Capital gains deduction and broadband sales/use tax exemption clarification sent to Governor Kehoe

By Ray McCarty, president/CEO, Associated Industries of Missouri

May 7, 2025 - The Missouri House gave its final approval today to SS#2 HCS HBs 594 & 508, a bill that contains a capital gains deduction for state income tax purposes, a clarification of a sales/use tax exemption of equipment used to provide broadband service, sales tax exemptions for diapers and feminine protection products, an expansion of property tax relief programs for seniors, and several local sales tax provisions. The Senate passed the bill April 7 and it will now be sent to Governor Mike Kehoe.

"We are proud to cut taxes for everyday Missourians and give our local communities the resources they need to thrive," Speaker Jon Patterson said in a statement. "Cutting taxes on diapers and feminine hygiene products affects ALL Missouri families and will have the greatest positive impact with low-income women and girls across Missouri. House Bill 594 is family first legislation."

Speaker Pro Tem Chad Perkins, sponsor of the bill, said, "There is something in this for everyone. I couldn't imagine anyone not supporting this."

Capital Gains Deduction

The capital gains deduction for individual taxpayers is effective for tax years beginning on or after January 1, 2025, and is a 100% deduction. If the Missouri individual income tax rate is reduced to 4.5%, corporations would also be entitled to a capital gains deduction for tax years beginning on or after January 1 of the following year.

"Allowing a deduction for capital gains will benefit many businesses, particularly family businesses looking to keep a business in the family," said Ray McCarty, president/CEO of Associated Industries of Missouri. "Transferring a business to a family member can create such a large tax liability that the business must be sold to pay the taxes. It is similar in that respect to the federal death (estate) tax. Any reduction in this tax liability could allow these businesses to remain in the family for the 90% of businesses that report their business income on their individual income tax returns."

Sales Tax Exemptions

Currently, machinery and equipment used to provide telecommunications services are exempt from state and local sales and use taxes. This bill clarifies that exemption also applies to machinery and equipment used to provide broadband services. Nearly all of this equipment is already exempt but this clarifies the exemption to prevent future misunderstandings in application of the exemption.

The bill also contains a sales and use tax exemption for diapers, incontinence products, and feminine protection products. Previous versions of this language would have lowered the rate on such items to the same rate as food items, but the language in this bill is a complete exemption.

NOTE: Whether this exemption applies to local sales/use taxes or not may be open for debate. The exemption is worded as if it only applies to state sales and use taxes and local sales taxes because it specifically exempts the items from the provisions of Chapter 144. This chapter contains the state sales and use tax laws and also the local use tax law but does not include local sales tax laws. However, subsection 8 of section 32.087, RSMo, provides that all state sales tax exemptions shall also apply to local sales taxes. That provision has not changed since it was passed into law in HB 29 (1991), and it specifically applies to exemptions that are later amended by the General Assembly.

Senior Citizens and Disabled Property Tax Credit Changes

The bill changes the income used to determine eligibility for the senior citizen, disabled and veteran property tax credit and increases the amount of that credit for calendar years beginning on or after January 1, 2026.

Local Sales Tax Changes

The bill also allows a local law enforcement sales tax adopted in the 2022 general election in a particular county to create a sales tax rate greater than 1% (but only up to 1.5%); allows a regional jail district sales tax to be implemented at a rate of up to 1% (currently .5%), allows proceeds from a local sleeping room tax to be used for operating costs of a community center if approved by voters, allows local sleeping room taxes to apply to bed and breakfast inns and campground cabins without a vote (even though when adopted the tax did not apply to those entities), and allows several more communities to impose local public safety sales taxes and local ambulance and fire protection district sales taxes.