Is the product delivered by an Application Service Provider (ASP) — such as an electronic sales-tax-rate lookup accessed over the internet — subject to Colorado sales and use tax?

Plain-English summary

A company buys a service from an Application Service Provider (ASP): it sends its sales data to the ASP electronically and the ASP sends back the correct sales tax rate for each product. It asked whether Colorado sales or use tax is due on what the ASP delivers. The Department explained the rule but, as a GIL, made no determination on this specific product.

Colorado taxes tangible personal property, not (with some exceptions) services. The real question is whether using the ASP's software is a sale or rental of property (the software or the host servers) or the sale of a service. Effective July 1, 2012, computer software is taxable only if all three are true: it is (1) prepackaged for repeated sale or license, (2) governed by a tear-open non-negotiable license, and (3) delivered to the consumer in a tangible medium. Software a customer uses via an ASP fails the third test — it isn't delivered in a tangible medium — so it is not taxable computer software (§ 39-26-102(15)).

An ASP is "an entity that retains custody over (or 'hosts') software for use by third parties," accessed over the internet; the ASP may or may not own the software but generally owns the hardware/networking, and may charge a license fee and/or a maintenance fee. Crucially, the Department declined to decide whether the company's particular geo-information / tax-rate lookup actually is an ASP product, or whether it's taxable — that needs a private letter ruling.

What this means for you

Businesses buying hosted/SaaS tools

If you access software through a provider's servers over the internet (SaaS/ASP), Colorado generally doesn't treat it as taxable software, because nothing is delivered to you in a tangible medium. The post-July-1-2012 software test is conjunctive — prepackaged and tear-open license and tangible delivery — and hosted access fails the tangible-delivery prong.

ASPs and data/lookup-service providers

Whether your offering qualifies as a non-taxable ASP product turns on the specific facts — how the software is hosted and accessed, what you're really selling. The Department pointedly would not label this geo-information/tax-rate service one way or the other in a GIL. If you need certainty, a private letter ruling is the route.

Accountants and tax professionals

Anchor on § 39-26-102(15): software is taxable only if prepackaged + tear-open license + tangible-medium delivery. ASP/hosted software fails tangible delivery and is therefore not taxable software. But "not taxable software" isn't the same as a blanket exemption — characterization (software vs. service vs. something else) is fact-specific, and the Department reserved it for a PLR. GIL — no determination.

Common questions

Q: Is software accessed through an ASP taxable in Colorado?
A: It is not taxable computer software, because it isn't delivered to the consumer in a tangible medium — one of the three requirements (with prepackaging and a tear-open license) for software to be taxable after July 1, 2012.

Q: Did the Department rule that this tax-rate lookup service is tax-free?
A: No. It explained the software rule but expressly made no determination whether the specific geo-information/tax-rate product is an ASP product or whether it's taxable. That requires a private letter ruling.

Q: What makes software taxable in Colorado after July 1, 2012?
A: All three of: prepackaged for repeated sale/license, governed by a tear-open non-negotiable license, and delivered in a tangible medium. Miss any one — as hosted/ASP software does on tangible delivery — and it isn't taxable software.

Q: Can I rely on this letter?
A: No. This is a General Information Letter — a general good-faith discussion that makes no specific determination and binds no one. For a binding answer, request a private letter ruling under Reg. 24-35-103.5.

Citations and references

Statutes:
- § 39-26-104, 204, C.R.S. — imposition of sales and use tax on tangible personal property
- § 39-26-102(15), C.R.S. — definition of tangible personal property; software taxable only if prepackaged, governed by a tear-open non-negotiable license, and delivered in a tangible medium (and the ASP definition)

Department procedure:
- Reg. 24-35-103.5 (general information letters vs. private letter rulings)

Related Colorado rulings (software / ASP / cloud):
- [[gil-13-020-electronically-delivered-software]]
- [[gil-15-003-cloud-service-plans]]
- [[gil-16-002-annual-software-updates-and-maintenance-agreements]]
- [[gil-17-012-software-and-related-services]]
- [[gil-13-014-software-license-renewal]]

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-12-006.pdf

Original ruling text

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

GIL-12-006
April 4, 2012
XXXXXXXXXXXXXXXXXXXX
ATTN: XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXX
Re: Application Service Providers
Dear XXXXXXXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXX ("Company") a request for guidance on the
application of sales and use tax on application service providers.
The Department issues general information letters and private letter rulings. A general information
letter provides a general overview of the relevant tax issues and is not binding on the Department.
A private letter ruling provides a specific determination for a specific set of facts, is binding on the
Department but not on the taxpayer, and requires payment of a fee. For more information about
general information letters and private letter rulings, please see Department regulation 24-35-103.5
at www.taxcolorado.org > Tax Library > Rulings.
The Department initially treats your request as one of a general information letter. If you would like
the Department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with regulation 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Issue
Is product provided by Application Service Providers subject to Colorado sales and use tax?
Background
Company uses an Application Service Provider ("ASP") who provides the sales tax rate for each
product Company sells. Company sends their sales information electronically to ASP who then
electronically sends the tax rate back to Company. The question at issue is whether Colorado sales
and use tax is due on the product provided from ASP.
Discussion
Colorado levies sales tax on the sale of tangible personal property and use tax on the use, storage
or consumption of tangible personal property. 5539-26-104 and 204, C.R.S. With certain exceptions,
Colorado does not levy sales or use tax on the provision of services.

The primary issue raised in your letter is whether the "use" of the software creates a sale or rental of
tangible personal property (of computer software and/or host servers) or whether the transaction is
more properly characterized as the sale of a service. Effective July 1, 2012, the definition of tangible
personal property includes computer software that is prepackaged for repeated sale, governed by a
tear-open non-negotiable license, and is delivered to the consumer in a tangible medium. Computer
software that is used by a consumer via an ASP is not taxable computer software because the
software is not considered delivered to the consumer in a tangible medium. 539-26-102(15).
An ASP is defined as, an entity that retains custody over (or "hosts") software for use by
third parties. Users of the software hosted by an ASP typically will access the
software via the Internet. The ASP may or may not own or license the software, but
generally will own and maintain hardware and networking equipment required for
the user to access the software. The ASP may charge the user a license fee for the
software (in instances where the ASP owns the software) and/or a fee for
maintaining the software/hardware used by its customer.
As noted above, the department does not make a determination in this general information letter
that the geo-information service described in your letter is an ASP or whether the product is subject
to sales and use tax. You can obtain a determination of the taxability of the specific product by
submitting to the Department a request for private letter ruling.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter does
not address sales and use taxes administered by home-rule cities and home-rule counties. You may
wish to consult with local governments which administer their own sales or use taxes about the
applicability of those taxes. Visit our web site at www.revenue.state.co.us for more information about
state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted
letter will be made public within 60 days of the date of this letter. Please let me know in writing
within that 60 day period whether you have any suggestions or concerns about this redacted
letter.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue

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