Kentucky Computer, Software, and SaaS Tax Guide

Prepared by Sales Tax Helper

Table of Contents

1. Introduction
2. Nexus Considerations
3. General Rules and Compliance Considerations
4. Specific Exemptions
5. Sourcing Rules
6. Audit Considerations
7. Voluntary Disclosure Agreements (VDAs)
8. Conclusion
9. References & Resources

1. Introduction

For software companies, SaaS providers, and technology firms conducting business in Kentucky, the state's sales and use tax rules present unique challenges and recent changes that need careful attention. Unlike some states that treat digital products and cloud-based services uniformly, Kentucky distinguishes between prewritten (canned) software, custom software, and various technology services based on their method of delivery and level of customization. Kentucky's tax treatment of software and technology-related services depends on multiple factors, including whether software is prewritten or custom, and increasingly, how cloud-based services are classified.

Most significantly, effective January 1, 2023, Kentucky began taxing Software as a Service
(SaaS) through the introduction of House Bill 8, which expanded the state's sales tax base to
include over 30 new services, including "prewritten computer software access services." This
change puts Kentucky in a growing minority of states that now tax SaaS and other
internet/cloud-based services.

Purpose of This Guide

This guide is designed to help businesses navigate Kentucky's sales and use tax rules related to software and technology services. It focuses on:

• Nexus Considerations: Understanding when businesses must register and collect
  Kentucky sales tax due to physical or economic presence.
• Taxability of Software & Services: Clarifying the tax treatment of prewritten vs. custom
  software, cloud computing services, and related technology offerings.
• Sourcing Rules: Determining how and where transactions are taxed based on customer
  location and method of software delivery.
• Audit Considerations: Identifying common tax audit triggers and best practices for
  compliance.
• Voluntary Disclosure Agreements (VDAs): Explaining the process for businesses to
  rectify past noncompliance while mitigating penalties and limiting back-tax liability.

Why This Matters for Technology Companies

Kentucky's sales tax laws impact software companies, SaaS providers, and technology firms in
multiple ways:

• Recent SaaS Taxation: With Kentucky's recent taxation of SaaS, businesses must assess
  whether their offerings trigger tax collection responsibilities and understand the $6,000
  exemption threshold.
• Compliance Challenges: The distinction between taxable prewritten software and
  exempt custom software requires careful documentation and proper invoice structuring.
• Multi-State Complexities: Technology companies often serve customers across many
  states, requiring them to navigate Kentucky's specific sourcing rules alongside those of
  other jurisdictions.
• Audit Risk Management: Failure to correctly assess and collect sales tax can result in
  significant penalties, interest, and extended audit exposure.

This guide will walk through Kentucky's specific sales tax rules governing software, SaaS, and
technology-related services while referencing applicable statutes, administrative rules, and
Kentucky Department of Revenue guidance. Throughout the guide, official Kentucky
Department of Revenue sources will be linked for further reference.

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