After Colorado reinstated the exemption for electronically delivered software on July 1, 2012, are digital e-books, music, and movies also exempt, and how is tax applied to ASPs and software accessed over the internet?

Plain-English summary

When Colorado reinstated its exemption for electronically delivered computer software on July 1, 2012, a company asked the natural follow-up: does that exemption also cover digital e-books, music, and movies, will the old Special Regulation SR-7 come back, and how is tax charged on ASPs (software accessed over the internet)? The Department gave general guidance on all three.

First, digital goods are not software. Colorado taxes sales of tangible personal property — "corporeal" (physical) property — and the Department, like most states, treats digital goods such as e-books as tangible personal property because they are not "merely conceptual in nature." Sales of books, music, and movies are taxable whether sold on paper, CD, DVD, celluloid, or as electronically delivered digital goods. The July 1, 2012 statute that excluded electronically delivered computer software from the definition of tangible personal property came with a legislative declaration stating the change does not alter the treatment of "digital goods," "application service providers," "software as a service," or "cloud computing." So digital books, music, and movies stay taxable.

Second, SR-7 is gone. The Special Regulation that used to govern software, ASPs, and maintenance agreements was repealed effective July 1, 2012. The Department said it was considering whether to promulgate a replacement but had not decided.

Third, ASP charges are not taxable to the extent they are for the use of software. An ASP is an entity that "hosts" software for third parties to access over the internet (defined in § 39-26-102(15)(c)(II)(a)). Because those charges are for using software — now outside the taxable-property definition — they are not subject to sales tax. But there's a flip side: an ASP whose software or equipment is located in Colorado is subject to use tax on those items.

What this means for you

Sellers of e-books, music, movies, and other digital media

Don't read the software exemption as a digital-content exemption. If you sell downloadable books, songs, or films to Colorado customers, the Department treats them as taxable tangible personal property — the same as the physical disc or paperback. The delivery method doesn't change the answer.

Software companies and SaaS/ASP providers

Charges for electronically delivered software and for hosted software use (ASP/SaaS/cloud) sit outside Colorado's sales tax after July 1, 2012. But if you operate as an ASP and your servers, equipment, or software live in Colorado, you owe use tax on those in-state items — the exemption on what you sell doesn't exempt the property you use to deliver it.

Accountants and tax professionals

Three lines to hold separate: (1) electronically delivered software — exempt after 7/1/2012; (2) digital goods (books/music/movies) — still taxable TPP; (3) ASP charges for software use — not taxed, but in-state ASP equipment/software owes use tax. SR-7 was repealed and (as of this 2013 letter) not replaced, so there was no special regulation to lean on. Because this is a GIL, none of it is binding.

Common questions

Q: Are downloaded e-books, music, and movies taxable in Colorado?
A: Yes. The Department treats digital books, music, and movies as taxable tangible personal property whether delivered on paper, CD, DVD, or electronically. The software exemption that took effect July 1, 2012 expressly did not change the treatment of digital goods.

Q: Is electronically delivered software taxable?
A: No — effective July 1, 2012 the legislature excluded electronically delivered computer software from the definition of taxable tangible personal property.

Q: How are ASP / SaaS / cloud charges taxed?
A: They are not subject to sales tax to the extent the charges are for the use of computer software. However, an ASP whose software or equipment is located in Colorado is subject to use tax on those in-state items.

Q: Did SR-7 come back?
A: No. Special Regulation 7 was repealed effective July 1, 2012. As of this letter the Department was considering a replacement but had made no decision.

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(1), C.R.S. — sales tax on tangible personal property
- § 39-26-202, C.R.S. — use tax
- § 39-26-102(15), C.R.S. — definition of tangible personal property ("corporeal personal property"); effective 7/1/2012 excludes electronically delivered computer software
- § 39-26-102(15)(c)(II)(a), C.R.S. — definition of application service provider (ASP)

Repealed regulation referenced:
- Special Regulation SR-7 (software/ASP/maintenance agreements) — repealed effective July 1, 2012

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

Related Colorado rulings (software / digital / cloud):
- [[gil-13-014-software-license-renewal]]
- [[gil-15-003-cloud-service-plans]]
- [[gil-16-002-annual-software-updates-and-maintenance-agreements]]
- [[gil-17-012-software-and-related-services]]
- [[gil-15-025-digital-photographs]]
- [[gil-13-007-maintenance-agreements]]

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-13-020.pdf

Original ruling text

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

GIL-13-020
August 20, 2013
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
ATTN: XXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Electronically Delivered Software
Dear XXXXXXXXX,
You submitted on behalf of XXXXXXXXXX (“Company”) a request for guidance on the
applicability of sales and use tax on electronically delivered software.
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.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
1. After the exemption for electronically delivered software is reinstated July 1, 2012 will products
such as e-books and music purchased and delivered digitally also be exempt or will these
products remain taxable?
2. Before the exemption was suspended, Special Regulation SR-7 described the requirements for
determining whether software, Application Service Providers (“ASPs”) and maintenance
agreements were taxable or exempt. Will SR-7 be reinstated on July 1, or will there be another
Special Regulation to help make determinations on the taxability of these transactions?
3. How does the Department apply sales and use tax on ASPs and similar services accessed
through the internet?
Background

Company provides information to decision makers in the financial, legal, tax and accounting,
healthcare, science and media markets throughout the world. One aspect of Company’s business is
to provide indirect tax compliance support.
Discussion
Colorado levies sales and use tax on the sale, use, storage, or consumption of tangible personal
property. §39-26-104(1) and 202, C.R.S. Tangible personal property is defined as “corporeal
personal property.” §39-26-102(15), C.R.S. Corporeal is typically defined as that which is physical,
tangible, or material in nature.1 In contrast, intangible personal property does not have a physical
existence and is conceptual in nature, such as a contract, corporate stock, and commercial goodwill.
Sales of books, music and movies either in the form of paper, CD, DVD, celluloid or electronically
delivered digital goods are subject to tax.
Effective July 1, 2012, Colorado legislature modified the definition of tangible personal property to
exclude electronically delivered computer software. In the legislative declaration for this legislation,
the legislature stated that the amended definition does not alter the tax treatment of "digital goods",
"application service providers", "software as a service", or "cloud computing". Therefore, the
Department will continue treating the sale of electronically delivered goods, such as music, movies,
and books, as taxable sales of tangible personal property.
Prior to July 1, 2012, the definition of tangible personal property expressly included electronically
delivered computer software. The statute also addressed maintenance agreements, apportionment
of tax for sales where the computer software was used in multiple states, among other issues.
Special Regulation 7 addressed these issues. This regulation is repealed effective July 1, 2012.
The Department is considering whether to promulgate a new regulation to replace SR-7, but a final
decision has not been made at this time.
Effective July 1, 2012, charges by application service providers (ASP) are not subject to sales tax to
the extent the ASP’s charges are for use of computer software. An ASP is defined in § 39-26102(15)(c)(II)(a), C.R.S. 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.
An ASP, whose computer software or equipment is located in Colorado, is subject to use tax for
those items.
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.
1 Merriam-Webster Desk Dictionary (1995); American Heritage College Dictionary, 3rd Ed. 1993.

2

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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