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Tax Modernization Efforts Are Well Under Way in Kentucky

During the 2005 legislative session, the Kentucky General Assembly created, amended, or repealed numerous tax-related statutes.  These changes, which became known as Tax Modernization, comprise Kentucky's most extensive tax reform in over half a century.  Tax reform was long overdue, but it meant that new computer software would have to be developed and hundreds of computer programs, forms and procedures would have to be changed in a short period of time.  Thanks to a strong working partnership between the Kentucky Department of Revenue (DOR) and the Commonwealth Office of Technology (COT), the commonwealth is well on its way to implementing the extensive changes necessary to make Tax Modernization happen.

"Implementing the Tax Modernization project has been quite a challenge for both Revenue and COT, but our staffs have done a remarkable job.  I'm extremely proud of the teamwork, dedication and professionalism that state employees from both agencies have shown in getting the job done."

   - Commissioner Mike Inman

House Bill 272 which created Tax Modernization was passed into law on March 18, 2005, and some of its tax changes went into effect as early as June 20, 2005.  The majority of the remaining changes were for taxable years that began on January 1, 2005, so the implementation effort had to begin immediately.  Soon after legislators left the capital city, staff in the DOR and the COT began to develop a comprehensive plan to tackle the massive project.  The mission was to modify existing legacy systems while implementing new Web-based functionality for Kentucky taxpayers.  The total effort estimated to complete the application development phases of the legislative mandates was approximately 90,000 hours!

In order to meet the initiative's target dates and produce a high-quality product for the commonwealth, staff within COT's Office of Application Development had to modify their normal processes and adopt innovative new approaches for the massive effort.  This included some creative structuring of the various projects into phases, consolidating testing by applications rather than projects, working in shifts when possible, and changing computer programs only once even if modifications were necessary for multiple tax projects.

While the magnitude of the effort has been enormous for COT's Office of Application Development, it has been just as intensive for the DOR.  Forms committees to re-write or create tax forms and publications have been meeting constantly since May to accommodate the many changes.  The development and training of over 700 employees is scheduled so that the agency can continue to administer taxes and provide quality service to all taxpayers of the commonwealth.  Seminars are also scheduled throughout the state to educate and answer questions for tax practitioners.

To date, the changes necessary for several taxes have been completed.  Transient room, cigarette and other tobacco products, alcoholic beverage, equine breeders, health care provider and utility gross receipts license taxes have been successfully implemented.  Other tax types involved in the Tax Modernization effort are:  the massive individual income tax, corporation tax, telecommunication tax, school tax and streamlined sales tax.  These taxes are in various stages of completion, but all are expected to be ready in time to meet their implementation dates.

The changes for Tax Modernization often include new Web-based capabilities that were not available in the past.  One such example is the Web filing functionality for the utility gross receipts license tax.  Utility companies will have the ability to submit monthly returns electronically to the DOR without having to utilize special software.  Built-in edits will validate file structure and provide on-screen messages that will instantly communicate the result of the edits to the user.  A subsequent e-mail will then be sent to the user detailing the ultimate acceptance or denial of the submitted return.  Similar new capabilities will be available for many of the other tax types.

To pay for all these changes, Kentucky taxpayers shouldn't have to dig any deeper into their pockets.  The tax law changes were established to be “revenue neutral,” which means that the revenue raised through new taxes should be equal to the amount of tax reductions and new credits.  The goal is to encourage, rather than impede, the success of businesses, as well as to attract and retain human capital in the commonwealth.  These changes are expected to spur future economic growth in Kentucky while exporting some of the state's tax burden to nonresidents.

Individuals and companies seeking more information on Tax Modernization may refer to the DOR's Web site at

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Last Updated 10/7/2005