Kentucky

Understanding SaaS Taxability in Kentucky

Is SaaS Taxable in Kentucky?

Yes, as of January 1, 2023, Kentucky imposes a 6% sales and use tax on prewritten computer software access services, which includes SaaS. This tax applies regardless of the pricing model, whether it’s per use, per user, per license, subscription, or another basis.

Distinction for B2B vs. B2C

Kentucky’s tax on SaaS applies uniformly to both business-to-business (B2B) and business-to-consumer (B2C) transactions. There are no specific exemptions for business-related purchases; thus, all SaaS transactions are subject to the 6% sales and use tax.

Determining SaaS Taxability

To determine if your SaaS product is taxable in Kentucky:

Assess the Nature of the Service: Confirm that your service qualifies as prewritten computer software accessed remotely, which is taxable under Kentucky law.
Evaluate the Delivery Method: Ensure that the software is accessed exclusively via the cloud or online through the seller’s server, as this aligns with the taxable definition.
Consider the Pricing Model: Understand that the tax applies regardless of whether the charge is on a per-use, per-user, per-license, subscription, or other basis.

Nexus Thresholds for Kentucky

Kentucky enforces economic nexus, requiring out-of-state sellers to collect sales tax if they meet specific thresholds, such as $100,000 in gross sales or 200 separate retail sales within the state.

Sales Tax Compliance Checklist

To ensure compliance with Kentucky tax regulations:

Register for a Sales Tax Permit: Businesses with nexus in Kentucky must register with the Kentucky Department of Revenue to obtain a sales tax permit.
Collect and Remit Sales Tax: Once registered, collect the appropriate sales tax on taxable transactions and remit the collected taxes to the state.
File Regular Tax Returns: Depending on your sales volume, you may be required to file monthly, quarterly, or annual sales tax returns. Timely filing is crucial to avoid penalties.

Examples of Taxable SaaS in Kentucky

Taxable:
- Business Use: A company subscribes to a cloud-based accounting software for its operations. This transaction is subject to Kentucky sales tax.
- Personal Use: An individual subscribes to a cloud-based accounting software for personal budgeting. This transaction is subject to Kentucky sales tax.

Local Tax Considerations in Kentucky

Kentucky does not have local sales taxes; therefore, SaaS taxability is consistent statewide.

Penalties for Non-Compliance in Kentucky

Non-compliance with Kentucky tax laws can result in:

Financial Penalties: Fines and interest on unpaid or late taxes.
Legal Consequences: Potential audits and legal actions by the Kentucky Department of Revenue.
Reputational Damage: Negative impact on your business’s credibility and customer trust.