Kentucky clarifies taxability of prewritten computer software

The Kentucky Legislature has clarified how Kentucky sales and use tax applies to prewritten computer software.

Under current law, sales and use tax applies to the sale and purchase of prewritten computer software. House Bill 487, which became law April 27 without Governor Matt Bevin’s signature, made the following changes to the definition of prewritten computer software:

• It no longer includes “the combining of two or more prewritten computer software programs or portions thereof.”
• It no longer includes modified or enhanced software designed and developed to the specifications of a specific purchaser when “there is a reasonable, separately stated charge on an invoice or other statement of the price to the purchaser for the modification or enhancement.”

H.B. 487 also exempts computer software, but not prewritten computer software, “from state and local ad valorem taxes, including the county, city, school, or other taxing district in which it has a taxable situs.” This change takes effect January 1, 2019.

A number of other sales tax changes are also included in the measure. It contains a corrected version of House Bill 366, which Gov. Bevin had vetoed; the legislature overrode his veto. For additional details, see H.B. 487 and H.B. 366.

It can be particularly challenging for businesses in the software industry to be sales tax compliant. Since software is a relatively new phenomenon, many laws don’t adequately account for it. Consequently, as in Kentucky, lawmakers and tax authorities are working to adapt their tax policies to software products and services. This means companies that sell to customers in many states need to be constantly on the lookout for change.

Learn more about software and sales tax at the Avalara Resource Center.