Are colocation cross connects, cables, direct private lines, and remote-management software subject to Colorado sales or use tax?

Plain-English summary

A company runs a colocation and hosting data center in Colorado. The product a customer buys is essentially a secure place to store its servers — protected from intruders, the elements, and power/Internet outages — delivered through bandwidth, power circuits, cross connects, cables, and sometimes direct private lines. It asked how Colorado sales/use tax applies to the cross connects/cables, the direct private lines, and the management software.

Important framing: the Department had told the company (by letter dated February 27, 2014) that these issues were complex enough to warrant a binding private letter ruling, but the company declined to request one. So this letter gives only general guidance on the pieces the Department could address generally — it does not resolve the company's taxability.

1. Cross connects and cables — "true object" test, unresolved. Whether using these cables is a taxable rental of tangible personal property or a non-taxable service depends on the true object of the transaction — an especially hard call when computer software and hardware are intertwined. The Department weighs several factors, the principal one being the degree of control the customer exercises (Romantix v. City of Commerce City, 240 P.3d 565 (Colo. App. 2010)). Here customers apparently exert some remote control over the servers via the company's software. Other factors: who owns the software running on the servers, who bears the risk of loss (insurance), the contract terms, and how the parties treat the property for federal tax purposes. The Department didn't decide the question.

2. Direct private lines — taxable telecom if used for phone/telegraph service. The company buys private lines from telecom providers and resells them to customers at a markup, but doesn't know how customers use them. Charges for private lines used to provide intrastate telephone and telegraph services are subject to sales tax (§ 39-26-104(1)(c)). If customers use the lines for those purposes, the company must collect sales tax on the charges, including the markup. (Whether they do is a fact the Department couldn't resolve.)

3. Remote-management software — ASP software isn't taxable. The company uses software letting customers remotely manage servers, back up data, etc. Charges by application service providers (ASPs) for the use of computer software are NOT subject to sales tax (§ 39-26-102(15)(c)(I)(C)). But the Department said it wasn't given enough information to determine whether this software is in fact ASP computer software.

What this means for you

Data-center and hosting providers

Colocation deals are bundles of space, connectivity, hardware, and software, and Colorado doesn't have one answer for them. The rental-vs-service question rides on the true object and especially how much control the customer has over the equipment (Romantix). If your facts are this tangled, the Department's own steer is to get a binding private letter ruling rather than rely on general guidance.

Technology businesses reselling connectivity

If you resell private lines and any customer uses them to provide intrastate telephone/telegraph service, those charges are taxable telecommunications — and you must collect tax on the full charge including your markup (§ 39-26-104(1)(c)). Know (and document) how customers use the lines.

Accountants and tax professionals

Three separate doctrines collide here: (1) true-object rental-vs-service with customer control as the lead factor (Romantix); (2) intrastate telephone/telegraph as a taxable telecom service (§ 39-26-104(1)(c)); and (3) ASP software as non-taxable because it isn't tangible personal property (§ 39-26-102(15)(c)(I)(C)). The Department resolved none of them on these facts and invited a PLR — a reminder that a GIL won't pin down a complex bundle. Watch the home-rule-city caveat below.

Common questions

Q: Are colocation cross connects and cables taxable in Colorado?
A: It depends on the true object of the transaction — a taxable rental of tangible personal property or a non-taxable service — with the customer's degree of control as the principal factor. The Department didn't resolve it in this general information letter.

Q: Are resold private lines taxable?
A: If customers use them to provide intrastate telephone or telegraph service, yes — the charges (including markup) are taxable telecommunications under § 39-26-104(1)(c). If they aren't used that way, that telecom tax doesn't apply.

Q: Is software that lets customers manage their servers taxable?
A: Charges by application service providers for the use of computer software are not subject to sales tax (§ 39-26-102(15)(c)(I)(C)). The Department couldn't confirm the software here qualified as ASP software on the facts given.

Q: Why didn't the Department just answer?
A: It had advised that the issues were complex enough for a binding private letter ruling, and the company declined to request one, so the Department could give only general guidance.

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

Citations and references

Statutes:
- § 39-26-104(1)(c), C.R.S. (intrastate telephone and telegraph service taxable)
- § 39-26-102(15)(c)(I)(C), C.R.S. (ASP computer software not taxable)

Case: Romantix v. City of Commerce City, 240 P.3d 565 (Colo. App. 2010) (degree of customer control as principal factor in rental-vs-service).

Related rulings: [[gil-15-018-dark-fiber]] (unlit fiber as tangible personal property), [[gil-14-001-promotional-videos]] (true-object test), [[gil-17-012-software-and-related-services]] (ASP / software taxability), [[plr-17-002-lease-of-space-on-telecommunications-towers]].

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-14-018.pdf

Original ruling text

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

GIL-14-018
July 28, 2014
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Colocation Services
Dear XXXXXXXXXX,
You submitted on behalf of your client (“Company”) a request for guidance to determine the
applicability of sales and use tax on bandwidth, cross connects and cables used in colocation
services, direct private lines, and software programs.
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 Rule 24-35-103.5 at www.colorado.gov/revenue/tax > Tax
Library > Rulings.
By letter dated February 27, 2014 we indicated that, because of the complexity of the issues raised
by your client, the issues are more appropriately handled as a private letter ruling and that in the
absence of such a request, the Department can provide only limited guidance. Company declined
to request a private letter ruling. Therefore, the issues in this letter are limited to those areas
where the Department can provide general guidance.
Issue
Are bandwidth, cross connects and cables used in colocation services, direct private lines, and
software programs subject to Colorado sales or use tax?
Background
Company operates a colocation and hosting facility in the State of Colorado. The colocation is
comprised of bandwidth, cross connects, power circuits, and, in some cases, direct private lines
between the facility and its customers. The end product that a customer receives is a place to
store its servers that is secure from intruders, the elements, and power and Internet connectivity
disruptions.
Cross connects are cables connecting one cabinet to another in instances where customer
equipment is located in different places within the facility, to provide connection to the Internet, or
to connect a direct private line that is located elsewhere in the facility to a customer’s cabinet.

Company asks whether the cross connects and cables are the rental of tangible personal property
or is a supply used by the client to provide its colocation services. In addition, would the taxability
change if the cost was not separately stated on the sales invoice and instead sold in a lump-sum
billing.
In addition to bandwidth, Company purchases direct private lines from several different
telecommunication providers for use in its colocation and hosting facilities, and the costs are
passed through at a marked up rate. The lines consist of various types of copper and fiber
connections and may be used to transport either voice or Internet services. The client is not privy
to what its customers transmit over the circuits. It is unclear whether the lines are actually resold to
the customer or whether they are used or consumed in the process of providing colocation.
Company asks if the direct private lines are deemed to be an item purchased for resale to its
customers, are they considered to be an exempt Internet service, a taxable rental of tangible
personal property, or a taxable telecommunications service. If the direct private lines are taxable,
may Company continue to pay sales tax to the vendor and only collect sales tax (or remit
consumer’s use tax) on the mark-up? Would the outcome change if Company billed its customers
on a lump-sum basis rather than providing customers and itemized invoice?
Lastly, Company uses a number of software programs to allow the customer to remotely manage
the servers to which they have subscribed, provide data back-up services, and other functions as
part of its managed hosting services. Company only provides the customer a non-exclusive, nontransferable, limited use license to the software program and only to the extent it is need for the
contract. The costs are not independent of the hosting services and are not recovered from the
customer in an itemized charge. Company asks whether this qualifies as a taxable sale. If so, does
it make any of the other changes or lump-sum charge for coloration and or managed hosting
taxable?
Discussion
Company asks whether charges relating to collocation facilities constitute charges for the rental of
tangible personal property or are charges for non-taxable services. These charges relate to cables
that connect servers, connect to the Internet, or connect to a private line located in the collocation
facility. Whether a transaction involving the use of tangible personal property is a taxable rental of
the property or the provision of a nontaxable service will depend on which is the true object of the
transaction. This is a particularly difficult determination to make when addressing computer
software and related hardware. The Department considers a number of factors. One of the
principal factors is the degree of control exercised by the customer.1 We note that customers
apparently exercise some level of control remotely over the servers by use of computer software
provided by Company. Other factors to consider may include who owns the software operating on
the servers, who bears the risk of loss (insurance), contract terms, and how the parties treat the
property for federal tax purposes.
Company purchases private lines from telecommunication service providers and passes the cost
of such lines at a marked-up price to its customers. Private lines can be used by customers for
two-way communications, but Company does not know whether customers use the lines for such
purposes. Charges for private lines used to provide intrastate telephone and telegraph services
are subject to sales tax.2 If customers are using the private lines for such purposes, Company
must collect sales tax on the charges paid by customers, including any mark-up.
The taxpayer utilizes computer software that allows customers to remotely manage the servers,
provide data back-up services, and other functions. Charges by application service providers for

1

Romantix v. City of Commerce City, 240 P.3rd 565 (Colo. App. 2010).

2 §39-26-104(1)(c) C.R.S.

2

DR 4010A (06/11/14)

use of computer software are not subject to sales tax.3 We are not given enough information to
provide guidance on whether such software is ASP computer software.
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

3

§39-26-102(15)(c)(I)(C) C.R.S.
3

DR 4010A (06/11/14)