On July 1, 2021, the state of Kentucky enacted a new sales tax exemption for electricity that is used or consumed in the commercial mining of cryptocurrency. The new law allows for commercial cryptocurrency mining operations to apply for an exemption certificate for purchases of electricity, which can also be used for the state’s local utility gross receipts license taxes.
Cryptocurrency mining is the process by which cryptocurrency transactions are verified, and by which new cryptocurrency is created. The process of mining involves solving complex mathematical problems, adding these solutions to a digital leger to verify cryptocurrency transactions through a technology called blockchain, and being rewarded for these solutions with newly minted cryptocurrency. Due to the complexity and speed required to solve these highly complex mathematical cryptographic problems, large scale processing centers requiring industrial amounts of electricity and computing power are required.
In the act creating the new law, the state of Kentucky states that it is intended to encourage and expand cryptocurrency mining operations in the state, similar to previous tax exemptions for other manufacturers and industrial processors, and hopes it will give the state the potential to become a national leader in this industry. Like how the sales tax statutes regarding goods, services, and communications have expanded and shifted in an increasingly digital world, Kentucky is adjusting its language around manufacturing exemptions to keep up with emerging technologies. The guidelines for how to apply tax to things that only exist in the digital realm continue to be reinterpreted with each new introduction to the digital commerce landscape, and how each state will work these new technologies, including cryptocurrency and blockchain, into their sales and use tax framework remains to be seen. Kentucky House Bill 230, Effective July 2021.