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 that makes solar-powered wireless cameras also sells cloud service plans that let customers send and view photos through the company's website and servers. It offers two flavors: a Wi-Fi plan (images travel over the customer's own Wi-Fi to the company's cloud) and a cellular plan (images travel over a mobile carrier's machine-to-machine data connection that the company buys and resells as part of the package). The question was whether either plan is subject to Colorado sales or use tax.

The Department split the analysis into two questions — the software/server side and the telecommunications side.

Software and servers — likely not taxable. Colorado does not tax computer software used by application service providers (an entity that hosts or retains custody over software for use by third parties). The Department said it "appears likely" the company is an ASP, so a customer's use of the company's cloud software would be a non-taxable charge. As for the servers, the Department said it likely would not treat customer access as a taxable rental of the servers, because control over the servers primarily stays with the company — and even if it were a rental, there'd be no taxable use in Colorado if the servers sit outside the state.

Telecommunications — potentially taxable. Colorado generally doesn't tax services, but it does tax intrastate telephone and telegraph service. The Department has for years read "telephone service" to include non-talking circuits, so it would likely view data plans from mobile carriers as telephone service. The company says it buys the cellular data plan and resells it to customers. That can avoid tax only if the company truly qualifies as a telecommunications reseller — broadly, it incorporates the purchased telecom into its offering and can be expected to contribute to the federal Universal Service Fund (USF), filing FCC Form 499-A (with a de minimis exception under $10,000 USF, and a system-aggregator exception). If the company does not qualify as such a reseller (e.g., it's de minimis), the Department would likely treat the company as the user and consumer of the data plans — i.e., the company's purchase is a taxable retail sale to it. And where a transmission path mixes intrastate and interstate service and the intrastate part isn't separately stated, the entire charge is taxable.

Wi-Fi plan — not telephone service. The Department would not view the Wi-Fi cloud charge as intrastate telephone/telegraph service, because the transmission from the camera to the customer's Wi-Fi network is the customer's own network doing the work, not a transmission service provided by the company.

Note the hedged language throughout ("appears likely," "would likely") — this is a GIL on incomplete facts, so a binding PLR would be worth the fee if real money turns on it.

What this means for you

IoT device makers and cloud/SaaS providers

Hosting your own software for customers to use (the classic ASP model) generally keeps that charge outside Colorado sales tax, and keeping control of (and ideally locating outside Colorado) the servers helps avoid a "rental of servers" theory. The trap is bundled connectivity: if you buy mobile-carrier data and pass it through to customers, Colorado may treat that data as taxable telephone service, and you may be the one owing tax on it unless you genuinely qualify as a telecom reseller.

Businesses reselling cellular/data connectivity

Don't assume "machine-to-machine, no voice" means no tax. Colorado's telephone-service tax reaches non-talking data circuits. To avoid being taxed as the consumer of the data plans, confirm your reseller status (USF contribution, FCC Form 499-A, annual reseller certifications to your wholesaler) — and watch the de minimis (<$10,000 USF) line, which can flip you into being the taxable user.

Accountants and tax professionals

Two independent regimes are in play: the ASP software carve-out (§ 39-26-102(15)(c)) and the intrastate telephone/telegraph tax (§§ 39-26-104(1)(c), 106; Reg. 39-26-104.1(c)), which excludes "mobile telecommunications services" under 4 U.S.C. § 124(7) but which the Department reads to capture non-talking data circuits. The mixed intrastate/interstate rule means a failure to separately state the intrastate portion taxes the whole charge.

Common questions

Q: Is cloud storage taxable in Colorado?
A: As described here, the cloud software/storage looks non-taxable because the provider appears to be an application service provider, and Colorado doesn't tax ASP-hosted software. The servers likewise are unlikely to be treated as a taxable rental.

Q: Why might the cellular plan be taxable when the cloud plan isn't?
A: Colorado taxes intrastate telephone/telegraph service and reads that to include mobile data ("non-talking circuits"). So the connectivity layer can be taxable even though the software layer isn't.

Q: Does reselling the data plan avoid the tax?
A: Only if you genuinely qualify as a telecommunications reseller (incorporating the telecom into your offering and expected to contribute to the federal USF, FCC Form 499-A). A de minimis provider (under $10,000 USF) likely doesn't qualify and would be taxed as the consumer of the data plans.

Q: Is the Wi-Fi plan taxed as phone service?
A: No. The Wi-Fi transmission is the customer's own network, not a transmission service the company provides, so it isn't intrastate telephone/telegraph service.

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

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.)