Yes. As of January 1, 2023, SaaS (software as a service) transactions are subject to Kentucky’s 6% sales and use tax. However, for SaaS to be taxable in Kentucky, certain criteria have to be met, and there are exceptions.
| SaaS | |
|---|---|
| Digital Goods | |
| Confused? | Talk to us -> |
| Sales | $100,000 |
|---|---|
| Transactions | 200 |
| Physical? |
| Kentucky | 6.00% |
|---|---|
| Average Total Rate | 6.00% |
| Local Rates Apply |
SaaS taxation varies significantly across the United States, in part because the technology is relatively new and doesn’t fit easily into some states’ tax classification systems. Unlike traditional software, which is usually purchased once and installed directly on a user’s device, SaaS users pay a subscription fee to access the software online — typically via the provider’s website.
Taxability can hinge on how SaaS is defined by each state. While physical goods or services are clearly classified in most tax codes, SaaS often falls into a gray area. This makes it essential for SaaS providers to understand the SaaS tax laws in each state they operate in.
SaaS taxability can depend on how a state classifies it, whether that be as tangible software, a service, or something else. For example, Tennessee considers all software taxable regardless of how a person accesses it, while Ohio classifies SaaS and taxes it as tangible personal property. Meanwhile, certain states exempt it from sales tax entirely.
In the past, many forms of SaaS were exempt from Kentucky’s sales and use tax, as the state did not consider software accessed through the cloud or a provider’s server taxable. However, with the passage of House Bill 8, Kentucky began taxing “prewritten computer software access services” — in other words, SaaS. This 6% tax applies to both business-to-business (B2B) and business-to-consumer (B2C) transactions. Although this tax rate is also consistent across different nexus types, it’s helpful to understand how nexus functions in Kentucky.
In many states, including Kentucky, “nexus” refers to the type of activity or presence that creates a tax obligation for a business. Nexus is generally categorized as either physical or economic. In Kentucky, the requirements for each nexus type include:
Businesses with an economic nexus in Kentucky are often referred to as “remote retailers,” as defined by House Bill 487. Whether you operate as a remote retailer or have physical nexus, you must register for a sales tax permit.
House Bill 8 introduces exemptions that may benefit SaaS providers. The legislation states that, starting January 1, 2025, the gross receipts exemption for taxable services will rise from $6,000 to $12,000 annually. This means that businesses that earn less than $12,000 in sales in Kentucky during a calendar year won’t need a sales tax permit. However, once a business exceeds this threshold, all sales above $12,000 are taxable. At that point, a provider will need to get a permit and to collect (and remit) taxes on sales in the state.
Careful recordkeeping is key for companies who believe they qualify for this gross receipts exemption. If Kentucky-specific sales exceed that $12,000 threshold and the appropriate compliance steps aren’t taken, a company could lose the ability to operate legally within the state until they resolve their tax obligations.
Digital goods that are purchased for storage, use, or other consumption in Kentucky are subject to sales tax. According to the Kentucky Department of Revenue, this tax also applies to digital goods that are purchased outside the state that will be stored, used, or consumed within Kentucky.
In addition, digital goods may qualify for the gross receipts exemption outlined by House Bill 8, which increases the threshold to $12,000 annually starting January 1, 2025. Hybrid digital services that integrate digital goods with SaaS features, such as video conferencing or file-sharing platforms, are also taxed under Kentucky’s broader definition of prewritten software.
According to the Kentucky Department of Revenue, there are no additional local sales and use taxes in the state. This means that SaaS is subject only to the statewide tax rate. As of November 2024, the sales and use tax rate is 6%, applied to gross receipts or purchase price.
There are no variations in the tax rate for SaaS companies that have economic nexus (those retailers are also known as “remote retailers”) or physical nexus.
The location of a provider’s customers within the state also has no impact on overall tax rate. For example, if the subscription cost for a SaaS product was $3500, the applicable tax would be $210. This will typically be collected when the customer in Kentucky pays their subscription fee.
In order for SaaS providers in Kentucky to stay compliant, they must follow these essential steps
Although Kentucky’s tax structure is relatively straightforward, it is still possible to make mistakes. Staying compliant can be a challenging task, and even minor errors can have serious consequences. Noncompliance may result in high penalties, accruing interest charges, and an increased likelihood of a business audit. To avoid these and other unnecessary repercussions, effective tax compliance tools like Numeral can be essential. SaaS providers may also want to use the tax compliance resources provided by the Kentucky Department of Revenue.
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Businesses can contact the Kentucky DOR directly through their Contact Us page or by calling (502) 564-4581.
Although SaaS providers may have previously enjoyed tax-exempt status, House Bill 8 has made it mandatory to collect and remit sales and use tax in Kentucky. In order to stay compliant, SaaS companies can benefit from:
Utilizing resources provided by Kentucky or tax compliance platforms like Numeral can simplify this process. By leveraging these resources and staying up to date on changes in tax law, SaaS providers can avoid expensive consequences and continue providing the services their customers require.
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