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Sourcing Guidlines

Sourcing guidelines for when the retail sales of services are subject to Kentucky sales and use tax.

Are the newly taxable services in Kentucky subject to tax based upon where the services are performed or where the services are received?

Sales tax on services is based on where the customer receives the service. If the service provider performs the services in Kentucky and then bills and provides the services to a customer that is located out of state, then the transaction is not subject to Kentucky sales and use tax. See guidance on the sourcing of retail sales in KRS 139.105 and information on receiving services in Kentucky Administrative Regulation 103 KAR 30:190.

A Kansas customer ships a soil sample to Kentucky for testing and analysis. The laboratory testing company performs the laboratory testing of the soil in Kentucky and sends the results back to the customer in Kansas. Is the charge for this soil testing subject to Kentucky sales tax?

No, since the customer receives the testing services in Kansas, the transaction is not taxable in Kentucky.

A Kentucky company pays a third party for the provision of web hosting services. The server used to host the Kentucky customer’s website is out of state and the provider is also outside of Kentucky. Is Kentucky sales and use tax due on the charges for these web hosting services?

Yes, the Kentucky customer receives the web hosting services in this state. Therefore, the sales transactions are sourced to Kentucky and the charges for web hosting services are subject to the 6% Kentucky sales and use tax.

A Kentucky company purchases 100 licenses for prewritten computer software access services for its employees from an out of state software provider. Some of the employees are based in Kentucky and others live and work in company locations in other states. Are all the purchases of the software access services subject to Kentucky tax?

The licenses for prewritten computer software access services purchased for use by the out of state employees are eligible for the temporary storage exemption provided the identified licenses are used solely outside the state by those employees. Since the sale of these services is by an out of state software provider, the 6% use tax is imposed on these transactions for the storage, use, or other consumption of the prewritten computer software access services for the Kentucky-based employees (KRS 139.310). See also the definitions of “storage" and “use" in KRS 139.010, which are the basis of the temporary storage provision. This treatment for software access services mirrors the treatment of similar transactions involving tangible personal property or digital property.

If a purchaser receives a service in Kentucky that became taxable, effective 01/01/2023, from a retailer located in another state that does not charge the Kentucky sales and use tax, is the purchaser required to pay the 6% Kentucky use tax?

Yes, the new services under HB 8 from the 2022 Session that became taxable on 01/01/2023 are subject to both sales tax under KRS 139.200 and use tax under KRS 139.310. Therefore, if a Kentucky customer purchases one of these services from an out of state service provider that does not charge the 6% tax on the transaction, the customer is required to directly report the 6% use tax to the Department of Revenue. According to the provisions of KRS 139.330, the purchaser's liability for use tax payment is not extinguished unless the purchaser has a receipt showing that the 6% Kentucky tax was charged by the seller on the retail transaction.

To report use tax, retail businesses should use line 23 of the sales and use tax return. Non-retail businesses with a consumer's use tax account report purchases subject to tax on line 1 of the consumer's use tax return. For non-registered businesses that have use tax liabilities, they may report purchases subject to the 6% Kentucky use tax on line 1 of the Consumer's Use Tax Return (Form 51A113(O)), available on the Department website Sales & Use Tax - Department of Revenue (ky.gov). Non-business individual consumers may report purchases subject to use tax on the individual income tax return. The department also provides a look-up table as an option to report estimated use tax owed on retail purchases based on adjusted gross income when receipts are not readily available. The link is accessible at Consumer Use Tax - Look-Up Table.

An out of state service provider is providing criminal background check services to a Kentucky client with offices in both Kentucky and Ohio. How does the service provider know when to charge the 6% Kentucky sales and use tax on billings to the client?

The sourcing of these services depends upon where the customer receives the services. If the service provider sends the bill and report to the Kentucky office, then the charges are subject to Kentucky sales and use tax. If the provider sends the report and bills the Ohio office, then the sale is sourced to Ohio with tax due there.

In the last scenario, what if the criminal background check report goes to the Ohio office but the billing goes to the Kentucky Office?

Since the report goes to the Ohio office, the customer receives the service in that state. No Kentucky sales and use tax is due when the purchaser receives the services at the out of state location for use in that jurisdiction. Please note that the billing address is just one of the factors in determining the proper sourcing of a retail transaction. See KRS 139.105(1) for the hierarchy used to apply the information available to the seller.

​Sourcing Guidlines