Kentucky Sales & Use Tax Guide for E-Commerce and Marketplaces

Sales and Use Tax Basics in Kentucky

Sales Tax

In Kentucky, the sales tax is imposed on the gross receipts related to the retail sales of tangible personal property, also known as tangible goods, digital property, and the sale of particular services defined as taxable.

Use Tax

As a complementary measure of the sales tax, use tax in Kentucky applies to the purchase price of tangible goods and digital property acquired for storage, use, or consumption within the state. The use tax ensures that tax is still collected when goods are purchased from outside Kentucky but used within the state.

Kentucky Sales and Use Tax Rates

The State of Kentucky only imposes a statewide 6% sales and use tax rate on retail sales. There are no applicable local sales and use tax rates imposed by cities or counties.

Tax-Exempt Transactions

The Kentucky sales and use tax legislation provides a comprehensive list of tax exemptions. The exemption may be categorized in several ways, including sales of tangible goods or digital property under federal or state law, as well as those referring to specific uses or users of property and services, such as containers used in product sales, occasional sales, and goods sold to government agencies for official use.

The list of exempt transactions also includes sales to common carriers for out-of-state use, low-value vending machine sales, and residential purchases of water, sewer, and fuel when used in a domicile. Sales to out-of-state tax-exempt organizations are excluded, as are specific industrial and manufacturing inputs.

The legislation also provides an exemption for small businesses, specifically service providers whose revenue is below the USD 12,000 revenue threshold. However, this exemption does not apply if the businesses also sell taxable goods or services listed in earlier statutory categories.

Nexus Rules in Kentucky

Taxable persons may become liable for sales and use tax in Kentucky if they establish a nexus in the state. Nexus can be established by being physically present in the state or by exceeding the thresholds set for economic and marketplace activity. 

Physical Nexus

Taxable persons who have an office, place of distribution, sales location, sample location, warehouse, storage place, or similar physical place of business in Kentucky, established the physical nexus there, and are required to register for, collect, and remit sales tax. 

Additionally, having a representative, agent, salesman, canvasser, or solicitor operating in Kentucky under the authority of the retailer or its subsidiary to sell, deliver, or take orders for any tangible goods, digital property, or taxable services is sufficient to establish a physical nexus.

Economic Nexus

Remote or out-of-state sellers that do not have a physical presence in Kentucky may be liable for sales tax if they exceed the economic nexus threshold set at 200 or more sales into the state or more than USD 100,000 in gross receipts from sales into the state.

Regardless of whether remote sellers exceed the transaction or amount economic nexus threshold, they must register for, collect, and remit sales tax.

Marketplace Nexus

Marketplace facilitators that sell or facilitate retail sales on behalf of marketplace sellers may also become liable for sales tax in Kentucky if their revenue exceeds USD 100,000 in gross receipts or they have 00 or more separate transactions sourced to this state.

Taxable Goods and Services in Kentucky

A 6% sales tax is imposed on the gross receipts from retail sales of tangible goods and digital property, regardless of how the property is delivered or accessed. In addition to tangible goods and digital products, a wide range of services is also subject to taxation.

The list of taxable services includes short-term rental accommodations, such as hotel rooms and campsites, sewer services, most forms of admissions, with exceptions for horse racing tracks and certain nonprofit events, as well as prepaid phone services. Furthermore, Communication services, natural gas transport, except for residential use or resale, and an extensive list of personal, professional, and commercial services are also taxed.

Other taxable services listed include landscaping, janitorial and laundry services, small animal veterinary and pet care services, skin tanning, weight loss programs, photography, telemarketing, lobbying, website development and hosting, as well as various security and investigative services.

Bundled Transactions and the True Object Test

Two or more distinct products or services sold for a single non-itemized price form a bundled transaction. These transactions are subject to specific sales tax rules, depending on the nature of the goods being sold and their pricing. Generally, if a taxable tangible good is bundled with either an exempt tangible good or exempt services, the entire transaction is still taxable. However, there are some exceptions to this rule.

For example, when a bundled transaction includes both taxable and non-taxable items, the entire amount is taxable unless the seller can separate the non-taxable portion using reasonable, verifiable methods from regular business records. If both items in the bundle are taxable but taxed at different rates, the highest rate applies to the full price, unless the seller can separate the values using the same methods.

Additionally, if the price varies based on the buyer's choices, a service is the primary purpose of the sale and the included product is secondary, or the taxable portion of the transaction is 10% or less of the total price, the transaction is not considered bundled. Also, if the transaction includes exempt items, such as food or medical supplies, and the taxable portion is 50% or less of the total price, the transaction is not considered bundled.

E-Commerce Framework

Remote sellers are sellers that do not have a physical presence in Kentucky. These sellers often offer and sell goods and services through their website or similar channels. Those who adopt this direct-to-consumer approach must register for sales tax in Kentucky if their retail sales of tangible goods, digital products, or taxable services exceed the economic nexus threshold set at USD 100,000 in gross receipts or 200 or more in-state transactions.

However, remote sellers may also offer and sell their goods, products, and services through online marketplaces. The applicable rules for these sales depend on whether sales are made exclusively through online marketplaces or in combination with direct-to-consumer sales.

Marketplace Rules

Remote sellers that sell products to Kentucky consumers through multiple channels, including online marketplaces, are required to report all their Kentucky-sourced marketplace sales as part of their total gross receipts on line one of the Sales and Use Tax Return for each reporting period. However, those sales that were facilitated and already reported by marketplace facilitators should be deducted as other deductions. Additionally, the return must include the name and Kentucky tax account number of each provider that collected the tax.

On the other hand, a remote seller that only makes sales through a registered marketplace facilitator, commonly referred to as a marketplace seller, and has no other tax obligations in Kentucky, is not required to register for a separate Kentucky sales and use tax account.

Digital Goods and Services

Digital goods and services are defined as digital property, which are taxable regardless of whether they are permanently owned, accessed temporarily, or paid for via subscription. Digital property, such as digital audio works, which include ringtones, songs, readings, and other sound recordings, is taxable, except for audio greeting cards sent via email.

Digital or e-books are defined as literary works that resemble traditional books and are also taxable, except for digital audio-visual works, periodicals, chat rooms, and blogs. Digital codes that allow access to specific types of digital content are taxable unless they function like stored-value cards or gift cards.

Notably, digital audio-video works, which include movies, music videos, news programs, and live events, as well as satellite radio programming, are explicitly excluded from the definition of taxable digital property.

Digital Marketplace

Under the Kentucky sales and use tax law, digital marketplaces are platforms that allow multiple retailers or sellers to advertise, sell, or lease tangible goods, digital property, or services. The offer and sale may be made through various media, including catalogs, websites, and television or radio broadcasts.

Whether operators of these digital marketplaces fall under the scope of sales and use tax rules and regulations depends on whether they meet other criteria. These criteria include listing or advertising products or services on a marketplace they own or control, handling communication or transactions between buyers and sellers, providing infrastructure or technology that connects buyers and sellers, offering fulfillment or customer service, and even branding the sale.

In addition to this, digital marketplaces must be involved in processing payments, collecting the sale amount, or enabling purchases through virtual currency, to fulfill the requirements set for the marketplace facilitator definition. Any online platform, app store, or digital distribution center that fulfills these requirements must follow the marketplace facilitator rules, also known as marketplace providers, in Kentucky.

Digital Platform Operator

Marketplaces that offer or operate a marketplace through which retail sales of tangible personal property, digital goods, or services are made, or that otherwise facilitate such sales, are subject to marketplace provider rules. Therefore, if they exceed USD 100,000 in gross receipts or complete 200 or more separate transactions sourced to Kentucky in the current or previous year, they are required to register for a Kentucky sales and use tax account and begin collecting tax on all sales into the state through their marketplace.

This marketplace nexus or threshold applies when the total number or value of sales, either from the marketplace provider alone or combined with sales it facilitates, exceeds the set sales or transaction limits. Once the threshold is exceeded, the marketplace provider must register for, collect, and remit sales tax on all sales made through the platform.

Marketplace providers are required to register for two separate Kentucky sales and use tax permits. The first one is to report and pay their due taxes, and the second one serves to report and pay tax on the sales it facilitates on behalf of its marketplace retailers or sellers.

Filing and Payment Requirements in Kentucky

Typically, filing and payment frequency is monthly by the 20th of the month following the reporting period. Even the temporary sellers without a permanent business location must file a tax return on a non-permit basis. However, the Kentucky rules do include a provision that allows the Kentucky Department of Revenue to enable or require tax returns or payments on schedules other than the standard monthly ones.

Therefore, retailers or sellers who wish to file quarterly returns must submit a written application at least 90 days before the quarterly return's due date and obtain departmental approval. Notably, filing quarterly is only allowed if retailers continue to make monthly tax payments based on taxable receipts or sales prices for the preceding month.

Penalties for Non-Compliance with Sales and Use Tax Requirements

Penalties for non-compliance with sales and use tax requirements include a late filing penalty of 2% of the total tax due for each 30 days or fraction thereof the return is late, with a maximum penalty of 20% and a minimum penalty of USD 10 or USD 100 if a jeopardy assessment has been issued. 

Additionally, a late payment or failure to withhold or collect tax results in a 2% penalty for each 30 days or fraction thereof, with a maximum penalty of 20% and a minimum penalty of USD 10. Furthermore, failure to obtain a required tax ID, permit, or license results in a 10% penalty of any related cost or fee, with a minimum of USD 50 and no maximum.

In addition to penalties, an interest rate applies to tax liabilities. The rate of interest is changed annually, and for 2025, it is 10%.