Kansas enacts income, property and sales tax changes

Kansas Gov. Laura Kelly recently approved several pieces of tax legislation passed during the 2022 legislative session. The legislation provides significant changes to Kansas income taxation including the enactment of a pass-through entity (PTE) tax election and revisions and expansions to various income tax credits.¹ In addition, enacted legislation includes property tax provisions modifying the revenue-neutral rate notice and hearing procedures, enacting new procedures for taxpayer complaints, and expanding the residential property tax exemption.² New legislation also provides COVID-19-related property tax relief for certain retail storefront owners.³ Lastly, Kansas has enacted several significant changes to sales tax laws, including an exclusion of separately stated shipping and handling charges from tax,⁴ a phase-out of the state sales tax on food and food ingredients,⁵ and elimination of certain sales tax estimated payment requirements.⁶

Income tax changes

PTE tax election

On April 14, 2022, H.B. 2239 enacted the state’s new SALT Parity Act, which provides certain PTEs the ability to elect to pay income tax at the entity level rather than by the individual owners of the PTE. Effective for tax years beginning on or after Jan. 1, 2022, an S corporation or partnership may elect to be subject to tax at the entity level.⁷ For electing PTEs, tax is imposed at 5.7% on the sum of each resident PTE owner’s distributive share of the PTE’s income and each nonresident PTE owner’s distributive share of PTE income apportioned to the state.⁸ Further, nonresident PTE owners whose only source of Kansas income is from an electing PTE are not required to file a Kansas individual income tax return.⁹

Under the SALT Parity Act, individual owners of electing PTEs are not liable for the PTE tax in their separate or individual capacity, and are allowed a refundable credit against their individual income tax for their direct share of PTE tax paid by the entity.¹⁰ Further, for purposes of calculating the resident credit for taxes paid to other states, the amount of income taxes paid to another state by a PTE that is included in the Kansas adjusted gross income of a resident individual, estate or trust who owns an interest in such PTE is considered income tax paid to the other state by such resident.¹¹

Income tax credits

H.B. 2239 enacted several new income tax credits targeted at specific industries such as aviation and aerospace, education and short-line railroads.¹² Most notably, however, the legislation increases and expands the eligibility for the Research and Development (R&D) Activities Tax Credit.¹³ Effective for tax years beginning on or after Jan. 1, 2023, the R&D credit is increased from 6.5% to 10% of qualified expenditures in R&D activities conducted in the state.¹⁴ Further, the legislation allows for all income taxpayers to claim the R&D credit (including electing PTE taxpayers), rather than solely by corporate income taxpayers as previously allowed.¹⁵ Lastly, the legislation allows for a one-time transfer of the R&D credit generated. The transferred credit is non-refundable and can be carried forward until utilized by the transferee.¹⁶

Property tax changes

Changes to revenue-neutral rate procedures

H.B. 2239 includes several procedural changes aimed at enforcing the revenue-neutral rate legislation previously enacted by the state. Under the revenue-neutral rate rules enacted in March 2021, taxing subdivisions that wish to increase property taxes beyond a revenue-neutral rate are required to hold a public hearing and to provide property owners notifications about proposed tax increases at least 10 days prior to such hearing.¹⁷ Under legislation recently enacted by the state, taxpayers owning property within a subdivision which fails to comply with the notice, hearing and budget adoption provisions of the 2021 legislation may file a complaint with the Kansas Board of Tax Appeals (BTA). If the BTA finds the taxing subdivision did not comply with the revenue neutral rate requirements, the BTA is directed to order refunds of property taxes paid or a reduction of taxes levied over the amount generated by the revenue neutral rate.¹⁸

Changes to residential property tax exemption

Under H.B. 2239, the amount of the residential property tax exemption from the uniform statewide school finance levy is increased from $20,000 to $40,000 of property value.¹⁹ Subsequent year increases in the exemption are provided in the legislation and tied to the average percentage change in statewide residential real property values for the preceding 10-year period, which cannot be less than zero.²⁰

COVID-19 Retail Storefront Property Tax Relief Act

Enacted on June 2, 2022, H.B. 2136 creates a property tax refund for certain taxpayers with retail storefronts which were operationally shut down or restricted by a COVID-19-related order or action imposed by the state, a local unit of government, or a local health officer.²¹ For the 2020 and 2021 tax years, a taxpayer is eligible for a refund of 33% of a “COVID-19 Qualifying Sum” that equals the sum of a COVID-19 ordered shutdown days gross rebate and a COVID-19 ordered restricted operations days gross rebate, up to a maximum refund of $5,000 per retail storefront.²² It should be noted that the legislation excludes many taxpayers such as grocery stores, hardware/home improvement stores, liquor stores, schools, property management companies, professional services, passive businesses, financial businesses, utilities, and other businesses that have received more than $150,000 in prior COVID-19-related federal, state and/or local funding.²³

Sales tax changes

Treatment of separately stated shipping and handling charges

Effective for tax periods beginning on and after July 1, 2023, Kansas will exempt from sales tax any delivery charges that are separately stated on the invoice, bill of sale or similar document given to a purchaser. Delivery charges remain taxable for periods before July 1, 2023.²⁴

Phase-out of state sales tax on food and food ingredients

Enacted on May 11, 2022, H.B. 2106 provides for a phased elimination of the state sales and compensating use tax imposed on the gross receipts from the sale of food and food ingredients. Beginning Jan. 1, 2023, the rate imposed on food and food ingredients is reduced from 6.5% to 4%. The rate is subsequently reduced to 2% for the 2024 calendar year, and is eliminated beginning Jan. 1, 2025.²⁵ Further, the definition of “food and food ingredients” is expanded to include bottled water, candy, dietary supplements, foods sold through vending machines, and soft drinks.²⁶ It should be noted that the phase-out does not apply to many prepared foods, nor does it apply to the sale of alcoholic beverages or tobacco.²⁷

Changes to filing thresholds and elimination of estimated sales tax remittance requirements

Effective on July 1, 2022, H.B. 2136 permanently eliminates the requirement for retailers with total annual tax liabilities which exceed $40,000 to remit an estimated payment covering the first 15 days of the current month when filing the prior month’s sales tax return.²⁸ Further, the legislation makes slight adjustments to the thresholds for annual, monthly, and quarterly filings effective on or after Jan. 1, 2024.²⁹

Commentary

The 2022 legislative session brought the enactment of tax changes which can generally be viewed as taxpayer-friendly. From an income tax perspective, the enactment of the SALT Parity Act brings Kansas in line with a growing number of other states which have enacted PTE tax regimes aimed at mitigating the impact of the federal $10,000 “SALT cap” on itemized deductions enacted by the federal Tax Cuts and Jobs Act of 2017 (TCJA).³⁰ Taxpayers operating in a PTE structure should evaluate the impact on their businesses and determine whether or not such an election is in the best interest of the owners. Such an analysis should consider each owner individually, as what may be beneficial for one owner may be detrimental to another. Moreover, it is important to consider the ASC 740 impacts of making such an election, to determine whether or not the election results in an entity-level tax provision requirement. Nonetheless, when coupled with the expansion of tax credits and their new transferability, the legislation seems poised to ensure the state remains competitive for new investment.

The property tax provisions contained in the state’s recent legislation provide broad relief to residential and commercial property taxpayers who have seen large increases in property tax assessments in recent years as a result of high valuation increases despite the pandemic. However, while many of the exclusions from the COVID-19 retail storefront property tax refunds are targeted at essential businesses which remained operational during the pandemic, some of the categories of excluded businesses are expansive and subject to some level of interpretation. Taxpayers who believe they may be eligible for such refunds should closely consider the specific categories to ensure eligibility.

Similarly, the sales tax provisions contained in the new legislation are generally taxpayer-favorable. In particular, the elimination of sales tax on food and food products brings the state in line with the vast majority of states which do not tax such items. Further, the permanent elimination of the sales tax on separately stated delivery charges, along with the current-month estimated payment requirements, will likely help to streamline taxpayer compliance with sales tax remittance requirements, particularly in a post-Wayfair environment. That said, taxpayers should evaluate all such changes to ensure their systems are calibrated to reflect the new taxation decisions the legislation has created.