Is SaaS Taxable in Kentucky? - Commenda

2025 SaaS Sales Tax Rates for Kentucky

As of 2025, Kentucky maintains a statewide sales tax rate of 6%, with no local sales taxes imposed by cities or counties. This uniform rate applies across the entire state, including major cities like Louisville and Lexington. Consequently, businesses operating in Kentucky are subject to this single sales tax rate, simplifying compliance and planning.​

However, it’s important to note that while Kentucky does not have local sales taxes, certain local jurisdictions may impose additional taxes or fees on specific services or products. This blog provides an in-depth look at the taxability of SaaS in Kentucky and the specific rules businesses need to follow to stay compliant.

Is SaaS Taxable in Kentucky?

Understanding whether “Is SaaS taxable in Kentucky?” is a straightforward question but crucial for businesses offering these services. According to Kentucky’s House Bill 8, SaaS offerings are taxable as “prewritten computer software services”.

The state applies the same rate as sales tax to SaaS transactions, regardless of whether they are business-to-business (B2B) or business-to-consumer (B2C). Additionally, the taxability of SaaS can be influenced by factors such as how the service is delivered (e.g., whether it is accessed remotely or involves downloads) and the nature of the transaction (e.g., subscription versus licensing).

How Does Kentucky Define SaaS and Digital Products?

To answer how is SaaS taxable in Kentucky, it’s important to first clarify how the state defines these categories. Here are the key distinctions:

• SaaS: These softwares are considered a service rather than a tangible product. Since it’s accessed remotely without transferring ownership, it is not taxable in Kentucky.
• Digital Products: They include products like e-books, digital music, and downloadable software that are typically subject to local sales tax in Kentucky.

These distinctions help clarify how different software products are taxed under Kentucky tax rules for SaaS businesses.

Sales Tax on Software in Kentucky

Understanding how Kentucky taxes different types of software is essential for businesses to stay compliant. Here’s how the taxability of various software products in Kentucky:

Managing the complexities of Kentucky SaaS software taxability and regulations can be overwhelming, but Commenda offers simple solutions. Click here to learn how we can help you stay compliant.

How to Determine if Your Product is Taxable in Kentucky?

Determining if your SaaS product is taxable in Kentucky involves several key factors. Here are the main considerations for SaaS taxability:

• Delivery Method: Regardless of the method of delivering the software, it impacts the sales tax on SaaS in Kentucky.
• Licensing Model: Subscription-based SaaS services are taxable. The tax applies regardless of whether the software is licensed perpetually or accessed temporarily, as long as it falls under prewritten software services
• Customization: Custom software specifically designed for a client may still be taxable if it is not sufficiently distinct from prewritten software. Kentucky’s tax laws broadly include most software-related services under taxable categories
• Bundled Services: If SaaS is bundled with other taxable goods or services, the entire bundle may be subject to sales tax unless the components are itemized and separated appropriately.
• Nexus Rules: Businesses with either physical or economic nexus in Kentucky must comply with sales tax regulations. Economic nexus applies if annual gross receipts exceed $100,000 in the state.

Are Digital Goods Taxable in Kentucky?

While Kentucky does impose a sales tax on SaaS, the taxability of digital goods can differ.

Here’s how the question “Are digital goods taxable in Kentucky?” is answered presently:

• Taxability of Digital Goods: Digital goods like downloadable software, e-books, and digital music are generally taxable in Kentucky under the state’s local tax rules. The taxability can vary based on the local jurisdiction, so businesses must assess the specific location where the transaction occurs.
• Relevance to SaaS Businesses: For SaaS businesses offering digital content, it’s crucial to understand how digital products are treated differently from SaaS services to avoid confusion in compliance.

Sales Tax Exemptions in Kentucky

Kentucky offers several sales tax exemptions, which can help businesses reduce their tax liabilities.

Here are some of the common sales tax exemptions available in Kentucky:

• Resale Exemption: Sales made for resale are exempt from sales tax. To claim this exemption, businesses must provide a resale certificate.
• Nonprofit Organizations: Sales to qualified nonprofit organizations are exempt from sales tax, but businesses must retain proper documentation, such as proof of nonprofit status.
• Custom Software: Charges for custom software developed specifically for a client are generally exempt. However, businesses must demonstrate the level of customization with supporting documentation.

These exemptions help businesses minimize tax liabilities, but maintaining proper documentation is essential for substantiating exemption claims.

Consequences of Non-Compliance with SaaS Tax Rules in Kentucky

Non-compliance with Kentucky’s SaaS tax rules can result in significant penalties and risks for businesses.

Here are some potential penalties for non-compliance:

• Tax Audits: Failure to comply with Kentucky SaaS service tax rules may trigger a tax audit, where your business’s financial records are examined to assess tax liabilities.
• Penalties for Underpayment: Businesses found to have underpaid taxes may face financial penalties in addition to the taxes owed.
• Interest on Late Payments: Interest will be charged on any overdue taxes, increasing the overall tax burden.
• Reassessment of Taxes: Non-compliance can lead to a reassessment of taxes, potentially resulting in higher liabilities than originally calculated.

Filing and Remitting Kentucky Sales Tax for SaaS Businesses

To stay compliant with Kentucky’s tax rules for SaaS businesses, it’s essential to understand how to file and remit sales tax. Here’s a concise guide:

Filing Frequencies and Due Dates

• Filing Frequency: Most businesses start with quarterly filings. The Kentucky Department of Revenue may adjust your filing frequency to monthly, quarterly, or annually based on your tax liability. You will be notified in advance.
• Due Dates: 
  • Monthly account holders must file and pay their October return online before the November 22 due date.
  • Quarterly and annual account holders must file and pay their October-December or January-December return online before the January 20 due date.

How and Where to File?

• Online Filing: Use the Kentucky Business One Stop Portal to file electronically.
• Payment Methods: Payments can be made through check or the Kentucky Department of Revenue’s Electronic Payment Application online.

Common Sales Tax Challenges for SaaS Companies in Kentucky

SaaS businesses in Kentucky face a variety of challenges when it comes to complying with sales tax regulations. 

Here are some common issues faced by SaaS companies:

• Nexus Misunderstanding: SaaS businesses may struggle to determine when they establish nexus in Kentucky, which is necessary to collect sales tax. This issue can arise when a business has economic or physical presence in the state.
• Bundled Services: When SaaS is bundled with other taxable goods or services, determining the correct sales tax treatment can be complex. If a bundle contains taxable items, the entire package might be subject to sales tax.
• Exemption Management: Managing exemptions, such as those for nonprofit organizations or resale, requires businesses to maintain proper documentation to avoid mistakes in tax filings.
• Multi-State Compliance: SaaS companies operating in multiple states face challenges in complying with varying sales tax regulations across jurisdictions, adding complexity to tax calculations and filings.

Simplify Kentucky SaaS Sales Tax Compliance with Commenda

Treading through Kentucky’s SaaS sales tax regulations and answering the question, “Is SaaS Taxable in Kentucky?” can be complex. But Commenda simplifies the process with its comprehensive compliance solutions. Our software automatically calculates sales tax based on real-time customer data, ensuring accuracy and eliminating errors. 

With real-time updates and automated tax filings, you can easily track your obligations while saving valuable time. Commenda integrates smoothly with your existing systems, reducing the need for technical adjustments. 

Our platform handles tax return filings and payment remittances, lowering administrative costs. It ensures compliance with both state and local tax requirements, helping you tread through Kentucky’s diverse tax rates. 

With Commenda, SaaS businesses can focus on growth while staying compliant with tax laws. Ready to refine your SaaS sales tax compliance in Kentucky? Schedule a demo with us today.

FAQs About Kentucky SaaS Sales Tax

Q. Is SaaS taxable in Kentucky if my business doesn’t have a physical office there?

Yes, in Kentucky, a business may still be required to collect sales tax on SaaS services if it has established a nexus in the state, even without a physical office. Nexus can be triggered by factors like economic presence or having customers within the state.

Q. How does Kentucky classify SaaS products for sales tax purposes?

Kentucky generally treats SaaS as a service and does not tax it at the state level. However, local jurisdictions may apply their own tax rules depending on the nature of the service and its delivery.

Q. Do I need to collect sales tax in Kentucky if I only sell subscription-based SaaS?

No, subscription-based SaaS is typically not taxable in Kentucky as long as the service does not involve the sale of tangible personal property or downloadable software.

Q. Are setup fees or bundled SaaS services taxable in Kentucky?

If setup fees or bundled services contain taxable components, such as physical goods or downloadable software, they may be subject to local sales tax depending on the jurisdiction and the nature of the bundle.

Q. What are the penalties for not charging sales tax on SaaS in Kentucky?

Failure to comply with Kentucky’s sales tax regulations can result in tax audits, penalties for underpayment, and interest on overdue taxes. Non-compliance can lead to significant financial and operational risks for your business.

Q. Does Kentucky provide exemptions for SaaS sold to nonprofit or government entities?

Yes, sales made to nonprofit organizations or government entities are generally exempt from sales tax in Kentucky. Still, businesses must retain proper documentation, such as proof of nonprofit status or government affiliation, to support exemption claims.

Q. How often do SaaS businesses need to file sales tax returns in Kentucky?

SaaS businesses must file sales tax returns on a monthly, quarterly, or annual basis, depending on their sales volume and the specific rules of the local jurisdiction they operate in.

Q. What’s the easiest way to automate SaaS sales tax compliance in Kentucky?

Using Commenda can streamline the process by calculating taxes, managing filings, and staying updated with any regulatory changes, ensuring your SaaS business remains compliant with Kentucky’s complex tax rules.