US_Kentucky – Sales Tax Imposition on AI-Supported Software

The Kentucky Revenue Department, in its latest Winter 2025/2026 Sales and Use Tax Newsletter, addressed the complexity of taxing AI-enabled or AI-supported software. As is well known, the sales tax treatment of software varies significantly across US states. 

In Kentucky, sales and use tax is imposed on the retail sale of prewritten computer software and on access services for prewritten computer software. From a retail sales tax perspective, prewritten computer software is classified as tangible personal property and is taxable regardless of how it is delivered. 

Remote access to prewritten software, where the supplier retains control of the application and grants the buyer access, primarily through a subscription-based fee, is also taxable. (SaaS as a model of delivery)

AI-Prewritten Computer Software 

In the winter sales and use tax newsletter, tax officials explained to suppliers of software solutions that incorporate AI that, in most cases, these products are classified as prewritten computer software and are taxable under Kentucky’s retail sales tax. 

The incorporation of AI into the app, from a sales tax perspective, does not change the product’s classification and, in most cases, cannot be tax-exempted, as the product isn’t customized by default.

One of the main prerequisites for treating the supply of software as tax-exempt is that the product is customized to the customer’s requirements, and/or that the customization of the prewritten software is separately indicated on the invoice, on a separate line. 

When AI-enabled software isn’t customized, it generally meets the definition of prewritten computer software, and as such is always taxable. As mentioned earlier, the tax status doesn’t change, regardless of how the software is delivered to the customer.