Does Colorado sales or use tax apply to custom software, standalone services, installation, repairs, freight, and training sold with telecommunications equipment?

Plain-English summary

A company that sells and installs telecommunications equipment — hardware, canned and custom software, installation, plus optional training and repair (done at its Minnesota warehouse) — asked how Colorado sales/use tax applies to each line item. Everything is separately stated on the invoice. The Department went item by item:

• Custom software — generally not subject to Colorado sales tax (see Special Regulation 7). State-collected local taxes treat software the same, but self-collected home-rule cities/counties may differ (see DRP 1002).
• Service only (no hardware/software) — the Department couldn't tell exactly what was meant, but Colorado generally doesn't tax services (§ 39-26-104(1)(a)).
• Installation — generally a non-taxed service, but if it's performed in connection with selling tangible goods it becomes taxable even if separately stated when it is not "separable" from the sale. The test (from A.D. Stores) is whether the buyer has a realistic option to buy the equipment without the install — e.g., if the seller won't sell or warrant the equipment without installing it, or only the seller can install it, the install is not separable and is taxed.
• Repairs — repair labor is a non-taxed service, but tangible parts sold as part of the repair are taxable.
• Freight — transportation charges are generally not taxable unless not separable from the sale (Special Regulation 18). If the freight charge is taxable, then bundled insurance that isn't separately stated is also taxable.
• Training — not subject to Colorado sales or use tax (a service).

What this means for you

Sellers who bundle equipment with software, install, freight, and training

The recurring pivot is separability. Pure services (software development, training, repair labor) ride free, but a service welded to the sale of taxable goods gets pulled into the taxable price — separate invoicing won't save it. Ask: could the customer realistically buy the equipment without this service? If not, charge tax on it.

Repair and freight specifics

Bill repair labor and repair parts so you can tax the parts and not the labor. For freight, keep transportation genuinely optional/separable; and remember that once freight is taxable, any insurance folded into it (not separately stated) is taxable too.

Multi-jurisdiction sellers

State-administered local taxes follow the state treatment of software, but Colorado's self-collected home-rule cities and counties set their own rules — check DRP 1002 and contact those jurisdictions directly.

Common questions

Q: Is custom software taxable in Colorado?
A: Generally no for state sales tax. But licensed/canned software can be taxable (Special Regulation 7), and home-rule cities may treat software differently.

Q: I separately state my installation charge — is it automatically tax-free?
A: No. If the installation isn't separable from the equipment sale (the buyer can't realistically buy the equipment without it), it's taxable even when separately stated.

Q: Are repair charges taxable?
A: Repair labor is a non-taxed service, but tangible parts sold as part of the repair are taxable.

Q: Is freight taxable?
A: Generally not, unless it isn't separable from the sale. If freight is taxable, bundled insurance that isn't separately stated is taxable too.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance only, not binding on the Department, and the Executive Director (the only person who can bind the Department) did not formally review it.

Citations and references

Statutes, cases, and rules:
- § 39-26-104(1)(a), C.R.S. — Colorado does not levy sales/use tax on services
- A.D. Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001) — separability of a service from a sale
- Department Special Regulation 7 (Computer Software)
- Department Special Regulation 18 (Transportation Charges)
- DRP 1002 — list of self-collected home-rule jurisdictions

Separability / SaaS-and-software cousins: [[gil-08-002-web-hosting-computer-software]], [[gil-09-018-taxability-of-services]], [[gil-09-011-xxxxxxxxxx]].

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-08-001.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2008-1

XXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
January 8, 2008

Subject: Sales Tax
Re: telecommunications, computer software, freight, training, repair
Dear XXXXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated October 26,
2007, re: taxability of products and services.
Issue
Does sales or use tax apply to the following products and services: custom software, service-only (no
hardware or software purchased), installation service, repairs, freight (if handling, insurance is
included, but not separately stated), training?
Background
Your company sells and installs telecommunications equipment. Equipment includes hardware,
canned and custom software, and installation of your communications systems for customers. Each
item is separately stated on the invoice, including freight costs. Your company provides training at
the request of customers. The company also offers repair services at the company’s warehouse
located in Minnesota and ships the repaired equipment back to the customer. Your company holds a
Colorado sales tax license.
Discussion
Custom software
Generally, custom software is not subject to Colorado sales tax. You can view and download the
department’s regulation regarding software by going to our website at: www.revenue.state.co.us and
clicking on “Taxation” > “Publications/Resources” > “Regulations > “Final Tax Regulations” > “Sales
and Use Tax” > “SR-7 Computer Software.”
The department collects and enforces sales and use tax for a number of cities, counties and special
districts, all of which levy tax on software in the same manner as the state sales tax. However,

please note that certain cities and counties, referred to as “Home-rule” cities and counties, are
authorized to enact and enforce their own sales and use tax, which may be different from the state
tax. For a list of these home-rule cities and counties, see department publication DRP 1002, which is
also available on our web site under “Taxation” > “Forms” > “Businesses” > “Sales and Use Tax.”
Contact these home-rule jurisdictions if you have questions about their taxes.
Service only (no purchase of hardware or software)
It is not clear what is encompassed here. Generally, Colorado does not levy sales or use tax on
services. §39-26-104(1)(a), C.R.S.
Installation service
Generally, Colorado does not levy sales or use tax on services. §39-26-104(1)(a), C.R.S. If the
installation service is performed in conjunction with the sale of tangible personal property, then the
service is taxable, even if separately stated, if the service is not “separable” from the sale of the
equipment. A.D. Stores v Department of Revenue, 19 P3d 680 (Colo. 2001). In determining whether
a service is “separable” from the sale of the equipment, the department will consider whether the
purchaser has a realistic option of acquiring the equipment without the installation service. For
example, if the company does not sell the equipment without also the installation service, or does not
warrant the equipment without its installation, or the equipment is such that only the company is
capable of installing the equipment, then the department will likely find that the installation service is
not separable and require that the tax be collected on the price of equipment and installation
services.
Repairs
Generally, Colorado does not levy sales or use tax on services such as repair service. §39-26104(1)(a), C.R.S. Tangible personal property that is sold as part of the repair service is subject to
sales tax.
Freight
Generally, transportation charges are not taxable, unless they are not separable from the sale. You
can view and download the department’s regulation on the taxability of transportation charges by
going to the department’s website, referenced above, and go to “Taxation” > “Publication/Resources”

“Regulations” > “Final Tax Regulations” > “Sales and Use Tax” > “SR-18 Transportation Charges.”
Note that if the transportation charge is taxable, then the insurance cost, which you indicated is not
separately stated, is also taxable.
Training
Colorado does not levy sales or use tax on services such as training. §39-26-104(1)(a), C.R.S.
Finally, the Department makes a good faith effort to provide accurate and complete answers to
questions posed to it by taxpayers. However, the information and answers provided here are not
binding on the Colorado Department of Revenue, nor do they replace, alter, or supersede Colorado
law and regulations. The Executive Director, who by statute is the only person having authority to
bind the Department, has not formally reviewed and/or approved this response.
Respectfully,

Office of Tax Policy
Colorado Department of Revenue