Colorado: Software and Sales Tax
- Feb 23, 2012 | Will Frei
The Colorado Department of Revenue issued a letter ruling that highlights the complexities of determining which software products and services are subject to sales tax.
Letter ruling PLR 11-007 responds to a query to determine whether a particular company should collect and remit sales tax for a fee associated with a software service. The company allows users to upload, track and download large files over the web. Customers do not pay for individual files, but for specific amounts of storage space (though the most basic service is free).
Colorado charges sales and use tax on "the sale, use, storage, and consumption of tangible personal property, which includes standardized software, but does not impose sales tax on services." So does this particular service involve tangible personal property?
The letter makes it clear that this is not an easy question to answer, twice calling the matter "difficult." It cites the Colorado Supreme Court approach in City of Boulder v. Leanin' Tree Inc, which involved a number of "tests" for determining whether a particular software service is taxable. One such test is to ask whether the "essence" of a transaction is "corporeal tangible property or an intangible right or service."
The letter states that the essence of the service in question is "very similar to the ubiquitous services of Google, Yahoo, and many other web-based providers," which are considered "providers of a service not lessors of computer servers or software" (emphasis added). Furthermore, the letter argues that because the company maintains a great degree of control over the files the customers should not be considered lessors of personal property.
Conclusion: the company provides a service not subject to sales tax. This ruling follows similar rulings made by other states: