Ezel / Tax Rulings / CO
CO GIL 08-002 Sales & Use Tax 2008-01-08

Are software-as-a-service (SaaS) hosting fees and network-connectivity fees subject to Colorado sales or use tax?

Short answer: Apparently not. On the limited facts, the Department found that neither a SaaS hosting fee (the right to use hosted software, with no ownership transferred) nor a separately billed network-connectivity fee appears to be taxable—internet access, email, web hosting, and domain registration aren't telecommunications and are non-taxable services in Colorado. Licensed software, by contrast, can be taxable, but the taxpayer asked only about SaaS. (General Information Letter: general guidance only, not binding on the Department.)
Currency note: this ruling is from 2008
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is a Colorado Department of Revenue General Information Letter (GIL) — a general discussion of the tax law that represents the good-faith opinion of Department personnel. A GIL is NOT binding on the Department and CANNOT be relied upon as a ruling by any taxpayer. It does not address sales or use taxes administered by self-collected home-rule cities and counties. This summary is informational only and is not legal or tax advice. Consult a licensed Colorado tax professional about your situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.
View original ruling (PDF)

Plain-English summary

An out-of-state software vendor offers retailers "back office" and point-of-sale software. Instead of (or in addition to) licensing the software, it provides Software-as-a-Service (SaaS): customers access the vendor's hosted applications over a Remote Desktop connection, send their store data to the vendor's servers, and can export data and print reports — while keeping ownership of their own data and getting no ownership of the software. The vendor charges a hosting fee (the right to use the hosted software plus support) and an optional, separately billed network-connectivity fee (a broadband link between the customer and the hosting facility). It asked whether those fees are taxable.

The Department's answer, on the limited facts provided: neither fee appears to be taxable. Colorado taxes tangible personal property and some services (including telecommunications), and licensed software can be taxable (Special Regulation 7) — but the vendor asked only about SaaS, not licensed software. Internet access, email, web site hosting, and domain-name registration are not telecommunications services, so they're non-taxable in Colorado (FYI Sales 79 and 80). The hosting fee (access to hosted software, no ownership) and the network-connectivity fee fell into that non-taxable bucket.

What this means for you

SaaS providers and customers

Charging for access to hosted software — where the customer never takes ownership of the software — is treated very differently from selling or licensing software. Under this guidance, true SaaS hosting fees read as non-taxable services, as do connectivity/internet-access charges. The label matters less than the substance: is the customer buying software (potentially taxable) or buying access to software running on your servers (service)?

Watch the licensed-software line

The Department flagged that licensed software can be taxable under Special Regulation 7. If your deal includes a software license (canned software delivered to the customer), that piece may be taxable even though the SaaS access isn't. Structure and document the two separately.

Home-rule and a thin record

This conclusion rested on "very limited information." For a transaction with real exposure, get a private letter ruling, and remember Colorado's self-collected home-rule cities can reach different results.

Common questions

Q: Are SaaS subscriptions taxable in Colorado?
A: Under this 2008 guidance, a SaaS hosting fee (access to hosted software with no ownership transferred) appeared non-taxable, because web hosting and internet-type services aren't taxable telecommunications.

Q: What about a separate network-connectivity (broadband) fee?
A: It also appeared non-taxable — internet access is a non-taxable service in Colorado.

Q: Is licensed software treated the same?
A: No. The Department noted licensed software can be taxable (Special Regulation 7). The vendor here asked only about SaaS.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance only, not binding, based on limited facts. The Executive Director did not formally review it.

Citations and references

Rules and publications:
- Department Special Regulation 7 (Computer Software) — licensed software can be taxable
- Department publications FYI Sales 79 and 80 — internet access, email, web hosting, and domain registration are non-taxable

Software / services cousins: [[gil-08-001-telecommunications-computer-software-freight-training-repair]], [[gil-09-018-taxability-of-services]], [[gil-09-011-xxxxxxxxxx]].

Source

Original ruling text

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

GIL-2008-2

XXXXXXXXXXX
Attn: XXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
January 8, 2008

Re: web hosting, computer software
Dear XXXXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated September 27,
2007, re: taxability of hosting and network connectivity fees.
Issue
Does sales or use tax apply to hosting and network connectivity fees?
Background
[Company] is an out-of-state vendor that provides “Back office” and “Point of Sale” software to
customers located in North America. You state that [Company] either licenses this software to
customers or provides “Software as a Service” (SaaS) in a hosted infrastructure located in [country].
SaaS is an agreement between [Company] and the customer by which the customer obtains access
to [Company]’s hosted applications (Connected Retailer Solutions, which consists of Merchandising,
Sales Audit, Customer Relations Management (CRM) and Point of Sales (POS) with an additional
option for a Planning Module and Great Plains Dynamics software), and receive POS equipment
support and maintenance services for the in-store solution.
Customers transmit data to [Company] from the in-store POS solution and the data is stored on
[Company]’s servers. The customer’s head office users connect to the hosted infrastructure via a
Remote Desktop Software and have the right to export and save data, and print reports locally.
Ownership of the material data for the SaaS solution remains with the customer.
[Company] charges customers:
A hosting fee, which means a charge for the right to use the Connected Retailer Software in the
hosted environment and at the Point of Sale locations and obtain support services. The customer
has no right of ownership of the software or any component thereof.

A Network Connectivity fee to those customers who opt to purchase the service. This is a high speed
broadband connection established between the customer’s store and/or head office locations to the
[Company] hosting facility.
The hosting and connectivity fees are billed separately.
Discussion
Colorado levies sales and use tax on the sale of tangible personal property, and some services,
including telecommunications services. In addition, software that is licensed can be taxable. See
department Special Regulation 7. However, you requested advice only for SaaS services and not for
licensed software. Please let me know if this is incorrect.
Internet access, e-mail services, web site hosting and domain name registration are not
telecommunications services and, thus, are non-taxable services in Colorado. Department
publication FYI Sales 79 and 80. Based on the very limited information you provided, it appears that
neither the hosting fee or network connectivity fee are taxable.
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