In one of the first pieces of administrative guidance addressing the sales tax treatment of generative artificial intelligence (AI) services, the Indiana Department of Revenue (DOR) recently issued a revenue ruling confirming that charges for a generative AI chatbot service are not subject to Indiana sales tax. In reaching its conclusion, the Indiana DOR used the legal framework applicable to examining whether services involving software are subject to taxation (a framework we expect other state DORs to apply when examining services involving generative AI functions).
The Indiana DOR previously issued guidance confirming that software “remotely accessed over the internet . . . is not considered an electronic transfer of computer software and is not considered a retail transaction” subject to Indiana sales tax. In the case of the AI chatbot service, the “software that operates the chatbot is never downloaded onto a customer’s computer” but instead is accessed via a “website or free app.” As such, and consistent with its prior guidance addressing remotely accessed software, the Indiana DOR determined that the AI powering the chatbot service was merely “accessed electronically with no permanent ownership aspect” and therefore was not subject to sales tax.
We anticipate that, like the Indiana DOR, other state DORs will rely on their preexisting guidance addressing the taxability of software to determine the taxability of services involving generative AI functions. This means that, depending on a state’s preexisting law and guidance, state DORs will ask questions such as:
- Whether generative AI functions are downloaded or accessed remotely
- Whether generative AI functions are directly accessible by a customer or if such functions are used by a service provider in providing their services
- Whether and to what extent the generative AI function(s) in a service are the “primary function”/“primary purpose”/“true object” of an underlying transaction.
