For Kentucky income tax purposes, the term “doing business” means the operation of any enterprise or activity in Kentucky for

FINANCE AND ADMINISTRATION CABINET

State Tax Increment Financing Commission

(New Administrative Regulation)

103 KAR 50:050. Incremental Revenues for Income and Limited Liability Entity Taxes.

RELATES TO: KRS 65.7045, 65.7071, 65.7075, 65.7077

STATUTORY AUTHORITY: KRS 65.7069(8)

NECESSITY AND FUNCTION: KRS 65.7069(8) authorizes the State Tax Increment Financing Commission to promulgate administrative regulations regarding tax increment financing participation programs. This administrative regulation provides guidance for the Finance and Administration Cabinet and agency to follow in computing incremental revenues, state tax revenues, new revenues and old revenues related to tax increment financing programs with respect to income and limited liability entity taxes.

Section 1. Definitions. (1) "Agency" is defined in KRS 65.7045(2).

(2) "Annual rent" means the actual sum of money or other consideration payable, directly or indirectly, by the corporation, pass-through entity or sole proprietorship for its benefit for the use of the property during the old or new revenues periods;

(a) Including:

1. Any amount payable for the use of real or tangible personal property whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise; and

2. Any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs or any other items which are required to be paid by the terms of the lease or other arrangement; and

(b) Not including:

1. Amounts paid as service charges, such as utilities or janitorial services; and

2. Incidental day-to-day expenses such as hotel or motel accommodations, or daily rental of automobiles.

(3) "Apportionment factor" means a fraction, the numerator of which is the property factor, representing twenty-five(25) percent of the fraction, plus the payroll factor, representing twenty-five (25) percent) of the fraction, plus the sales factor, representing fifty(50) percent of the fraction, and the denominator of which is four (4), reduced by the number of factors, if any, having no denominator, except that if the sales factor has no denominator, then the denominator shall be reduced by two (2).

(4) "Commencement date" is defined in KRS 65.7045(8).

(5) "Commercial domicile" means the principal place from which the trade or business of the corporation, pass-through entity or sole proprietorship is managed.

(6) "Commonwealth" is defined in KRS 65.7045(10).

(7) "Corporation" is defined in KRS 141.010(24)(a).

(8) "Employee" means an individual included by the corporation, pass-through entity or sole proprietorship as an employee for purposes of the payroll taxes imposed by 26 U.S.C. 3121(d).

(9) "Footprint" is defined in KRS 65.7045(18).

(10) "Gross receipts" means the total amount of consideration, including cash, credit, property, and services, paid for the sale, lease, rental, or use of property.

(11) "Incremental revenues" is defined in KRS 65.7045(21)(b).

(12) "Limited liability company" is defined in KRS 275.015(11).

(13) "New revenues" is defined in KRS 65.7045(28)(b).

(14) "New revenues period" means the period described in KRS 65.7045(28).

(15) "Net annual rental rate" means the total annual rental paid, less total annual rental received from subrentals.

(16) "Office" is defined in KRS 65.7045(29).

(17) "Old revenues" is defined in KRS 65.7045(30)(b)1 to 2.

(18) "Old revenues period" means the period described in KRS 65.7045 (30)(b)1. to 2.

(19) "Original cost" means the basis of the property for federal income tax purposes, prior to any federal adjustments, at the time of acquisition by the corporation, pass-through entity or sole proprietorship and adjusted by subsequent capital additions or improvements thereto and partial disposition thereof, by reason of sale, exchange, or abandonment.

(20) "Partnership" means "partnership" as defined in Section 7701(a)(2) of the Internal Revenue Code, 26 U.S.C. 7701(a)(2), except that a publicly traded partnership as defined by Section 7704(b) of the Internal Revenue Code, 26 U.S.C. 7704(b) shall be excluded.

(21) "Pass-through entity" means a partnership, S-corporation or multi-member limited liability company taxed as a partnership or S-corporation for federal income tax purposes.

(22) "Payroll factor" means a fraction, the numerator of which is the total amount paid or payable in the footprint by a corporation, pass-through entity or sole proprietorship during the old revenues or new revenues periods for compensation, and the denominator of which is the total amount paid or payable in this state by a corporation, pass-through entity or sole proprietorship during the old revenues or new revenues periods for compensation. Compensation is paid or payable in the footprint if:

(a) The individual’s service is performed entirely within the footprint;

(b) The individual’s service is performed both within and without the footprint, but the service performed without the footprint is incidental to the individual’s service within the footprint; or

(c) Some of the service is performed in the footprint and the base of operations or, if there is no base of operations, the place from which the service is directed and controlled is not in any state in which some part of the service is performed, but the individual’s residence is in the footprint.

(23) "Physical presence within a footprint" means owning or leasing real or tangible personal property that is located within a footprint.

(24) "Project grant agreement" is defined in KRS 65.7045(34).

(25) "Property factor" means a fraction, the numerator of which is the average value of the real and tangible personal property owned or rented and used in the footprint by a corporation, pass-through entity or sole proprietorship during the old or new revenues periods and the denominator of which is the average value of the real and tangible personal property owned or rented and used in this state by a corporation, pass-through entity or sole proprietorship during the old or new revenues periods; except that property which has been certified as a pollution control facility as defined in KRS 224.01-300 shall be excluded from the property factor.

(26) "Reciprocity state" means a state with which the Department of Revenue has an income tax reciprocity agreement in full force and effect as described in 103 KAR 17:140.

(27) "S-corporation" is defined in KRS 141.010(27).

(28) "Sales factor" means a fraction, the numerator of which is the total sales of the corporation, pass-through entity or sole proprietorship in the footprint during the old or new revenues periods, and the denominator of which is the total sales of the corporation, pass-through entity or sole proprietorship in this state during the old or new revenues periods.

(29) "Sole proprietorship" means an unincorporated business with one individual as the owner, including an individually owned single member limited liability company that is disregarded as an entity separate from its owner for federal income tax purposes.

(30) "State tax revenues" is defined in KRS 65.7045(40)(b) to (d).

Section 2. Apportionment. A corporation, pass-through entity or sole proprietorship that has a physical presence within and without the footprint shall compute the apportionment factor for purposes of apportioning state tax revenues to the footprint as follows:

(1) Sales factor.

(a) The following shall serve as examples of activities that result in the assignment of gross receipts to the numerator of the sales factor:

1. The sale, lease, rental, or other use of tangible personal property in the footprint;

2. The sale of real property located in the footprint;

3. The lease, rental or other use of real property located in the footprint;

4. The provision of services performed entirely in the footprint;

5. The provision of services performed within and without the footprint; and

6. The distributive share of net income received from a pass-through entity that has a physical presence within the footprint.

(b) Sales of real or tangible personal property shall be assigned to the footprint if the property is in the footprint or is shipped or delivered to a purchaser in the footprint.

(c) Sales of tangible personal property to the U. S. Government shall be assigned to the footprint if the property is shipped from the footprint.

(d) Receipts from intangibles shall be assigned to the footprint if the corporation, pass-through entity or sole proprietorship’s commercial domicile is in the footprint.

(e) Rents or royalties from real or tangible personal property shall be assigned to the footprint if the property is located in the footprint or in the case of mobile property the rent is assigned to the footprint, if the lessee’s base of operations for the property is in the footprint.

(f) Receipts from the performance of services shall be assigned to the footprint if the services are performed entirely in the footprint, or the services are performed both within and without the footprint but a greater portion is performed in the footprint than outside the footprint based on cost of performance.

(g) The denominator of the sales factor shall include the amount of the distributive share income from a pass-through entity apportioned to Kentucky pursuant to KRS 141.206.

(h) Sales of goods destined for delivery to a Kentucky location outside of the footprint shall be included only in the denominator.

(i) The denominator shall include the assignment of gross receipts to Kentucky and sales assigned to Kentucky under the provisions of 103 KAR 16:270.

(2) Payroll factor.

(a)1. Compensation shall not include payments to an independent contractor or any other person not properly classifiable as an employee.

2. Only amounts paid directly to employees shall be included in the payroll factor. Amounts considered paid directly shall include the value of board, rent, housing, lodging, and other benefits or services furnished to employees by the corporation, pass-through entity or sole proprietorship in return for personal services, if the amounts constitute income to the recipient under KRS 141.010(12) and (13).

(b) The total amount paid or payable for compensation during the taxable year shall be determined by the corporation, pass-through entity or sole proprietorship’s accounting method and shall be the same method used by the corporation, pass-through entity or sole proprietorship for federal income tax purposes. If the corporation, pass-through entity or sole proprietorship has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have been paid; and

(c) The denominator of the payroll factor shall include the wages and compensation described in Section 2 of 103 KAR 16:090.

(3) Property factor.

(a) Property shall be included in the property factor if it is actually used or is available for or capable of being used during the taxable year. Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor.

(b) A plant temporarily idle or raw material reserves not currently being processed shall be included in the factor.

(c) Inventory in process shall be included in the factor. Property or equipment under construction during the taxable year shall be excluded from the factor until it is actually used or is available for or capable of being used during the old or new revenues periods.

(d) Property used shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as its sale.

(e) Property in transit between a buyer and seller shall be included in the numerator if the destination is located within the footprint. Property in transit between locations of the same corporation, pass-through entity or sole proprietorship shall be considered at the destination location for purposes of the property factor.

(f) The value of mobile or movable property such as construction equipment, trucks or leased electronic equipment which is located within and without the footprint during the old or new revenues periods shall be determined, for purposes of the numerator of the factor, on the basis of total time within the footprint during the old or new revenues periods.

(g) Property owned by the corporation, pass-through entity or sole proprietorship shall be valued at original cost.

(h) Capitalized intangible drilling and development costs shall be included in the property factor whether or not they have been expenses for either federal or state purposes.

(i) If the original cost of property is not ascertainable, is nominal, or is zero, the property shall be included in the factor at its fair market value at the date of acquisition by the corporation.

(j) Inventory shall be included in the property factor by the valuation method used for federal income tax purposes.

(k) Property acquired by gift or inheritance shall be included in the factor at its basis for depreciation for federal income tax purposes.

(l) Annual rental rate shall be determined as follows:

1. If the property is rented for a twelve (12) month period, the annual rent.

2. If the property is rented for less than a twelve (12) month period, the net rent paid for the actual period of rental.

3. Property rented by a corporation, pass-through entity or sole proprietorship shall be valued at eight (8) times the net annual rental rate.

4. If this calculation results in a negative value or a clearly inaccurate valuation, any other method which will properly reflect the value may be required by the office at the direction of the commission or may be requested by the corporation, pass-through entity or sole proprietorship, except the net annual rental rate shall not be less than the total annual rental rate multiplied by a fraction, the numerator of which is the fair market value of rent applicable to rental property used by the corporation divided by the fair market value of rent applicable to all of the corporation’s rental property.

5. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and the other items; or

(m) If property is used at no charge or rented for a nominal rate, the property shall be included in the property factor on the basis of the fair market value of rent for comparable property in the area.

(n) Leasehold improvements shall, for the purposes of the property factor, be treated as property owned by the corporation, pass-through entity or sole proprietorship regardless of whether the corporation, pass-through entity or sole proprietorship is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. The original cost of a leasehold improvement shall be included in the factor.

(o) Averaging by monthly property values shall apply if:

1. Fluctuations in the values of the property exist during the old or new revenues period;

2. Property is acquired after the beginning of the old or new revenues period or disposed of before the end of the old or new revenues period; or

3. Fluctuations in the percentage of property used in Kentucky exist during the old or new revenues period.

(p) The denominator of the property factor shall include the amounts included in the numerator of the property factor in 103 KAR 16:290.

Section 3. Agency Requirements. (1) An agency that is participating in a project grant agreement shall furnish the following information, if applicable, in addition to the increment calculation required under KRS 65.7083(1)(b) to the office to allow the office to assist the commission in verifying state tax revenues, old revenues, new revenues, and incremental revenues.

(a) The state withholding tax identification number for any corporation, pass-through entity or sole proprietorship located in the footprint who withholds Kentucky income tax from the wages of employees in a footprint.

(b) A list of all employees for each corporation, pass-through entity or sole proprietorship in the footprint, including the employee’s social security number, except that employees who are residents of a reciprocity state shall not be included.

(c) A list of all corporations and pass-through entities doing business within the footprint, their federal employer identification number and Kentucky corporation or limited liability entity tax taxpayer identification number.

(d) A list of all sole proprietors doing business within the footprint and their social security numbers.

ROBERT M. BURNSIDE, Chair

APPROVED BY AGENCY: August 15, 2007

FILED WITH LRC: August 16, 2007 at 11 a.m.

PUBLIC HEARING AND PUBLIC COMMENT PERIOD: A public hearing on this proposed new administrative regulation shall be held on October 22, 2007 at 8 a.m. in the Office of Legal Services Conference Room, Third Floor, 200 Fair Oaks, Frankfort, Kentucky 40601. Individuals interested in being heard at this hearing shall notify this agency in writing at least five workdays prior to the hearing, of their intent to attend. If no notification of intent to attend the hearing is received by the required date, the hearing may be canceled. This hearing is open to the public. Any person who wishes to be heard will be given an opportunity to comment on this proposed administrative regulation. A transcript of the public hearing will not be made unless a written request for a transcript is made. If you do not wish to be heard at the public hearing, you may submit written comments on the proposed administrative regulation. Written comments shall be accepted through October 31, 2007. Send written notification of intent to be heard at the public hearing or written comments on the proposed administrative regulation to the contact person noted below.

CONTACT PERSON: Angela Robinson, Finance and Administration Cabinet, 702 Capitol Avenue, Room 195-B, Frankfort, Kentucky 40601, phone (502) 564-4240, fax (502) 564-3894.

REGULATORY IMPACT ANALYSIS AND TIERING STATEMENT

Contact person: Angela Robinson

(1) Provide a brief summary of:

(a) What this administrative regulation does: This regulation provides guidance on the computation of old and new revenues related to tax increment financing participation programs and provides the reporting requirements of agencies participating in project grant agreements.

(b) The necessity of this administrative regulation: This regulation is needed to insure that the correct amount of incremental revenues is pledged by the State Tax Increment Financing Commission.

(c) How this administrative regulation conforms to the content of the authorizing statutes: KRS 65.7069(8) provides that the State Increment Financing Commission shall have authority to promulgate any regulations necessary for the administration of KRS 65.7069, 65.7071, 65.7073, 65.7075, 65.7077, 65.7079 and 65.7081 in accordance with KRS Chapter 13A.

(d) How this administrative regulation currently assists or will assist in the effective administration of the statutes: This administrative regulation provides both the Finance and Administration Cabinet and participating agencies guidance to follow in computing incremental revenues, state tax revenues, new revenues and old revenues related to tax increment financing programs.

(2) If this is an amendment to an existing administrative regulation, provide a brief summary of:

(a) How the amendment will change this existing administrative regulation: N/A

(b) The necessity of the amendment to this administrative regulation: N/A

(d) How the amendment will assist in the effective administration of the statutes: N/A

(3) List the type and number of individuals, businesses, organizations, or state and local governments affected by this administrative regulation: The Commonwealth and any county, city or agency designated as the entity managing a development area established pursuant to KRS 65.7049, 65.7051, or 65.7053 will be affected by this administrative regulation.

(4) Provide an analysis of how the entities identified in question (3) will be impacted by either the implementation of this administrative regulation, if new, or by the change, if it is an amendment, including:

(a) List the actions that each of the regulated entities identified in question (3) will have to comply with this administrative or amendment: The entities identified in question (3) will follow this administrative regulation when computing incremental revenues, state tax revenues, new revenues and old revenues related to tax increment financing programs.

(b) In complying with this administrative regulation or amendment, how much will it cost each of the entities identified in question (3): The guidance in this administrative regulation should not increase the cost of entities having tax increment financing participation agreements, but should provide needed guidance that will expedite the process.

(c) As a result of compliance, what benefits will accrue to the entities identified in Question (3): The entities in question (3) will have better guidance to follow when computing incremental revenues, state tax revenues, new revenues and old revenues related to tax increment financing programs, which should help eliminate misunderstandings and litigation.

(5) Provide an estimate of how much it will cost to implement this administrative regulation:

(a) Initially: There will be a minimal cost initially in the administrative regulation process for the Finance and Administrative Cabinet. Also, a small amount of costs associated with notifying cities, counties or designated agencies of this administrative regulation will be incurred.

(b) On a continuing basis: There will be no additional cost to the Finance and Administration Cabinet on a continuing basis as a result of this administrative regulation.

(6) What is the source of the funding to be used for the implementation and enforcement of this administrative regulation: No additional funding will be needed by the Finance and Administration Cabinet for the implementation and enforcement of this administrative regulation.

(7) Provide an assessment of whether an increase in fees or funding will be necessary to implement this administrative regulation, if new, or by the change if it is an amendment: No increase in fees or funding will be necessary to implement this administrative regulation.

(8) State whether or not this administrative regulation establishes any fees or directly or indirectly increases any fees: This administrative regulation does not establish any fees or directly or indirectly increase any fees.

(9) TIERING: Is tiering applied? Tiering does not apply to this administrative regulation as it applies to all tax increment financing participation programs in which the Commonwealth has agreed to participate.

FISCAL NOTE ON STATE OR LOCAL GOVERNMENT

1. Does this administrative regulation relate to any program, service, or requirements of a state or local government (including cities, counties, fire departments, or school districts)? Yes

2. What units, parts or divisions of state or local government (including cities, counties, fire departments, or school districts) will be impacted by this administrative regulation? Finance and Administration Cabinet and all cities, counties or designated agencies having tax increment financing participation programs in which the Commonwealth has agreed to participate.

3. Identify each state or federal statute or federal regulation that requires or authorizes the action taken by the administrative regulation. KRS 65.7069(8) authorizes the action taken by this administrative regulation.

4. Estimate the effect of this administrative regulation on the expenditures and revenues of a state or local government agency (including cities, counties, fire departments, or school districts) for the first full year the administrative regulation is to be in effect. A small increase in expenditures for the Finance and Administration Cabinet will occur in the administrative regulation process and to notify cities, counties and designated agencies having tax increment finance participation agreements of this administrative regulation.

(a) How much revenue will this administrative regulation generate for the state or local government (including cities, counties, fire departments, or school districts) for the first year? Unknown fiscal impact in the first full year this regulation is to be in effect.

(b) How much revenue will this administrative regulation generate for the state or local government (including cities, counties, fire departments, or school districts) for subsequent years? None.

(c) How much will it cost to administer this program for the first year? A very small increase in expenditures will occur in the first year of implementation.

(d) How much will it cost to administer this program for subsequent years? No increase in costs for subsequent years.