Artificial intelligence, or more commonly AI, seems to be what everyone is talking about nowadays. Businesses are investing hundreds of billions into AI research and, in parallel, integrating AI products into their day-to-day operations in order to maximize business savings and obtain a competitive advantage over their competitors.  It is no secret the tax treatment of AI could have profound consequences for businesses. However, most states have not made their position on the taxability of AI clear. Indiana is one of the first states to offer in-depth analysis of how it will treat AI services provided in its state and it will be interesting to see if other states adopt its approach.Â
On July 23, 2025, the Indiana Department of Revenue published a revenue ruling, Ind. Rev. Rul. 2025-02 (July 23, 2025), holding that a “generative AI chatbot” is not subject to sales and use tax in Indiana. The Department of Revenue noted that Indiana (1) does not tax either “SaaS,” defined as “a service provider hosting software application over the internet” nor “charges for accessing prewritten computer software electronically via the internet [i.e., remotely accessed software] where no permanent ownership interest, control or possession in the software is acquired [by a purchaser,]” and (2) only taxes products transferred electronically (i.e., via download) if they meet the definition of specified digital products. The Department of Revenue then concluded:
The chatbot AI services provided by the Company would be considered a service. Since the AI is accessed electronically with no permanent ownership aspect, the AI would not be subject to sales tax. The Company’s customers access the chatbot through web access or through open-sourced API. Customers have no permanent ownership of the chatbot. The chatbot AI services would not be subject to sales tax as it does not meet the definition of prewritten software or specifically enumerated digital products.
The ruling is interesting both for what it says and what it leaves to the imagination. Without explicitly stating it, the ruling suggests that the Department of Revenue considers AI chatbots to be remotely accessed software, and since remotely accessed software is nontaxable in Indiana, the AI chatbot is also nontaxable.
Given the relative novelty of AI, most jurisdictions have not published guidance on how AI is to be treated for sales and use tax purposes. This ruling highlights one (but not the only) possible approach a jurisdiction may take with respect to AI. Broadly speaking, there are two approaches a jurisdiction could take:
- One approach is to include AI chatbots and/or services in pre-existing categories that the jurisdiction has already published guidance for, such as remotely accessed software, SaaS, infrastructure as a service (IaaS), platform as a service (PaaS), and/or a taxable digital service (e.g., digital automated services in Washington) and determine tax treatment according to that category;
- Another approach would be to treat AI as its own, unique category, either through legislative or regulatory actions. This approach is similar to the way many states approached digital goods/products – defining and taxing digital goods/products in a way that is distinct from previously existing taxable categories (e.g., software).
As mentioned above, the Indiana Department of Revenue seems to have taken the first approach. We anticipate that we will see more states issue their own guidance in the coming months as AI is only going to further entrench itself in modern business. We welcome that guidance because guidance enables businesses to satisfy any compliance obligations that they may have while simultaneously making lives much easier for SALT practitioners everywhere.
Contact the Authors: Ted Bots, Stephen Long and David Simon-Fajardo
