Kentucky confirms AI-powered software remains taxable in 2026
Kentucky tax officials have clarified that adding artificial intelligence features to software does not change how it is taxed. AI-enabled software is generally taxable as prewritten computer software under existing Kentucky law.
Written by Alex Lamachenka
Head of DemandGen
Published
What changed
This is not a new tax. It is a clarification.
In its Winter 2025/2026 Sales Tax Facts publication, the Kentucky Department of Revenue confirmed:
- Prewritten computer software remains taxable
- Software delivered electronically or accessed online via subscription is taxable
- AI functionality does not convert prewritten software into custom software
Kentucky law treats prewritten computer software as tangible personal property under KRS 139.010, regardless of delivery method.
What this means for AI-enabled SaaS
Many SaaS products now include machine learning or AI-driven features that adapt based on user data.
Kentucky’s position is clear:
“Software that adapts, personalizes responses, or learns over time is still prewritten software if the underlying code is not custom-built for a specific customer. Only software created specifically for one customer, with separately stated customization charges, may qualify for different treatment.”
Why this matters for sellers
Some businesses assume AI functionality makes a product a professional service rather than software. Kentucky explicitly rejects that argument.
If you sell:
- AI-enhanced SaaS
- Subscription-based software platforms
- Cloud software with machine learning features
Sales to Kentucky customers are generally taxable unless a specific exemption applies.
This is particularly important for companies marketing products as “AI tools” or “intelligent platforms.” Branding does not change taxability.
Who this affects
- SaaS providers selling into Kentucky
- AI platform providers
- Subscription software businesses
- Finance and tax teams evaluating digital product taxability
Next steps
- Calculation: Confirm Kentucky taxability settings for AI-enabled products.
- Documentation: Ensure any true customization charges are separately stated.
- Review: Avoid assuming AI functionality changes tax classification.
Other US Sales Tax Updates
Alabama sales tax update: credit card fees no longer taxable in 2026
Beginning September 1, 2026, Alabama will exclude credit card processing fees from sales and use tax calculations. Learn what changed and how to prepare.
Texas will tax marketplace seller fees from Oct 1, 2025
Starting October 1, 2025, Texas will require marketplaces to charge sales tax on the commission fees they take from sellers.
The City of Grand Junction eliminates vendor fee in 2026
Effective January 1, 2026, Colorado will eliminate the sales tax vendor fee under HB25B-1005. Grand Junction is aligning with the state by removing the vendor fee deduction, meaning sellers will remit the full amount collected, impacting cash flow but not tax rates.