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

Plain-English summary

The Department treated this company's electronically delivered static digital images as tangible personal property for Colorado income-tax apportionment. It applied destination sourcing to sales of the images. A sale delivered to a purchaser or recipient in Colorado is sourced to Colorado under the rule discussed in the PLR.

For an image delivered outside Colorado, the ruling addresses whether the company is taxable in the destination state. It says an out-of-state delivery is not a Colorado sale when the company is taxable there. That destination-state taxability condition does not qualify the rule for images delivered into Colorado.

The PLR separately discusses the company's maintenance and analytics offerings as services. It binds the Department only for the addressed taxpayer on its stated facts.

What this means for you

For this company, image-delivery destination controls the tangible-property sourcing analysis. Do not add the destination-state taxability test to a delivery into Colorado; that test matters to the letter's out-of-state-delivery discussion.

Common questions

Q: How did the Department classify the described digital images?
A: It treated them as tangible personal property for this company's Colorado income-tax apportionment.

Q: When is an image sale sourced to Colorado?
A: Under this PLR, delivery to a purchaser or recipient in Colorado sources the image sale to Colorado. The destination-state taxability condition concerns images delivered outside Colorado.

Q: What if the image is delivered to another state?
A: The ruling says that, when the company is taxable in the destination state, a sale delivered there is not a Colorado sale.

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
5. A static digital image delivered electronically to a purchaser / consumer is the sale of tangible
   personal property for purposes of Colorado income tax apportionment.
6. 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.
7. 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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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. 7

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