For Colorado income tax apportionment, is digital imagery delivered electronically tangible personal property, and how is it sourced?

Plain-English summary

This ruling is about Colorado corporate income tax apportionment (not sales tax). A global provider of commercial imagery (satellite/aerial photographs) sells digital images to customers — civil governments, location-based-services companies, resellers, and a large government customer — mostly delivered electronically via FTP, with a few large orders on physical drives, all under an End User License Agreement (EULA) that's non-exclusive and bars copying/redistribution. The company asked how to apportion the income from these sales: are the digital images tangible personal property (TPP), and to which state are the sales sourced?

The Department's conclusions:

1. A static digital image delivered electronically is the sale of TPP for Colorado income tax apportionment.
2. All the digital-imagery sales (under the various methods described) must be sourced as sales of TPP.
3. It's not a Colorado sale if the product's destination is outside Colorado and the company is taxable in the destination state.
4. Regardless of how the destination state would source a sale to the federal government, the company must source that sale to the destination state for Colorado purposes.

The reasoning. Corporations with income inside and outside Colorado apportion using single-factor (single-sales-factor) apportionment (Reg 39-22-303.5.3(1), for tax years beginning on/after Jan. 1, 2009), and revenue from the sale of TPP is apportioned to the state where the property is delivered to the purchaser or recipient (§ 39-22-303.5(4)(b)). The Department had previously advised that digital goods delivered electronically — music, books, movies, magazines, photographs — are TPP (GIL-11-014), and it saw no substantial difference between this company's imagery and other digital photographs. The non-exclusive EULA is like the licenses that let iTunes, Netflix, and Amazon resell digital media, and the customers get more than a mere intangible IP right (American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64 (1995), reaffirmed in Cinemark v. City of Fort Collins, 190 P.3d 793 (Colo. 2008)).

Two refinements. Where the large government customer gets "first priority" to buy images on demand, that might look like buying a service — but the Department said the true object is the purchase of photographs, with the priority right just a premium to buy on demand, so it's still TPP (the company's separate maintenance and analytics offerings are services, apportioned separately). And on sourcing, Colorado applies its own destination rules (Reg 39-22-303.5.4(B)) regardless of how another state sources the same sale — so a sale delivered out of state stays sourced out of state for Colorado even if the other state would throw it back to Colorado (with the practical result that such a sale may fall out of every state's numerator).

What this means for you

Multistate sellers of digital goods

For Colorado income tax, electronically delivered digital images/media are TPP, and you source the revenue to the state of delivery under the single-sales-factor rule — not to where you produced or transmitted them. A sale delivered outside Colorado is a non-Colorado sale if you're taxable in the destination state.

Corporate tax departments

Watch the license-vs-good and service-vs-good lines. A non-exclusive EULA doesn't make the sale an intangible (American Multi-Cinema / Cinemark), and a priority-to-purchase premium doesn't convert a goods sale into a service when the true object is the photographs. Truly distinct maintenance/analytics services are apportioned separately as services.

Accountants and tax professionals

The throughline: digital photographs delivered electronically = TPP (GIL-11-014) → destination sourcing under § 39-22-303.5(4)(b) and Reg 39-22-303.5.4(B) → Colorado doesn't conform its sourcing to other states' (no recharacterization because another state would source differently), including federal-government sales sourced to the destination. This is the income-tax companion to the Department's treatment of digital photographs as taxable TPP for sales tax in [[gil-15-025-digital-photographs]]. Note the "taxable in another state" tests in § 39-22-303.5(3)(c).

Common questions

Q: Are electronically delivered digital images tangible personal property in Colorado?
A: For income tax apportionment, yes. The Department treats digital photographs delivered electronically as TPP (consistent with GIL-11-014), so the income is apportioned like a sale of goods.

Q: Where is the income sourced?
A: To the state where the image is delivered to the purchaser or recipient, under single-sales-factor apportionment. It's a Colorado sale only if delivered into Colorado and the company is taxable in the destination state.

Q: Does a non-exclusive license make it an intangible instead?
A: No. The Department compared it to iTunes/Netflix/Amazon licenses and cited American Multi-Cinema and Cinemark — the customer gets more than a mere intangible IP right, so it's still TPP.

Q: What about a "first priority" right to buy images on demand — is that a service?
A: No. The true object is the purchase of photographs; the priority right is just a premium to buy on demand. Separate maintenance and analytics offerings are services, apportioned separately.

Q: Does Colorado follow another state's sourcing?
A: No. Colorado applies its own destination sourcing regardless of how the destination state sources the sale, including sales to the federal government, which are sourced to the destination state.

Q: Can my company rely on this ruling?
A: No. A private letter ruling binds the Department only as to the taxpayer and facts it was issued to and cannot be relied upon by anyone else. It's also void if the taxpayer's representations were inaccurate.

Citations and references

Statutes, rules, and authority:
- § 39-22-303.5(4)(b), C.R.S.; Reg 39-22-303.5(4)(B) (TPP revenue apportioned to the delivery state)
- Reg 39-22-303.5.3(1) (single-factor apportionment, tax years on/after Jan. 1, 2009)
- Reg 39-22-303.5.4(B) (sourcing of TPP delivered into Colorado)
- § 39-22-303.5(3)(c), C.R.S. ("taxable in another state" tests)
- Colorado GIL-11-014 (digital goods delivered electronically are TPP)
- American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64 (1995); Cinemark v. City of Fort Collins, 190 P.3d 793 (Colo. 2008) (more than a mere intangible right)

Related rulings: [[gil-15-025-digital-photographs]] (digital photographs as taxable TPP for sales tax), [[gil-14-001-promotional-videos]] (true-object test).

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-13-008.pdf

Original ruling text

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

PLR-13-008
October 2, 2013
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Private Letter Ruling
Dear Mr. XXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXX (“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 sale of a digital photograph delivered electronically the sale of tangible personal
property for purposes of Colorado income tax apportionment?
2. Other than the certain limited services discussed below (re: DAP maintenance, analytics,
etc.), is the sale of digital imagery sold under various methods to various customers
described below to be sourced as a sale of tangible personal property for Colorado
apportionment purposes?
3. To the extent the products described below are considered tangible personal property, would
the sale be sourced to the destination state to which the property is shipped for Colorado
apportionment purposes if the Company is taxable in that destination state?
4. If the destination state treats the sale of digital images to the federal government as sourced
to the origination state (Colorado), would Colorado source a sale to the federal government
to the destination state for apportionment purposes?
Conclusions
1. A static digital image delivered electronically to a purchaser / consumer is the sale of tangible
personal property for purposes of Colorado income tax apportionment.
2. The sale of digital imagery sold under various methods to various customers described below
must be sourced as a sale of tangible personal property for Colorado apportionment
purposes.
3. The sale is not a Colorado sale if the destination of the product is not in Colorado and
Company is taxable in the destination state.

4. Regardless of whether the destination state treats the sale of digital images to the federal
government as sourced to the origination state (Colorado), Company must source the sale to
the federal government to the destination state for Colorado apportionment purposes.
Background
Company is a global provider of commercial XXXXXXXXXXXX imagery products. A range of
products, including XXXXXXXX or XXXXXXX images, are offered to customers from Company’s
XXXXXXXXXXXXXXXXX, as well as imagery and other information that is acquired from third party
suppliers. Company has two main segments of revenue: XXXXXXXXXXXX and commercial.
Products sold by Company
Examples of typical customers in the commercial segment include international civil governments
and location based services (“LBS”). International civil government customers purchase Company’s
products for mapping, monitoring and planning activities for their populations. Providers of LBS
include internet portals, connected devices and digital map makers who use Company’s imagery to
expand their products. These sales can be made through resellers and directly to customers.
Commercial contracts can be sold as imagery per XXXXXXXXXXX where customers request
specific images or pictures for a specific amount of XXXXXXXXX. Company bases their commercial
pricing list on the amount of XXXXXXXXX in the image. In addition, the price can depend on the
XXXXXXXXXXXXXX and the resolution of the image. At times, Company will already have images
requested in their archives and other times XXXXXXXXX will need to take new images. Company
retains the right to sell to other customers any image in their archive inventory. Whether the image
was in their archives or a new image is photographed XXXXXXXXXXX, there is no difference in the
deliverable to the customer.
Company also provides a product described as XXXXXXXXXXXX where the customer is
purchasing a XXXXXXX of images. Essentially, Company sells a subscription whereby it agrees to
update that XXXXXXX of images whenever new images are taken. These images are being
purchased by the customer who incorporates these images into XXXXXXXXXX or other end user
uses.
In addition Company’s XXXXXXXXXXXXXXX allows customers to XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXX. In essence, customers purchase XXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXX. The contracts could be in XXXXXXXXXXXXXXXXXX, as Company can compute either in
a direct correlation. The customer has the ability to download imagery directly from the XXXXXXX
as a result of purchasing the requisite hardware required to communicate with and process imagery
from XXXXXXXXX. Again, the end result is that the customer receives an image, although in this
situation, the image is relatively raw because the customer has purchased the necessary
equipment to further process and enhance the image to their specifications. There is also a small
amount of maintenance related to the XXXXX equipment that occurs with some XXXXX customers
that is sourced as a service for apportionment purposes.
The XXXXXXXXXXX is one of Company’s largest XXXXXXX and XXXXXXXXX customers. The
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX purchases imagery products and services on behalf
of various agencies XXXXXXXXXXXXXXX. There are various delivery platforms for the imagery,
including a XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

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XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. The XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXX. The contract is for a certain capacity of image XXXXXXXX capabilities from the
XXXXXXXXXXXXXX that they use up over time. The end deliverables provided by the
XXXXXXXXXXXXXXXX to the XXXXXXX are images. The XXXXXXXX can obtain as many images
as they wish, subject to the capacity limitations within their contracts, and can request additional
images from Company’s archives for a fixed price per month.
Lastly, Company has an analytics business offering that provides services related to imagery.
These services involve XXXXXXXXXXXXX images or groups of imagery to provide information to
the customer XXXXXXXXXXXXXXXXX. The deliverable for the offering is the XXXXXXXXXXX. The
imagery is only used by Company to perform the XXXXXXXX. This is a small portion of Company’s
overall revenue and is clearly a service.
Delivery of Products
Company’s XXXXXXXXXXX and XXXXXXX imagery sales are subject to an End User License
Agreement (EULA) that limits the customer’s use of the images to only the uses agreed upon
between the customer and Company. The EULA is used to protect Company from unauthorized
copying and redistribution of the images. It is used in a manner similar to patent law and copyright
law to provide protection against unlawful acts. This type of protection is the norm related to digital
media of all sorts.
Most of the images sold are delivered directly to the customer via FTP (electronic delivery) and a
few larger orders are delivered on fire wire drives. This standard EULA provides that the customer
makes a one-time payment for a perpetual (subject to the terms of the license), non-exclusive, nontransferable, limited license to (i) access the licensed images, (ii) modify the licensed images
subject to limitations in the EULA, and (iii) permit the end users to view the licensed images by
downloading, printing, reproducing and transmitting such licensed images for non-commercial
purposes (for internal, educational or demonstration purposes only). There is a provision in the
EULA that states that Company retains all rights, title and interest, including intellectual property in
the licensed imagery, at all time.
Company also has several Re-Sellers (“RS”) who purchase and re-sell the imagery. Under this
arrangement, the RS purchases imagery from Company based on the RS’s customer order. The
RS receives the imagery and then sends the imagery to its customer or directs Company to send
the imagery directly to the customer. The RS typically does not maintain a database of imagery that
it has previously purchased from Company. All customer orders are submitted through Company’s
system but the images are sent to the RS who then re-distributes that image to its customers, and
the RS has no right to make copies of Company’s imagery, not even for re-sale to its customers.
Company ships imagery from two offices in Colorado and another location outside Colorado to
customers in the United States and foreign jurisdictions. The imagery is delivered to customer using
the distribution method that best suits the customer’s needs. Company generally transfers its
products using one of two methodologies. The first involves providing the digital data via electronic
transmission, and if the customer did not receive the imagery, then Company would retransmit the
imagery as many times as necessary until the end user received the imagery at no additional cost
to the customer. The second method involves Company putting the digital data on a tangible
medium (disk, fire wire, etc.) and sending the product to the customer. In practice, if the digital
imagery was shipped via tangible medium and the customer did not receive it, Company would
replace it at no additional cost to the customer. Based on these facts, Company believes that “risk

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or loss” passes to the customer only when the customer satisfactorily receives the imagery because
Company bears the burden of shipping or transmitting that imagery until it is received by the
customer. Company believes the subsequent “beneficial ownership” passes to the customer once
the data is successfully received by them at their location.
Discussion
Corporations that derive income from sources both inside and outside this state must apportion
their income between and among the states using single-factor apportionment.1 Revenue from the
sale of tangible personal property is apportioned to the state in which the property is delivered to
the purchaser or recipient.2
Company sells digital images to customers pursuant to an EULA, which is primarily intended to
prohibit customers from copying and reselling the images. This license is non-exclusive, which
allows Company to sell the image to multiple customers, much like license agreements that allow
iTunes, Netflix, and Amazon to resell digital music, movies, and books. The Department has
previously issued advice that the sale of digital goods, such as digital music, books, movies,
magazines, and photographs delivered electronically are tangible personal property.3 We perceive
no substantial difference between Company’s XXXXXXXX imagery and other digital photographs.4
Therefore, we rule that income derived from the sale of such digital imagery is from the sale of
tangible personal property for purposes of apportioning Colorado income tax.5 More specifically,
the income derived from such sales is apportioned inside and outside Colorado based on the place
of delivery to the purchaser or recipient if the Company is taxable in the state in which the digital
photographs are delivered.6
Company often sells digital photographs to the XXXXXXXXXXXXXXXX. Purchases are typically
made by one XXXXXXXXXXXX, which purchases the photographs on behalf
XXXXXXXXXXXXXXX, which may be located in states other than the state in which the purchasing
agency is located. Department Regulation 39-22-303.5.4(B) provides that a sale is sourced to
Colorado if the tangible personal property is delivered into Colorado when the purchaser is located
in Colorado or if the property is ultimately delivered into Colorado to a recipient in Colorado. Thus,

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2
3

4

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Department Regulation 39-22-303.5.3(1), effective for tax years beginning on or after January 1, 2009.
§39-22-303.5(4)(b), C.R.S. and Department Regulation 39-22-303.5(4)(B).
General Information Letter GIL-11-014. Moreover, Company’s customers, who are granted a license to use and,
in some cases, transfer the digital photographs, have more than a mere intangible intellectual property right.
See, e.g., American Multi-Cinema, Inc. v. City of Westminster, 910 P2d 64, 07/13/1995 and reaffirmed in
Cinemark v. City of Fort Collins, 190 P3d 793 (Colo. 2008) (rejecting taxpayer’s contention that its contractual
right to display movies was merely an intangible intellectual property right).
Company represents that its sales agreements with the XXXXXXXXXXX give the XXXXXXXXXXXX first priority
in the use of Company’s XXXXXXXXX. Company further represents that the XXXXXXXXX does not control the
XXXXXXXXX other than to designate the images to be taken. This first priority may suggest to some that the
XXXXXXXXXXX is purchasing a service, not tangible personal property. We believe such a characterization is
incorrect. The true object of the transaction is the purchase of photographs and the XXXXXXXXXXX simply pays
a premium for the right to purchase those photographs on demand.
Company provides certain services related to the sale of the digital photographs (maintenance and analytics),
which are apportioned as services.
Company’s income is taxable in another state if it meets either one of two tests: (1) if by reason of business
activity in another state, the taxpayer is subject to one of the types of taxes specified in 39-22-303.5(3)(c)(1) (i.e.,
net income tax, a franchise tax measure by net income, a franchise tax for the privilege of doing business, a
corporate stock tax, or other similar tax; or (2) if by reason of such business activity, another state has jurisdiction
to subject the taxpayer to a net income tax, regardless of whether or not the state imposes such a tax on the
taxpayer.

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Company’s sales of digital photographs are sourced to Colorado if the photographs are delivered
into Colorado.7
Some states source sales XXXXXXXXXXXXXX to the state from which the sale originates.
Company asks whether sales XXXXXXXXXXXX, which are not sourced to Colorado under
Colorado’s sourcing rules, remain sourced to those other states for Colorado income tax purposes
when the other state(s) source the income from such sales to Colorado.8 Colorado sources sales of
tangible personal property in accordance with the aforementioned Department regulations and the
result is not altered if the other state(s) has different apportionment rules. Therefore, we rule that
Company sources income to the destination state in accordance with Colorado apportionment
regulations regardless of whether the destination state sources such sales to Colorado.

Miscellaneous
This ruling is premised on the assumption that 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

The Colorado legislature declined to adopt a separate XXXXXXXXX sales rule when it adopted the single sales
factor apportionment.
8
The net result in such cases being that this sale is not included in the numerator of any state apportionment
formula.
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