Is SaaS Taxable in Kentucky? Yes, at 6% Since 2023, and Website Hosting Is Taxed Too

Key Takeaway: Kentucky taxes SaaS. Since January 1, 2023, "prewritten computer software access services" have been on the state's list of taxable services, and the definition applies "regardless of whether the charge for the access or use is on a per use, per user, per license, subscription, or some other basis." A per-call AI agent API is inside that wording. The rate is a flat 6%, and the Department of Revenue says "there are no local sales and use taxes in Kentucky." Two other items on the list matter to an AI business: website hosting, and, since August 1, 2026, data brokering.

What I Read

This guide rests on the official Legislative Research Commission text of KRS 139.010 (the definitions) and KRS 139.200 (the imposition section), both in the version effective August 1, 2026. It also rests on the Department of Revenue's Sales Tax Facts, Winter 2025/2026 edition, pages 6 to 8, and the Department's sales and use tax page. I have not read any Kentucky regulation, ruling or court decision on AI or API products for this guide, and my searches this session did not turn one up.

One housekeeping point. House Bill 757 (2026) inserted a new definition, data brokering services, at KRS 139.010(6), so every later definition moved down one number on August 1, 2026. The Department's Winter newsletter predates that change. It cites prewritten software at 139.010(33) and software access services at (34). In the current text they are (34) and (35). Same words, new numbers. If an auditor's letter and your memo cite different subsections, this is probably why.

SaaS: An Enumerated Service

Kentucky does not tax services in general. KRS 139.200(2) is a closed list, running from hotel rooms at (2)(a) to data brokering at (2)(ay). If a service is not on the list, it is not taxed as a service. SaaS is on the list at (2)(ax): "Prewritten computer software access services."

KRS 139.010(35) defines that as "the right of access to prewritten computer software where the object of the transaction is to use the prewritten computer software while possession of the prewritten computer software is maintained by the seller or a third party, wherever located." The billing clause follows: per use, per user, per license, subscription, "or some other basis."

Three features of that definition decide most agent cases.

• "Wherever located." The servers can be anywhere. The Kentucky customer's access is what is taxed.

• "A third party." A reseller that runs a model on someone else's infrastructure still sells access to software held by "a third party."

• "Object of the transaction is to use." This is the only real argument against tax. If the customer is buying a finished output, such as a report, and never gets access to the software, the definition may not fit. That argument has not been tested in Kentucky. A customer with an API key is exercising a right of access, so I would not rely on it for an API product.

Downloaded software is taxed by a different route. KRS 139.010(47) includes "prewritten computer software" in tangible personal property, and KRS 139.200(1)(a) taxes tangible personal property "regardless of the method of delivery." Download, install, or access remotely: all three are taxed.

AI Does Not Make Software Custom

The Department addressed AI directly on page 6 of the Winter newsletter. Many AI programs, it said, "contain the ability to alter their responses or output based on the data they receive from the users without being explicitly programmed," but "this capability is not custom software." Its summary: "AI features that adapt based on user data do not qualify as custom software and remain fully taxable." Our July post covers this guidance in detail.

The statute leaves a narrow custom-work exemption. KRS 139.010(34)(a)3 keeps a modification made to one buyer's specifications inside "prewritten" software "unless there is a reasonable, separately stated charge on an invoice." Page 8 of the newsletter, citing the bundling rule in KRS 139.215, gives the practical version. If you sell prewritten software and customization for one price, tax applies to the whole price, and "the burden is on the retailer to separately itemize the unique customization charges." Fine-tuning or integration work for one client only stays out of the tax base if it is a separate line on the invoice.

Website Hosting Is Taxed. Data Processing Is Not Listed.

Website hosting. KRS 139.200(2)(w) lists "Website hosting services," and (2)(v) lists "Website design and development services." Several states do not tax plain hosting. Kentucky does. An agent platform that hosts a customer's site or app, or builds one, is selling a taxable service.

Data processing. The list has no data processing entry, no cloud computing entry, and no information services entry. Read alone, that suggests compute that gives the customer no software access is not taxed. Most AI products do not fit that description, though. A customer who sends inputs through an API to a hosted model and gets outputs back is using prewritten software held by the seller. Until Kentucky says otherwise, I would treat inference, embedding and hosted-agent calls as software access.

Data brokering. Since August 1, 2026, KRS 139.200(2)(ay) taxes "data brokering services." KRS 139.010(6) defines them as "collecting, aggregating, and analyzing personal data for sale to a third party," billed on any basis. That is aimed at personal data, so research and lead-generation agents that compile information about people should check their facts against it. Our HB 757 post covers the elements.

Consulting. Management consulting and general business advice are not on the list. A human consultant's advice is not taxed. If what is delivered is really access to a hosted agent, the label "consulting" will not move it off the software-access line.

Digital Downloads: A Closed List

KRS 139.200(1)(b) taxes "digital property," whether or not the buyer has permanent use and even when use depends on continued payment. KRS 139.010(12) limits digital property to a list that includes digital audio works, digital books, "finished artwork," digital photographs, periodicals, video games and electronic games. Software is not on that list because it is already tangible personal property. "Transferred electronically" means obtained "by means other than tangible storage media" (KRS 139.010(50)).

One exclusion is unusual: KRS 139.010(12)(b) says digital property "does not include digital audio-visual works." Movies and videos are outside the digital property definition. Whether another provision taxes them, I have not resolved, so I would not treat an AI-generated video download as tax-free on this guide alone. AI-generated images sold as downloads are a different matter. "Finished artwork" and "digital photographs" are both on the list.

Buyers: Use Tax Covers Services

The use tax reaches services too. KRS 139.010(51)(a)2 defines "use" to include "any right or power to benefit from any services subject to tax under KRS 139.200(2)(p) to (ay)," and software access services are inside that range. A Kentucky company that buys agent access from a vendor that does not collect Kentucky tax owes 6% use tax on it.

How AgentTax Handles Kentucky

I ran the engine for a Kentucky buyer on a $1,000 business purchase today.

• 6% ($60): saas, api_access, ai_model_access, ai_labor, web_hosting, digital_good (every digital_content_type, including video), data_purchase, and research work.

• 6%, with a disclosed watch advisory: compute, data_processing, storage and cloud_infrastructure. These carry KY_DP_CLASSIFICATION_WATCH, which says the engine treats API-invoked processing on hosted software as software access, and that the output-only argument is untested.

• $0: payment_processing_fee. Payment processing is not on the list.

• Taxable, and probably too high: consulting computes at 6%, but the engine's own Kentucky note says professional services are not on the list. True advisory work billed this way is over-collected. We have logged it for review. Taxability changes need sign-off, so the engine has not been edited.

• video downloads compute at 6%, which is the conservative side of the audio-visual exclusion above.

The rate table carries no Kentucky ZIP codes, so a ZIP returns a ZIP_UNKNOWN advisory and the 6% state rate. That costs nothing in Kentucky, because there is no local sales tax to miss.

For sellers, the engine returns $0 with a NEXUS_NOT_CONFIGURED advisory until Kentucky is set in your nexus configuration. Kentucky's remote-seller test is now $100,000 in gross receipts; the 200-transaction count ended on August 1, 2026 (see our deregistration post). To run the numbers, use the playground or the AI agent sales tax API. For other states, see the 50-state SaaS guide.

What to Watch

First, whether the Department or a court ever applies the "object of the transaction" test to an output-only AI service. That one answer decides whether service-bureau compute stays outside the list. Second, the first published guidance on data brokering, because the definition's reach over AI research agents is not yet clear.

This analysis is for informational purposes only and does not constitute legal or tax advice. This post reflects AgentTax's current interpretation of evolving law. Consult a licensed tax professional for compliance decisions.