Kentucky sales tax guide for SaaS businesses

Is SaaS taxable in Kentucky?

As the world becomes increasingly digitized, more and more businesses are opting for SaaS products to streamline their operations and enhance their efficiency. However, with the rise of SaaS products, the question of their taxability has become a complex issue.

As of January 1, 2023, Kentucky taxes SaaS and other cloud services. Previously, Kentucky had only been taxing a limited set of digital goods, which remain taxable in the state.

Kentucky’s recent shift is proof of the constantly shifting nature of sales tax laws in the US, especially when it comes to digital products. It’s critical for businesses selling SaaS or other digital goods and services to stay on top of the latest sales tax developments in order to avoid penalties and fees.

How to determine if your product is taxable in Kentucky

To determine if your SaaS product is taxable in Kentucky, you need to understand whether your product falls under a taxable category in the state. It can be helpful to consult with a tax professional who specializes in SaaS taxation and Kentucky tax laws to ensure your product complies with state tax regulations.

Additionally, Kentucky is a state that has both traditional physical nexus and economic nexus rules. These rules are important for businesses to understand, as they determine whether or not a company is required to pay sales tax in the state.

Physical nexus is established when a business has a physical presence in the state. This can include having an office, store, warehouse, or employees in Kentucky. If a business has physical nexus in the state, they are required to collect and remit sales tax on all taxable sales made in Kentucky.

In addition to physical nexus, Kentucky also has economic nexus rules. Economic nexus is established when a business meets certain sales thresholds in the state. Specifically, a business must have either:

• Gross receipts from sales in Kentucky exceeding $100,000 during the current or previous calendar year, or
• 200 or more separate transactions in the state during the current or previous calendar year

If a business meets either of these thresholds, they are required to register for a Kentucky sales tax permit and collect and remit sales tax on all taxable sales made in the state.

It is important for businesses to evaluate their nexus status in Kentucky, as failure to comply with these rules can result in penalties and interest charges. Additionally, businesses that are not in compliance with Kentucky sales tax rules may face legal action from the state.

Sales tax compliance in Kentucky

Once you have established a nexus in Kentucky, and identified which digital products are taxable, your business must ensure compliance with Kentucky’s sales tax regulations. This includes:

• Register for a sales tax permit: All businesses with nexus in Kentucky must register for a sales tax permit.
• Collect sales tax: Once you have your sales tax permit, you need to collect the appropriate amount of sales tax on taxable transactions, including any taxable SaaS products and digital goods.
• File sales tax returns: Businesses must file periodic sales tax returns, typically on a monthly, quarterly, or annual basis, depending on the sales volume. When filing the return, you need to report the total sales and taxable sales, as well as the sales tax collected during the reporting period.
• Remit collected sales tax: Along with filing your sales tax return, you must also remit the collected sales tax to the state. Failure to do so could result in penalties and interest charges.

Managing sales tax compliance can be challenging in Kentucky and across different US states, especially for SaaS businesses. It is highly recommended to consult with a tax professional or use specialized sales tax compliance software to ensure your business remains compliant and up-to-date with ongoing changes in state tax laws.