As artificial intelligence (AI) becomes a built-in feature of everyday software, Kentucky tax officials are reminding businesses and consumers that AI does not change how software is taxed. According to guidance published on Kentucky’s Winter 2025/2026 Sales Tax Facts publication, AI-enabled software is generally taxable when it meets the definition of prewritten computer software. This includes software that is downloaded, delivered electronically, or accessed online via subscription.
Kentucky law imposes sales tax on the sale of prewritten computer software and prewritten computer software access services, even when those products incorporate AI. Under KRS 139.010, prewritten computer software is classified as tangible personal property and is taxable no matter how it is delivered. A common misconception is that software becomes “custom” just because it uses AI or changes its responses over time, but Kentucky says that is not enough. AI that adapts based on data is still prewritten software, which makes it taxable. Only software built specifically for one customer with customization charges clearly listed separately on the invoice may qualify for an exemption.
As AI continues to be embedded into more digital products, Kentucky’s guidance serves as a reminder that advanced technology does not automatically change tax obligations. For most users and providers of AI-enabled software in Kentucky, sales tax still applies. (Sales Tax Facts, “Is A.I. Pre-written Computer Software?”, Kentucky Department of Revenue, Winter 2025/2026)