Sales Tax Changes for Non-Profits in Kentucky

Earlier this year, the Kentucky Legislature passed two tax bills that broadly change Kentucky’s corporate and personal income tax system, as well as make a number of sales and use tax and property tax changes. In the effort to expand its sales and use tax base, Kentucky has made a number of previously non-taxable services taxable, broadened definitions, and limited exceptions. Significantly, the tax reform extends the state sales tax to nonprofit organizations’ sale of admissions to events. This change specifically negates a sales tax exception previously enjoyed by nonprofits and educational institutions.

Kentucky imposes a sales tax at a rate of six percent (6%) on all retailers on the gross receipts received from, among other things, admission charges to various events. If an organization is engaged in the sale of admission, it will be considered a retailer and be subject to this tax on all gross receipts. Accordingly, whether or not there is an “admission” for sales tax purposes is a key determination.

Kentucky’s statute defines an admission as a fee paid for the right of entrance to an entertainment or amusement event or venue and includes programs, sporting events, music concerts, performances, plays, and exhibits. The recent tax reform extends this definition to include the privilege of using facilities or participating in an event or activity including the use of bowling centers, skating rinks, tennis courts, swimming pools and golf courses. This extension eliminates the carve out from the definition of admission that these privileges enjoyed prior to the tax reform, and broadens the sales tax base.

Nonprofit organizations and educational institutions were exempted from this sales tax on admissions under Kentucky regulations but the tax reform has eliminated this exemption. Only admissions to race tracks, historical sights, and a portion of county fair admissions are excluded from the sales tax under the new tax regime.

Nonprofit organizations and educational institutions subject to Kentucky’s sales tax are required to collect and remit based on gross receipts. The state defines gross receipts as consideration received in exchange for property or services and this includes all payments that are required as a prerequisite for admission even if designated as a donation. These terms of inclusion may leave the door open for an organization to argue either that a donation isn’t received in exchange for property or services, and therefore isn’t considered gross receipts or that the donation was not a prerequisite for admission. The possibility of success with these arguments is unclear and, absent reliance on the success of one or both arguments, organizations need to collect and separately state the tax on the receipt, ticket, or, in some circumstances, at the window of purchase.