2015.
7 Note that the Department also has issued instructions for reporting sales receipts on sales tax returns filed for July 2015. Notice 15-03, Kansas Department of Revenue, June 30, 2015.
8 KAN. STAT. ANN. § 79-32,117(c)(xx). The effective date of this amendment is not specified in the legislation, but the legislative summary indicates that this is effective beginning in the 2015 tax year.
9 Ch. 135 (H.B. 2117), Laws 2012.
10 For further discussion of the exemption for non-wage business income, see GT SALT Alert: Kansas Eliminates Nonresident Withholding on Flow-Through Entities.
11 KAN. STAT. ANN. § 79-32,110.
12 KAN. STAT. ANN. § 79-32,269.
13 KAN. STAT. ANN. § 79-32,120(a)(4).
14 KAN. STAT. ANN. § 79-32,110(f).
15 KAN. STAT. ANN. § 79-32,265.
16 KAN. STAT. ANN. § 79-3310. For further information on the cigarette tax increase, see Notice 15- 01, Kansas Department of Revenue, June 16, 2015 (revised).
17 KAN. STAT. ANN. § 79-3310c.
18 H.B. 2109, § 12.
19 KAN. STAT. ANN. § 79-2925b(g).
20 H.B. 2109, § 1(a)(1).
21 H.B. 2109, § 1(a)(2).
22 H.B. 2109, § 1(b), (c).
23 H.B. 2109, § 1(c).
24 H.B. 2109, § 1(a)(3).
25 Id.
26 H.B. 2109, § 1(f).
27 H.B. 2109, § 1(d).
28 H.B. 2109, § 1(g).
29 Notice 15-02, Kansas Department of Revenue, June 22, 2015. The Department posts its notices at http://www.ksrevenue.org/newtaxnotices.html.
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