Is a web-based subscription service for sending, receiving, and tracking large digital files subject to Colorado sales or use tax, or is it a non-taxable service?

Plain-English summary

A company that runs a web-based service for sending, receiving, and tracking large digital files over the internet (a paid file-transfer service, with monthly/annual subscriptions and some pay-per-use features) asked the Department for a binding ruling on whether its fees are taxable. The Department ruled the fee is for a service, and a service is not subject to Colorado sales or use tax.

How the service works: a customer uploads files to the company's servers (located outside Colorado) and designates a recipient, who gets an email link to download them; files are encrypted and virus-scanned and expire after a set number of days. Customers never download the company's software — everything happens through the website.

Colorado taxes sales and use of tangible personal property — which includes standardized software — but does not tax services. So the question was whether this is a (non-taxable) service or a (taxable) rental of software/servers. The Department applied the Leanin' Tree "totality of the circumstances / true object" test, asking whether the deal looks more like buying goods or buying a service. It concluded the service is essentially like the web-based email services everyone uses (Google, Yahoo): users send and store files via the provider's systems, but those providers are commonly understood to be providing a service, not leasing servers or software.

A second factor — degree of control (Romantix) — pointed the same way. The provider has physical custody of the servers and the staff that program and run them; the user's control (initiating an upload, picking a recipient, setting an expiration) is minor by comparison. The Department analogized to renting a truck with an operator: the operator controls the truck, so it's a service, not a rental of the truck. Conclusion: a non-taxable service.

The Department flagged but did not need to decide a second hard issue — whether a Colorado user's "use" of out-of-state software/servers happens in Colorado — noting the HB 10-1192 legislative declaration (adding standardized software to the definition of taxable property doesn't itself make hosted software, ASPs, or cloud computing taxable) and the multistate apportionment rule (Reg. 39-26-102.13(3)).

Because this is a private letter ruling, it is binding on the Department only for this taxpayer and these facts and cannot be relied on by anyone else.

What this means for you

SaaS, cloud, and file-transfer providers

When customers access your software/servers over the web without downloading anything, and you keep custody and control of the systems, Colorado is likely to treat the subscription as a non-taxable service rather than a taxable rental of software or hardware. The analysis is fact-specific (Leanin' Tree totality of circumstances), and "who controls the property" is a key factor — the more control the customer has over the systems, the more it can look like a taxable rental.

Buyers of cloud/file-transfer subscriptions

A web-based file-transfer or similar cloud subscription where you never download software is generally not subject to Colorado sales/use tax. Home-rule cities can reach different conclusions, so check locally.

Accountants and tax professionals

This ruling is a clean application of Leanin' Tree and Romantix to a SaaS/cloud fact pattern: standardized software is taxable TPP, but access-only web services are non-taxable services, with provider-vs-user control as the pivot. The unresolved sourcing question (where the "use" occurs for multistate users) and HB 10-1192's neutrality on hosted software/ASP/cloud are worth flagging for clients with mixed taxable software offerings.

Common questions

Q: Is software-as-a-service (SaaS) taxable in Colorado?
A: Standardized software delivered to you is taxable tangible personal property, but a web-based service you merely access — without downloading the provider's software — is generally a non-taxable service. This ruling treated a file-transfer subscription as a non-taxable service.

Q: Why isn't using the provider's servers a taxable rental?
A: Because the provider keeps custody and control of the servers and software; the customer's control is minor. Under the Leanin' Tree and Romantix tests, that makes the transaction a service, not a rental of property — like renting a truck that comes with an operator.

Q: Does it matter that the servers are outside Colorado?
A: The Department didn't need to resolve where the "use" occurs because it found the transaction was a non-taxable service in the first place. For taxable software used in multiple states, Colorado applies an apportionment rule (Reg. 39-26-102.13(3)).

Q: Can my company rely on this ruling?
A: No. A private letter ruling binds the Department only for the taxpayer and facts it was issued to. It shows the Department's reasoning, but your facts may differ.

Citations and references

Statutes, rules, and cases:
- § 39-26-104, C.R.S. (sales/use tax; standardized software is taxable TPP)
- HB 10-1192 legislative declaration (hosted software/ASP/cloud not implied taxable)
- Reg. 39-26-102.13(3) (multistate apportionment of taxable software)
- Leanin' Tree v. City of Boulder, 72 P.3d 361 (Colo. 2003) (true object / totality of circumstances)
- Romantix v. City of Commerce City, 240 P.3d 565 (Colo. App. 2010) (degree-of-control factor)
- 1 CCR 201-1, Reg. 24-35-103.5 (private letter ruling procedure)

Related rulings

• [[gil-12-006-application-service-providers]] — ASP/hosted software not delivered in a tangible medium
• [[gil-13-020-electronically-delivered-software]] — software taxability date line; digital goods
• [[gil-12-014-full-service-truck-wash-and-supplies]] — truck-with-operator true-object analogy

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-11-007.pdf

Original ruling text

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

PLR-11-007
December 20, 2011
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Private Letter Ruling
Dear XXXXXXXXXXXX,
Deloitte submitted on behalf of XXXXXXXXXX. (“Company”) a request for a private letter ruling
to the Colorado Department of Revenue (“Department”) pursuant to Regulation 24-35-103.5.
This letter is the Department’s private letter ruling.
Issues
1. Is the fee charged by Company for the Service, as defined below, a hosted software
application or a service?
2. To the extent that the Service is a hosted software, will the Service be subject to
Colorado sales or use tax?
3. If the Service is subject to Colorado sales tax, how should the transaction be sourced
for:
a. Sales made at the website, where the only information available to the Company
is the location information obtained from the purchaser’s credit card?
b. Sales invoiced to Enterprise customers when the Service purchased for use by
users located inside as well as outside of Colorado?
Conclusions
1. The fee charged by Company for the Service is a service.
2. The Service is not subject to Colorado sales or use tax.
3. Not applicable.

Background
Company provides a web-based solution (the “Service”) for sending, receiving, and tracking
large digital files via the Internet. Customers/users purchase a monthly or annual subscription
to the Service for which the sale price varies according to features included in the service
package. Some features may be purchased on a pay-per-use basis.
Company provides the Service as follows: At the Company’s webpage, customer inputs the
email address of the designated recipient. Customer then selects the desired files from its
computer hard drive and clicks a button on the webpage to initiate the file upload/send
process. Customer receives an email from Company when the file is available for download to
recipient. Next, recipient’s email inbox receives a notification email which appears as from the
email address of the Company, with a subject message reflecting that the file has been sent by
the email address of the customer. Recipient follows links within the body of the notification
email that take recipient to the Company’s webpage, where recipient then clicks a button to
download the file to its computer.
Uploading and downloading of files occurs at Company’s server. Company’s servers are
located outside Colorado. Uploading/sent files are stored for a certain number of days after
which the file automatically expires and is deleted from Company’s server. The Service
includes encryption and virus scanning to secure transfer of files. The Service is entirely webbased. Accordingly, customer/users do not download the Company’s software.
Recipients do not pay for downloading the file. Single-users may use the service at no charge
to send files containing a certain amount of data each month, but do not receive file storage.
Paid users receive a certain amount of file storage on the Company’s servers and can control
the expiration date on the uploaded/sent files. Some plans include a service to notify customer
when files are sent, or customers can purchase a download notification on a pay-per-use basis.
Company bills some enterprise customers for the service; however, most customers purchase
subscriptions with a credit card at the Company’s e-commerce server.
Discussion
With broad strokes, we can say that Colorado imposes sales and use tax on the sale, use,
storage, and consumption of tangible personal property, which includes standardized software,
but does not impose sales or use tax on services. This request raises at least two difficult
issues: whether the transactions at issue are services or the rental of tangible personal
property (software and servers), and whether a user located in Colorado is using software and
servers hosted in another state.1 We find it necessary only to address the first issue.

1 As Company notes in its ruling request, among the many issues entangled here is the issue of whether a “use” of
the software and/or server occurs in Colorado. In the legislative declaration to HB10-1192, the legislature stated that
the express inclusion of standardized software into the definition of tangible personal property cannot, in and of
itself, be understood to imply that hosted software, application service providers, and cloud computing are also
subject to sales and use tax. And, of course, the implication cannot be made that they are not subject to tax for the
same reasons. As to the issue of where a “use” occurs, Department Regulation 39-26-102.13(3) requires
apportionment of sales and use tax on taxable software among states when the software is used in many states.
For example, a company that has employees located in a variety of states and who use software located on a server
in Colorado must apportion the sales tax to other states based on the number of employees using that software in
those other states.

2

Whether a transaction is the provision of a service (and, therefore, not taxable) or a mixed
transaction of both services and the sale (or use) of taxable tangible personal property is
difficult to determine. In Leanin’ Tree v City of Boulder, 72 P.3rd 361 (Colo. 2003), the Colorado
supreme court reviewed a number of tests used in Colorado and other states in such an
inquiry. The court ultimately adopted a case-by-case approach which looks to the “totality of
the circumstances” and whether the transaction is commonly viewed as a sale of services or
sale of goods. (“Varied as these analyses may be, they largely share in common some attempt
to identify characteristics of the transaction at issue that make it either more analogous to what
is reasonably and commonly understood to be a sale of goods, or more analogous to what is
generally understood to be the purchase of a service or intangible right.” Leanin’ Tree,
supra.)). Factors which the court considered included whether the “true object, dominant
purpose, or essence” of the transaction is, in fact, corporeal tangible property or an intangible
right or service. Id. at 365. (“Whether couched in terms of the true object, dominant purpose,
or essence of the transaction, or of the consequential or incidental nature of the transfer of
tangible property, the rationales of most courts attempting to characterize inseparably mixed
transactions acknowledge, either explicitly or implicitly, that they are not reducible to a single
dispositive factor.”); see also Steven P. Young & Robert D. Walker, Current Developments:
Colorado, 14 J. Multistate Tax 28, 4 1-45 (2004); Andrew W. Swain, The Taxability of
Computer Software in Colorado, 32 Colo. Law. 91, 96 (Dec. 2003).
The essence of the Service is very similar to the ubiquitous email services of Google, Yahoo,
and many other web-based providers. Users of such systems send data, including documents,
image files, and wave files, to recipients via the Internet. These providers may encrypt the
transmissions to secure the transaction and alert recipients that an email is ready to be viewed.
Providers store files uploaded by users. In turn, recipients can download these files sent by
users. Although it is true that the users “use” the servers of these providers and the software
needed to provide the service, we believe that these providers are most commonly understood
to be providers of a service, not lessors of computer servers or software.
Another factor to consider, particularly in the context of whether a transaction is a rental, is the
degree of control exercised by the user. Leanin’ Tree, supra; Romantix v. City of Commerce
City, 240 P3rd 565 (Colo. App. 2010). If the property at issue is primarily under the custody
and control of the provider, then there is a tendency to view the transaction as a service. If the
user has significant control over the property, then there is a tendency to view the transaction
as one for the rental of tangible personal property. Users of the Company’s Service have some
degree of control over the servers and software. Users initiate the uploading of a file and
designate the recipient. Users can control whether files are stored on the system and the
duration of that storage. However, these seem minor in relation to the degree of control
exercised by the Company, which has physical custody of the property and staff that program
and control the systems. In some respects, this is similar to the case of a person who rents
both a truck and a truck operator for a single price: the operator has custody and control over
the truck, although the customer has some control where and when it is operated. Colorado,
as do many other states, views the transaction as the provision of a service and not the rental
of tangible personal property.
As noted above, this is a difficult issue. In the end, we believe that the transaction described in
the ruling request is a service, not the rental of tangible personal property, and, therefore, not
subject to sale and use taxes administered by the Department.
Miscellaneous

3

This ruling applies only to sales and use taxes administered by the Department. You may wish
to consult with local governments which administer their own sales or use taxes about the
applicability of those taxes.
This ruling is premised on the assumption that the Company has completely and accurately
disclosed all material facts. The department reserves the right, among others, to independently
evaluate Company’s representations. This ruling is null and void if any such representation is
incorrect and has a material bearing on the conclusions reached in this ruling. This ruling is
subject to modification or revocation in accordance to Department Regulation 24-35-103.5
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this redacted
version of the ruling 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 version of the ruling.

Sincerely,

Office of Tax Policy
Colorado Department of Revenue

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