Stites & Harbison, PLLC

On April 24, 2008, Kentucky Governor Steve Beshear signed into law House Bill 704, which provides for changes to Kentucky's revenue and taxation schemes.  Many of these changes are designed to improve the State's ailing fiscal health at the expense of taxpayers, with the two most significant changes impacting interest calculations.

First, House Bill 704 amends KRS 131.183 to alter the interest rates paid on both refunds owed by the State to taxpayers and taxes owed by taxpayers to the State.  Previously, interest on both types of payments was paid at a rate "equal to the adjusted prime rate charged by banks rounded to the nearest full percent" -- i.e., the prime rate.  H.B. 704 destroys this previously-existing balance by establishing a rate scheme that favors the State at the expense of taxpayers.  As of May 1, 2008, interest will accrue on obligations owed to the State at the prime rate plus two percent, while interest allowed on refunds paid by the State will be paid at the prime rate minus two percent.  Thus, interest on obligations owed to the State will accrue at a rate that is four percent greater than that applied on obligations owed by the State to taxpayers.

Second, House Bill 704 retroactively changes the accrual date for the calculation of applicable interest owed on all refunds issued after the effective date of the legislation.  Previously, interest on refund claims began to accrue 60 days after the date of the return or the date the tax was paid.  House Bill 704 alters this approach significantly.  Now, interest begins to accrue 60 days after the latest of:

(a)  the date of the return;
(b)  the date the return was filed;
(c)  the date the tax was paid;
(d)  the last day prescribed by law for filing the return; or
(e)  the date an amended return claiming a refund is filed.

It is the occurrence set forth in subsection (e) that should be of particular significance to Kentucky taxpayers, because it is commonplace for amended returns to be filed several years after original returns were filed; indeed, Kentucky law allows taxpayers four years within which to amend their returns.  House Bill 704 applies retroactively, so this provision will be applied to deprive numerous taxpayers of interest for periods for which it previously would have been owed.