Indiana Rules AI Chatbot Access Tax-Exempt

The Indiana Department of Revenue (DOR) has published a ruling regarding the applicable sales and use tax rules for companies that offer generative artificial intelligence (AI) services. Additionally, the ruling clarifies and guides the interpretation of state sales and use tax provisions when assessing whether certain digital services are subject to sales and use tax.

DORs Interpretation and Decision

The ruling pertains to a company that provides a chatbot API service without directly delivering any software to its users. The service is provided on a subscription-based model, where users access the AI chatbot through a website or app, without requiring any software to be downloaded or installed on their device. Additionally, users utilize their own internet connections and devices to interact with the AI chatbots.

Since the Software as a Service (SaaS) is exempt from sales and use tax, and because there is no software delivery when providing these services, the DOR ruled that access to a generative AI chatbot is not subject to Indiana sales and use tax. In other words, access to AI chatbots, without any delivery of software, is not classified as taxable tangible personal property, which, in contrast to SaaS, is subject to sales and use tax. It is treated the same way as SaaS, meaning these services are tax-exempt.

The same applies to API access to the AI chatbots, which allows integration into other applications, as long as no software is downloaded or transferred to users. Therefore, the key determining factor for sales and use tax treatment is whether a transfer of software occurs from service providers to users or consumers. The transfer can be made by making the software downloadable, streamable, or by providing it on a physical medium. In such cases, it is treated as tangible personal property.

Conclusion

The Indiana DOR's decision once again underlined that if software is stored on the cloud without requiring the software to be downloaded to the user’s computer, the transaction is not considered a retail transaction and is therefore non-taxable. Only if software is downloaded, streamed, or otherwise transferred to users is it subject to sales and use tax.

Source: Indiana’s Official Register, Bloomberg