Indiana’s Ruling Addresses Sales Tax Implications for Generative AI

Summary: As technology continues to evolve at a rapid pace, it is crucial for businesses to consider the sales tax impact of new services and products. A recent ruling in Indiana addresses the sales tax treatment of generative artificial intelligence (AI).

As technology continues to evolve, state tax authorities are left to address whether these new offerings will be subject to sales tax. In the absence of specific legislative or regulatory changes, state officials must rely on existing rules and guidance. A recent example of this comes from the Indiana Department of State Revenue (the Department) which issued a revenue ruling concluding that sales of generative AI constituted a nontaxable service.[1] 

How States are Taxing Generative AI Services

Generative AI refers to artificial intelligence that creates original content (e.g., text, images, code, audio, etc.) by learning patterns from vast amounts of existing data, as opposed to merely retrieving or organizing existing information. In the ruling, the primary service provided by the taxpayer is a generative AI chatbot that is trained to respond to natural language prompts in a human-like manner. Customers access the chatbot through the provider’s website or free app, with no software downloaded onto their devices. Premium features, allowing the integration of AI capabilities into the customers’ own applications (e.g., integration into Word or Excel), are available for an additional fee and end if payment stops. 

The Department’s decision was based on the principle that sales tax is imposed on retail transactions of tangible personal property and specifically enumerated services. Tangible personal property includes prewritten computer software. However, the ruling notes that Software as a Service (SaaS) is defined as a service provider hosting software applications over the internet, and is not taxable.[2] In addition, charges to access prewritten computer software over the internet are not taxable if customers do not gain permanent ownership interest, control, or possession of the software.[3]

Indiana’s Ruling on Generative AI: Implications for Sales Tax

The Department went on to explain that sales tax is imposed on products transferred electronically if the products meet certain definitions (i.e., digital audio works, digital audiovisual works, or digital books). However, such transactions are taxable when the seller grants the end user a right of permanent use of such digital product that is not conditioned on continued payment.

Based on the state’s existing guidance described above, the Department characterizes the taxpayer’s chatbot AI services as a service because:

1. The AI is accessed electronically with no permanent ownership aspect, and
2. The chatbot AI services do not meet the definition of prewritten software or digital products. 

As a result, the ruling concludes that the taxpayer’s chatbot AI services are not considered taxable under current state rules.

Final Thoughts: What Businesses Need to Know About Generated AI and Sales Tax

With the rapid growth and adoption of AI, similar rulings are likely to emerge from other states. While Indiana classified these offerings to be a nontaxable service, it is possible that other states may consider these services to be taxable. For instance, states that tax SaaS, might view customer access to the underlying AI software as taxable. Alternatively, generative AI services could be taxable if the chatbot performs a function, such as data processing or information services, that the state considers taxable.  

Given the diverse applications of AI, it is important for businesses to evaluate how their AI offerings may be classified by the states for sales tax purposes, and whether it would be beneficial to obtain their own sales tax ruling. 

[1] Indiana Revenue Ruling No. 2025-02-RST, 07/23/2025.

[2] See Indiana Sales Tax Information Bulletin #8.

[3] IC 6-2.5-4-16.7.  Software that is delivered to a customer electronically is subject to sales tax.