Kentucky Department of Revenue Clarifies Taxability of Software as a Service

Thoughtware Alert Published: Mar 10, 2021
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On January 8, 2021, the Kentucky Department of Revenue (DOR) published an updated version of its Sales Tax Facts newsletter clarifying the taxability of software as a service (SaaS). In the latest version, the Kentucky DOR stated that SaaS that is (1) not delivered into Kentucky and (2) is exclusively accessed via the cloud or the seller’s server is not subject to Kentucky’s sales and use tax. The Kentucky DOR had not previously addressed the taxability of SaaS prior to the January update.

In general, the sale of prewritten computer software is a retail sale of taxable tangible personal property in Kentucky. The definition of tangible personal property includes prewritten computer software electronically downloaded to the customer’s computer. However, as long as the software is accessed via the cloud or web and not actually downloaded to the customer’s computer, the sale of SaaS is not considered a retail sale of tangible personal property in Kentucky. This update comes as states grapple with fitting the taxability of SaaS and other cloud-based services in the framework of existing laws. Within the last year, multiple courts and state tax agencies clarified the taxability of SaaS. The Massachusetts Supreme Court upheld sales tax on SaaS offerings in Citrix Systems Inc. v. Commissioner of Revenue, 139 B.E.3d 293 (Mass. 2020). The Massachusetts Supreme Court concluded Citrix’s service offerings constituted the sale of electronically transferred prewritten computer software rather than a nontaxable service. The court noted the taxability of prewritten computer software does not turn on the method of delivery.

The Illinois DOR issued Private Letter Ruling ST 20-0004 (June 10, 2020) and General Information Letter ST 20-0002 (January 21, 2020), which determined that software accessed through a cloud-based delivery method is not subject to Illinois tax.

Lastly, the South Carolina Legislature has not specifically addressed the taxability of SaaS. However, the South Carolina DOR confirmed its stated position in Private Letter Ruling No. 20-4 (May 18, 2020). In the Private Letter Ruling, the DOR determined that SaaS is a taxable database access transmission service.

For additional guidance on Kentucky’s sales tax, contact your BKD Trusted Advisor™ or submit the Contact Us form below.

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