A Bluegrass State Distinction: Kentucky Municipality Taxes
In the Excess and Surplus Lines market, Kentucky Municipality Taxes can be a challenge. Is there a way to simplify surplus lines tax filing in Kentucky?
The Commonwealth of Kentucky is rich in tradition and culture–thoroughbreds, Bluegrass music, clogging, “Old 152”, and well-aged Kentucky Bourbon. Kentucky is also home to one of the oldest, continuously held sporting events in U.S. history, the Kentucky Derby.
Kentucky holds another distinction that many do not realize unless you are familiar with the Excess and Surplus Lines market–Kentucky Municipality Taxes.
On a National Level
In the insurance industry, various states collect municipality taxes, which is not unusual. Cities and counties from all states collect taxes to help support their communities. On a national level, the National Association of Counties (NACo), established in 1935, “unites America’s 3,069 county governments” and “brings county officials together to advocate with a collective voice on national policy,” according to the NACo website. NACo advocates for counties on a Federal level to provide solutions, resources, and education. Likewise, the National League of Cities (NLC) supports “more than 2,000 cities across the nation,” in addition to their mission to “strengthen local leadership, influence Federal policy, and drive innovative solutions,” as per the NLC website.
Many counties and cities across the United States are members of these national organizations and are involved not only on a national level but also at the state level. For example, one state involved with these two national organizations is the Commonwealth of Kentucky, a well-known fact among insurance carriers and surplus line brokers alike.
The State Level
The Kentucky Association of Counties (KACo) since 1978 “has teamed up with county governments and the private sector through the Kentucky Association of Counties Associate Membership Program (KACAM),” according to the KACo website. Beginning in 1927, the Kentucky League of Cities (KLC) has “served municipalities in the Commonwealth of Kentucky through advocacy and unity…” according to the KLC website, which further states that the KLC “is a non-stock, non-profit membership association serving over 380 Kentucky cities and municipal agencies.”
Both KACo and the KLC give a voice to the many city and county municipalities in Kentucky on legislative issues on a state and federal level, making it clear that these two organizations provide much-needed support to the many cities and counties they serve. According to the KLC website, in 2011 and 2017, the taxes collected from insurance premiums made up 14% of the tax revenue sources. These monies are “generally used to pay for most governmental services such as police protection or ambulance services.” So, the funds collected from insurance premium taxes are put to good use to help support much-needed services for communities. Likewise, KACo “Insurance premium taxes are one of the top three revenue sources for Kentucky counties,” according to the KACo website. Like the KLC, the revenue generated from insurance premium taxes is used to assist the counties.
An Important Distinction
What sets the Commonwealth of Kentucky apart from all other states? The taxes generated from insurance premiums are paid directly to the taxing municipality where the risk exposure is located. In other words, the surplus lines broker or insurance carrier is responsible for collecting and paying the municipality taxes to the proper taxing jurisdiction. In the admitted market, the insurance carrier is responsible for these taxes, and in the non-admitted market, it is the surplus lines broker’s responsibility. Currently, there are over 400 taxing jurisdictions, or municipalities if you prefer, in Kentucky, and keeping up with which municipality is owed the tax is no easy feat. Furthermore, each municipal taxing jurisdiction has a different tax rate, and the tax rates vary depending on coverage type, and certain municipalities require a minimum dollar amount.
Many surplus lines brokers struggle with determining the correct taxing jurisdiction because Kentucky does not allow the brokers or the carriers to use zip codes when determining which municipality receives the tax. Surplus lines brokers may contact the Kentucky County Property Valuation Administrator directly or purchase an approved Verified Risk Location (VRL) system or program to properly ascertain the correct municipality the insurance premium tax is due. InsCipher, a surplus lines management compliance company, is presently working with the Kentucky Department of Insurance (KY DOI) to become an approved Verified Risk Location software vendor. The process to become approved as a VRL vendor takes time, and once approved, must be renewed every three years.
Did you know? InsCipher offers a free Kentucky Surplus Lines Tax Calculator
These VRL software programs are not cheap, and many smaller brokers cannot justify the cost of purchasing the VRL software program based on the actual amount of premium written in Kentucky, so many opt to contact the county property valuator direct. Larger surplus lines brokers usually choose to purchase VRL software from one of the approved vendors listed on the KY DOI website.
The Municipality Tax Filing Pursuit
Surplus lines brokers must report and pay municipality taxes quarterly using the Form LGT-141. A separate LGT-141 form is used for each municipality in which insurance premium taxes are owed, and these reports are due within 30 days after the end of the calendar quarter. For example, if a broker wrote insurance in ten different municipalities during the calendar quarter, then ten LGT-141 forms would be completed, along with ten checks, each made payable to the appropriate municipality (one check per report) and mailed to each municipality separately. At the end of each reporting year, the surplus line broker is required to complete Form LGT-140, the Annual Reconciliation, for each municipality where business was written during the year, as reported on the LGT-141 Quarterly Reports. This is then mailed to each municipality on or before March 31 of the following year. Any return premium credits are reported using Form LGT-142 and must be completed and mailed with the Quarterly Form LGT-141. Except for Louisville, no other Kentucky municipality allows for online filing for the Quarterly Report Forms LGT-141 and LGT-142 or the Annual Reconciliation Form LGT-140. No other municipality allows for electronic payment of taxes. All municipality reports are manually completed, and the taxes are paid by the issuance of a paper check and mailed through the United States Postal Service.
The Kentucky 3% surplus line taxes are reported and paid electronically through the Kentucky Department of Insurance. The Kentucky 1.8% Revenue Surcharge tax may also be paid electronically, although a paper report is still required to be completed and mailed directly to the Kentucky Department of Revenue.
A Reason for a Manual Process
You may be wondering why the Kentucky municipality tax filings is a manual process… a good question, and there is a good answer. Many of the municipalities in Kentucky are all in favor of online reporting and electronic payments. However, many of these same municipalities are small with few resources and little money in their budgets to set up electronic reporting and payment of municipality taxes. Other than Louisville, these municipalities do not have the means to create portals for online filings.
For the surplus line broker, this presents a substantial problem. Brokers file hundreds of paper reports and issue hundreds of paper checks each year, which is cumbersome and time-consuming. To further complicate matters, all these paper reports and paper checks require signatures. This manual process of reporting and filing Kentucky municipality taxes has always put a burden on the surplus line brokers. When the COVID-19 pandemic hit, forcing states to lockdown with individuals working from home, it made the process that much more difficult.
Since many municipalities do not have the resources to develop and maintain their own software program, as Louisville does, perhaps a platform could be developed through the KLC and KACo. The Kentucky League of Cities and the Kentucky Association of Counties represent many cities and counties in the Commonwealth of Kentucky. For there to be any progress, it will have to start with these two organizations.
InsCipher is an insurtech company providing software and services that are revolutionizing inefficient insurance processes. Save your agency time and money by automating surplus lines compliance, filing, and reporting. Want to learn more? Request a free demo today!