Local Occupational Tax: A Vetted System That Works

(Editor’s Note: This is the third article in a multi-part series on local revenue in Kentucky. A previous article on occupational license fees is available here, and one on primary municipal taxes and revenues is available here.)

When Kentuckians call 911, turn their water on to brush their teeth, or drive on plowed streets in winter, they see the local occupational tax at work. This tax, which accounts for more than 60% of total municipal revenue across the state, is how cities pay for the services that make communities safe, functional, and vibrant.  

Kentucky’s system for collecting and administering this tax is one that works. Built through years of collaboration between cities, businesses, and state leaders, it strikes the right balance between efficiency, fairness, and local control. 

 The Constitutional and Statutory Foundation 

The ability to impose an occupational license fee stems from Section 181 of the Kentucky Constitution, which allows the General Assembly to delegate taxing power to local governments. Specifically, Section 181 provides that cities may collect license fees “on franchises, trades, occupations and professions.”  

This authority is implemented through KRS 92.281, which gives cities the ability to levy an occupational license fee on gross earnings, net profits, and certain gross receipts. Kentucky’s system is also guided by KRS 67.750 to 67.795, which establishes a uniform framework for local occupational license taxes. These statutes require the standardization of key components including definitions, tax formulas, and income allocation rules across all jurisdictions that impose the tax. This ensures consistency and fairness for businesses operating in multiple locations, while still preserving local control over rates, enforcement, and use of revenues. 

How Kentucky Modernized Local Tax Collection  

In 2012, the Kentucky General Assembly passed House Bill 277, launching a multi-phase effort to simplify the occupational license tax process. The goal of this legislation was clear: make it easier for businesses to comply while preserving the authority of local governments to administer this essential revenue source. Prior to its adoption, businesses operating in Kentucky had to locate, select, and file the correct forms with more than 200 taxing districts.  

HB 277 addressed that challenge by creating a centralized, consistent, and transparent process built on collaboration between the business community and local governments. Now, businesses are able to access all forms in place on the Secretary of State’s website.  

The first phase of implementing the legislation directed each taxing district that imposed an occupational license tax to submit a copy of their return forms, instructions, and ordinance that permits the levying of the tax to the Secretary of State. 

The second phase was the creation of standardized forms. These forms were developed by the Secretary of State through the guidance of numerous stakeholders. The parties involved, which included the Kentucky League of Cities (KLC), Kentucky Association of Counties (KACo), Kentucky Occupational License Association (KOLA), Kentucky School Board Association (KSBA), Kentucky Society of Certified Public Accountants (KyCPA), the cities of Lexington and Louisville, and business representatives.  

The result was a set of simple, uniform forms that streamline how businesses report taxes on gross wages, net profits, and gross receipts. The following forms are available on the Kentucky One-Stop Business Portal: 

A Collaborative Process that Works  

Kentucky’s adoption of the one-stop business portal and the standardized forms for occupational business licensure fees was an extensive process that required the involvement of multiple entities. The level of participation involved demonstrates that the process put in place was well designed and included a wide range of professional input. The passage of 2012 HB 277 has resulted in a system that is simple, convenient, and fast for all businesses that operate in Kentucky.  

The KLC Board of Directors has taken a strong stance in support of preserving local authority to collect occupational license, insurance premium, and transient room taxes. Local collection ensures that cities can respond quickly to community needs, maintain accountability to taxpayers, and protect the revenue streams that fund essential services.