What did the Indiana Department of Revenue rule about AI chatbot services?

The Indiana Department of Revenue ruled that access to generative AI chatbots provided via the cloud is exempt from state sales and use tax because no software is transferred to users.

Why are AI chatbot services in Indiana considered tax-exempt?

They are considered tax-exempt because the service is delivered through the cloud without downloading or transferring software, which means it does not qualify as taxable tangible personal property.

How does this ruling relate to SaaS in Indiana?

The ruling aligns AI chatbot services with SaaS, confirming that as long as no software is transferred, both are treated as tax-exempt services under Indiana law.

Does API access to AI chatbots fall under Indiana sales tax?

No, API access to AI chatbots is also exempt from sales tax as long as it does not involve downloading or transferring software to the user.

When would AI-related services be subject to Indiana sales and use tax?

They would be taxable if the service provider transfers software to users through downloading, streaming, or physical delivery, since that counts as tangible personal property.

What key factor determines taxability of digital services in Indiana?

The key factor is whether software is transferred to users. If there is no download or transfer, the service remains tax-exempt; if there is, it becomes taxable.

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