Are a camera maker's cloud-storage service plans subject to Colorado sales or use tax — both the software/server side and the cellular-data side?

Plain-English summary

A company selling camera cloud plans described a Wi-Fi plan and a cellular data plan. The Department discussed possible treatment of the cloud software, servers, and telecommunications service, using hedged language and making no specific determination.

The letter says it appears likely that the company is an application service provider and that the customer's use of its software would therefore be a nontaxable charge. It separately says the Department would likely not assert a taxable server rental when control remains with the company, subject to the facts. For cellular data, the Department discusses possible telephone-service treatment, resale, and the conditions for telecommunications-reseller status.

The reseller discussion includes incorporation of purchased telecommunications and expected Universal Service Fund contribution, with exceptions for a de minimis provider or system aggregator. The letter does not say that de minimis status makes a provider the taxable user; it identifies it as an exception to the USF requirement. The Department says tax would likely apply if the company did not file Form 499-A or was not a qualifying de minimis provider.

What this means for you

Cloud software and cellular data

The GIL uses terms such as "appears likely" and "would likely." It does not decide the company's ASP status, server location or control, cellular classification, or reseller status.

Reseller status

De minimis status is discussed as an exception to the USF contribution requirement. It is not described as a trigger for consumer taxation. The tax result depends on the facts and on whether the company satisfies the applicable reseller conditions.

Common questions

Q: Does the GIL decide that the company's cloud software is nontaxable?
A: No. It says the company appears likely to be an ASP and that the Department would treat the customer's software use as nontaxable, but it does not decide the issue.

Q: Does being a de minimis provider make the company taxable as the user of the data plans?
A: No. The letter describes de minimis status as an exception to the USF contribution requirement. It says tax would likely apply if the company did not file Form 499-A or was not considered a qualifying de minimis provider.

Q: Does the letter decide the cellular plan's taxability?
A: No. It discusses possible telephone-service treatment and conditional reseller rules without making a specific determination.

Citations and references

Statutes and rules:

• § 39-26-102(15)(c), C.R.S. (software used by application service providers — not taxed)
• § 39-26-104(1)(c), C.R.S. (tax on intrastate telephone and telegraph service)
• § 39-26-106, C.R.S. (telephone/telegraph imposition)
• Department Regulation 39-26-104.1(c) (definition of telephone and telegraph services, including non-talking circuits)
• 4 U.S.C. § 124(7) (mobile telecommunications services — excluded from the regulation's reach)
• Department Rule 24-35-103.5 (GIL / PLR procedure)

Federal telecom references:

• FCC Form 499-A (telecom provider/reseller filing); federal Universal Service Fund (USF) contribution and de minimis threshold

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-15-003.pdf

Original ruling text

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

GIL-15-003 — January 27, 2015

Re: Cloud Service Plans

You submitted on behalf of the Company a request for guidance to determine whether Colorado sales or use tax is applicable to cloud service plans. […] The Department initially treats your request as one of a general information letter.

Issue

Are Company's charges for cloud service plans subject to Colorado sales or use tax?

Background

Company manufactures solar-powered wireless cameras. Company also sells cloud service plans that allow customers to send and view photos on the camera by accessing Company's website. The cloud service relies on a mobile telecommunications carrier to transmit the data from the customer's camera to Company's servers. Company sells two types of plans. The first plan is a Wi-Fi enabled cloud service using the customer's Wi-Fi network to transmit images from the camera to Company's cloud storage. The second type of plan is a cellular network cloud service using the cellular phone service to transmit images from the camera to Company's cloud. Company asserts that it purchases a cellular phone data plan from a cellular phone company and resells the data plan to the customer as part of the cloud service package. The cellular data plan is considered machine-to-machine and there is no voice service with the plan. The cellular company does not charge Company sales tax on charge for the data plans.

Discussion

A customer's use of Company's cloud storage to store and view images raises the question of whether the software, service, or servers are subject to Colorado sales tax. Colorado does not levy sales or use tax on the sale or use of computer software used by application service providers. [§ 39-26-102(15)(c), C.R.S.] An application service provider means an entity that retains custody over or hosts computer software for the use by third parties. Although we do not decide the issue here, it appears likely that Company is an application service provider. Therefore, the Department would treat the customer's use of Company's computer software as a non-taxable charge. To the extent the charge is for use of the Company's servers, the Department would likely not assert that the customers are engaged in the a taxable rental of Company's servers if control over the servers primarily rests with Company. Even if this was a taxable rental of such servers, the Department would likely not assert that there was a taxable use in Colorado if the servers are located outside Colorado.

Colorado does not impose sales tax on most services, with the notable exception of intrastate telephone and telegraph services. [§ 39-26-104(1)(c), C.R.S.] Company's cloud service raises the possibility that Company may be the "provider" of intrastate telephone and telegraph services. […] Department Regulation (39)26-104.1(c)(l)(a) defines telephone and telegraph services to include, but not be limited to: On or after August 1, 2002, all telephone and telegraph services except those services defined as mobile telecommunications services under 4 United States Code section 124(7), which are intrastate telephone and telegraph service are subject to the tax imposed by C.R.S. 39-26-106 […]. The term "service" includes but is not limited to additional listings, joint-user service, non-talking circuits, leased circuits and facilities, local exchange service […], information charges, service connection charges, and any other charges assessed or passed on to the consumer with the exception of charges for installation or repair […].

There is some debate about whether data service provided by mobile telecommunication providers constitutes telephone or telegraph service. However, the Department has for many years defined intrastate telephone service to include non-talking circuits. Therefore, the Department would likely view charges for data plans by mobile telecommunication providers as telephone service. If the transmission pathway involves both intrastate and interstate telephone service and the charge for the intrastate service is not separately stated, then the entire charge is subject to sales tax.

Company represents that it purchases the telephone service for resale. An entity is considered a telecommunications services reseller if it (1) incorporates purchased telecommunications and (2) the entity can be reasonably expected to contribute to the Universal Services Fund ("USF") from those offerings. There is an exemption to this requirement if the reseller is a de minimis telecommunications provider or if it is a system aggregator. A provider meets the de minimis requirement if they are not a common carrier and would provide less than $10,000 to the USF. All providers of telecommunications services, including wholesalers and resellers, are required to file a Form 499-A. […] If Company [does not] file FCC Form 499-A or is not considered a [de] minimis telecommunications provider, the Department will likely view Company's purchase of the data plans from a mobile telecommunications provider as a taxable retail sale in which Company is the user and consumer of the data plans in delivering the service to their customers.

Finally, the Department would likely not view the charge for cloud Wi-Fi as a charge for intrastate telephone or telegraph service. The transmission from the camera to the customer's Wi-Fi network is not a transmission service made by Company; it is the customer's own Wi-Fi network providing the data transmission.

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.

(Condensed from the official PDF; see the linked source for the complete text and footnotes.)