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Proposed Regulation Seeks to Provide Guidance for Sourcing Digital Transactions


The Kentucky Department of Revenue recently proposed Administrative Regulation 103 KAR 31:130 (“Regulation”) in an effort to provide supplemental sales and use tax guidance for the sourcing of transactions involving digital property, presumably in response to concerns expressed by the Compliance Review and Interpretations Committee.  The Committee’s comments arose from its recently completed annual review of Kentucky’s compliance with the Streamlined Sales and Use Tax Agreement.   

KRS 139.200 imposes a sales tax upon all retailers at the rate of six percent (6%) of the gross receipts derived from retail sales of digital property.  KRS 139.310 imposes an excise tax on digital property purchased for storage, use or consumption in Kentucky, also at the rate of six percent (6%).

To help determine a retailer’s obligation to pay or collect and remit the taxes imposed by the above statutes, KRS 139.105(3) instructs that a retailer “shall source the sale of digital property to the place of primary use.”  The Regulation clarifies that in the event that a retailer does not have information sufficient to source the sale of digital property to the place of primary use, the retail sale shall be sourced as follows: (1) “over the counter” sales shall be sourced to the business location of the retailer; (2) sales delivered to a specific address shall be sourced to the delivery location; and (3) sales delivered to an address unknown shall be sourced to the first of the following addresses known to the retailer: (a) the address of the purchaser; (b) the billing address of the purchaser; or (c) the address from which the computer software was delivered electronically or was first available for transmission by the retailer.

A public hearing is scheduled for February 23, 2010, and written comments are being accepted.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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