States risk overtaxing AI products, services

A sales tax specialist says inconsistent state rules on artificial intelligence are leading some companies to overpay taxes and miss refunds. The warning matters as AI offerings blur the line between taxable products and non-taxable services across more than 13,000 U.S. taxing jurisdictions.

Why it matters: - Inconsistent state treatment of artificial intelligence can push companies to pay sales tax they may not owe. - The issue can hit businesses with six- and seven-figure annual overpayments, according to William Flick of EisnerAmper Advisory Group LLC. - Refund exposure rises when AI is sold across multiple states with different definitions of product, service and nexus.

What happened: - William Flick, managing director at EisnerAmper Advisory Group LLC, warned that state sales tax rules are still evolving around AI products and services. - Flick said the U.S. now has more than 13,000 taxing jurisdictions, making AI tax treatment difficult for finance teams to track. - The guidance centers on eight areas where companies are most likely to overpay sales tax on AI-related transactions.

The details: - Thirty states classify AI as software as a service, but state definitions of SaaS vary widely. - Some states treat SaaS as a taxable software product. - Other states treat SaaS as a non-taxable service. - Some states use a hybrid approach. - AI taxability can depend on where the AI is sold, bought and used. - A purchase made by headquarters can be taxable or exempt differently than use by an office in another state. - Many states exempt custom AI services from sales tax. - States also use sales and transaction thresholds to determine nexus. - AI activity can help a company cross a taxable threshold even when the AI itself is not directly taxed. - AI products are taxable when ownership is conveyed. - AI that only facilitates analysis or activity may be treated as a service and not taxed. - Definitions around AI-generated ownership and ideas are still changing. - Many companies automatically pay sales tax as invoiced. - A forensic review of accounts payable can uncover refund opportunities when tax was applied incorrectly. - Bundled invoices can cause exempt AI to be taxed along with taxable digital goods or services. - Audit findings on AI tax treatment can contain errors that support refunds when challenged.

Between the lines: - The real problem is not just whether AI is taxable, but how states categorize the same transaction differently. - Companies operating in multiple states face the biggest risk because AI offerings can look like software, a service or a hybrid, depending on the jurisdiction. - Flick framed AI taxation as an early-stage area where proactive review can improve margins.

What's next: - Companies using AI should review state-by-state classifications before billing, paying or remitting sales tax. - Finance teams may want to audit vendor invoices, bundled charges and prior audit results for refund claims. - Businesses that work with sales tax specialists may be able to recover overpayments as state rules continue to evolve.

The bottom line: - AI sales tax is still a moving target, and inconsistent state rules can turn routine compliance into a refund opportunity.