Is the electronic renewal of a software license taxable when the original prewritten software was delivered on a CD but the renewal involves no new tangible delivery?

Plain-English summary

A company that supplies tax-compliance software for the telecom and utility industries asked a narrow but important question: if a customer's original license to use prewritten, "canned" software was delivered on a CD (a tangible medium), is the later electronic renewal of that license — with no new transfer of tangible property — subject to Colorado sales/use tax?

The Department's answer: yes, the renewal is taxable. The reasoning:

• For software sold on or after July 1, 2012, Colorado taxes computer software (§ 39-26-102(15)(c)(I)) only if all three are true: (1) it's pre-packaged for repeated sale or license; (2) its use is governed by a tear-open nonnegotiable license; and (3) it's delivered to the customer in a tangible medium — not if provided via an application service provider (ASP), by electronic software delivery, or by load-and-leave.
• The key question is whether the license/agreement itself must be on a tangible medium. It need not be. Only the software must be delivered tangibly; there is no requirement that the agreement to renew or the license be in a tangible medium. (The Department concurrently ruled in PLR-13-003 that an online, click-"I Agree" nonnegotiable license still meets the "tear-open nonnegotiable" criterion — you don't literally have to tear open shrink-wrap.)
• The software here is and remains tangible personal property under the statute (it came on a CD). The renewal agreement is merely the means of measuring the charge for that property. The purchase price (on which tax is calculated) is the total money received for the purchase (Reg 39-26-102.7), and the renewal fee is just a further charge for the continuing right to use what's already established to be taxable tangible personal property.

(Footnote context: software sold during March 1, 2010 – June 30, 2012 was taxable as "standardized software" regardless of delivery method — see FYI Sales 89.)

What this means for you

Software vendors selling canned software with renewals

How the original was delivered controls the renewal. If the original license came on a tangible medium (CD/DVD), the software is taxable, and renewing that license is a further taxable charge for the same property — even if the renewal is delivered and agreed to entirely online. You can't strip the tax off a renewal just by switching to electronic delivery for the renewal step. Conversely, if the original software was delivered by ASP, electronic download, or load-and-leave, the post-July-2012 rules point the other way (the tangible-medium prong isn't met).

Businesses renewing software licenses

Don't assume an electronic renewal is tax-free. If your underlying software was originally delivered on a disc, the renewal fee is generally taxable, because you're paying to keep using taxable tangible property.

Accountants and tax professionals

Post-7/1/2012 taxability hinges on the three-prong test in § 39-26-102(15)(c)(I), and the tangible-medium prong attaches to the software, not the license (an online click-wrap license still satisfies "tear-open nonnegotiable," per PLR-13-003). A renewal is treated as a further charge for the same tangible property, measured by the renewal fee (purchase price, Reg 39-26-102.7). Mind the date overlay: 3/1/2010–6/30/2012 standardized software was taxable regardless of delivery (FYI Sales 89). Software cousins: [[gil-13-007-maintenance-agreements]], [[gil-16-002-annual-software-updates-and-maintenance-agreements]], [[gil-17-012-software-and-related-services]]. Watch the home-rule-city caveat below.

Common questions

Q: Is an electronic software license renewal taxable in Colorado?
A: It can be. If the original prewritten software was delivered on a tangible medium (a CD), the software is taxable property and the renewal is a further taxable charge for it — even though the renewal itself is delivered electronically.

Q: Does the license have to be on a tangible medium?
A: No. Only the software must be delivered in a tangible medium for the post-July-2012 test. The license/agreement can be electronic — an online click-"I Agree" still counts as a tear-open nonnegotiable license (PLR-13-003).

Q: What if the original software was downloaded, not on a disc?
A: Then the tangible-medium prong isn't met for post-July-2012 sales, which points away from taxability. The outcome here turned on the original CD delivery.

Q: Why is a renewal taxed when nothing new is shipped?
A: Because the renewal is just a further charge for the continuing right to use software that's already taxable tangible personal property. The fee measures the price of that property.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, not binding on the Department, and makes no determination on specific facts. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes, rules, and guidance:
- § 39-26-102(15)(c)(I), C.R.S. (definition of taxable computer software, on/after July 1, 2012)
- Department Regulation 39-26-102.7(a)(1), (3) (purchase price)
- PLR-13-003 (online click-"I Agree" license meets the "tear-open nonnegotiable" criterion)
- Department FYI Sales 89 (Computer Software; standardized-software definition; 3/1/2010–6/30/2012 taxability)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-13-014.pdf

Original ruling text

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

GIL-13-014
August 7, 2013
XXXXXXXXXXXXXXX
ATTN: XXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Software License Renewal
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXX (“Company”) a request for guidance to determine
the applicability of Colorado sales and use tax on software license renewals.
The Colorado Department of Revenue (“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.colorado.gov/revenue/tax > 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
Does sales tax apply to a license renewal to use prewritten, canned software when the original
license was delivered through a tangible medium, but the renewal is delivered electronically with no
additional transfer of tangible personal property?
Background
Company is a supplier of tax compliance software for the telecommunication and utility industries
and is inquiring about the application of sales tax on the renewal of a license to use prewritten,
canned software when the original license was delivered via tangible means, such as a CD, but the
renewal is delivered electronically with no additional transfer of tangible personal property.
Discussion

Computer software, as defined in §39-26-102(15)(c)(I), C.R.S., that is sold on or after July 1,
20121 is subject to Colorado sales or use tax if it meets the following criteria:
1. The software is pre-packaged for repeated sale or license;
2. The use of the software is governed by a tear-open non-negotiable license agreement;
and
3. The software is delivered to the customer in a tangible medium. Software is not
delivered to the customer in a tangible medium if it is provided through an application
service provider, delivered by electronic software delivery, or transferred by load and
leave software delivery.
The principal issue is whether the client’s agreement to the license and the license itself must
be on a tangible medium. Company obtains clients’ agreement to the license by electronic
means and presumably makes the license available for viewing by electronic means. Unlike
the software itself, there is no requirement that the agreement to renew the license or the
license be made in a tangible medium. We have concurrently ruled in PLR-13-003 that a
nonnegotiable license that is presented electronically to a customer meets the statutory criteria
of a “tear-open nonnegotiable” license even though the retailer offers the license online. PLR13-003 states in pertinent part:
“Tear-open, nonnegotiable” license agreements are those most commonly found
when a customer purchases a CD of a software program from a store. Once the
plastic packaging is torn off the CD case, the buyer can find the license agreement,
which is generally not negotiable. However, it is not essential that the buyer has to
actually tear something open in order to meet this criterion. For example, we believe
this provision applies to licenses presented on the Internet when the buyer only has
the option to click “I Agree” in order to purchase the software program.
In addition, the tangible personal property in question (i.e., computer software) is and remains
tangible personal property under the statute. The license renewal agreement is merely a
means by which the cost of the charge for the tangible personal property is measured. The
purchase price, on which sales tax is calculated, is the total amount of money received in
consideration for the purchase.2 The subsequent renewal fee is simply a further charge for the
continuing right to use what has already been established to be tangible personal property.

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2

The sale of standardized software that occurs between March 1, 2010 to June 30, 2012 is taxable. Such
software is, for that time period, considered tangible personal property, regardless of how the standardized
software is acquired by the purchaser or downloaded to the purchaser’s computer.
“Standardized software” means:
1. Computer software, including prewritten upgrades that are not designated or developed to the
specifications of a specific purchaser.
2. Computer software designed and developed to the specifications of a specific purchaser but then sold
to another purchaser.
3. Software that is modified or enhanced even if such modification or enhancement is designed and
developed to the specification of a purchaser.
Department FYI Tax Publication Sales 89, “Computer Software.” This publication, as well as other tax
publications are available on the Department’s web site at www.colorado.gov/revenue/tax > Tax Library.
Department Regulation 39-26-102.7(a)(1) and (3) and 39-26-102.7(a)(1) and (3).

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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.colorado.gov/revenue/tax 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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