Is a third-party company's charge for ERP-software maintenance and support — including tax, legal, and regulatory updates delivered electronically — subject to Colorado sales or use tax?
Plain-English summary
A company provides maintenance and support for businesses that license enterprise resource planning (ERP) software from other vendors — the big systems that run modules like manufacturing, finance, supply chain, HR, and customer relations. After the original vendor's support period ends, this company steps in. It assigns each client a single point of contact, helps the client download upgrades the client is already entitled to, fixes problems (a report that won't run, a process that won't complete), and pushes out Updates — including tax-rate changes and changes to keep the software current with new laws and regulations. The Updates are delivered electronically; support is bundled and billed as one non-itemized fee.
The Colorado Department of Revenue ruled that this charge is not subject to sales or use tax. Two reasons:
- The company isn't selling software. It's selling a service — maintaining and supporting software the client already licensed from someone else.
- Any tangible property is de minimis, and the true object is the service. Even if something that could count as tangible personal property passes to the client while the service is performed, it's trivial. What the client is really buying is the ongoing support, so the true object of the agreement is a nontaxable service. That covers the Updates too — including the tax, legal, and regulatory updates.
The takeaway: in Colorado, keeping someone else's software running and current is a service, not a sale of software. The label "Updates" doesn't turn a support contract into a taxable software sale when the substance of the deal is service and any property delivered is incidental.
What this means for you
Software-maintenance and IT-service providers
If your business maintains and supports software the customer licensed elsewhere — patching, troubleshooting, pushing updates, providing a help desk — Colorado treats that as a nontaxable service, even when you bundle it into one flat fee and deliver fixes electronically. The key facts the Department leaned on: you're not the one selling the underlying software, and any tangible/electronic property you hand over in the course of support is de minimis next to the service. If instead you sell the software itself, or your "maintenance" is really a vehicle for delivering new licensed software, the analysis can flip.
Businesses that buy ERP support
A standalone maintenance/support contract for ERP software you already license shouldn't carry Colorado sales or use tax on its service fee. Watch the distinction: buying the software (or a clearly software-delivery product) is different from buying support for software.
Accountants and tax professionals
This is a clean application of Colorado's true-object / de minimis doctrine to a software-support contract: the service predominates, the property is incidental, so the whole bundled fee is nontaxable. Note the ruling did not need to reach Colorado's rules on prewritten software or electronically delivered software because the Department characterized the deal as a service up front rather than a sale of software. Compare Utah's parallel "essence of the transaction" line for SaaS-versus-service questions.
Common questions
Q: Is a software maintenance and support contract taxable in Colorado?
A: Under this ruling, a charge by a third party to maintain and support software the customer licensed from someone else — including electronically delivered updates — is a nontaxable service, because the company isn't selling software and any property transferred is de minimis (the true object is the service).
Q: Does it matter that the fee is bundled and not itemized?
A: Here it didn't change the result — the Department found the whole bundle's true object was the service. Itemization matters more when a contract mixes a genuinely taxable sale with services; this contract was characterized as service through-and-through.
Q: Are the "Updates" (tax/legal/regulatory) taxable on their own?
A: No. The Department included the Updates in the nontaxable service. They're part of keeping the client's existing software current, not a separate sale of software.
Q: Does this ruling apply to my company?
A: Not automatically. A private letter ruling binds the Department only for the taxpayer and exact facts it was issued to and cannot be relied on by anyone else. Your facts — especially whether you sell the software itself — may change the outcome.
Q: Does this cover city sales tax?
A: No. The Department administers state and state-administered local taxes only. Colorado's self-collected home-rule cities may tax software and services differently. Check with each home-rule city.
Citations and references
Rules:
- 1 CCR 201-1, Rule 24-35-103.5 (private letter ruling procedure)
The Department's analysis rests on the common-law true-object test and the de minimis principle for incidental tangible personal property, rather than on a specific software-taxation statute, because it characterized the transaction as a service rather than a sale of software.
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-18-008.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
PLR 18-008
December 20, 2018
XXXXXX
Attn: XXXXXX
XXXXXX
XXXXXX
Re: PLR / Enterprise Resource Planning Software Maintenance Contract
Dear XXXXXX,
You submitted a request for a private letter ruling on behalf of your client XXXXXX
(“Company”) to the Colorado Department of Revenue (“Department”) pursuant to
Department Rule 24-35-103.5. This letter is the Department’s private letter ruling. This
ruling is binding on the Department to the extent set forth in Department Rule 1 CCR 201-1,
24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the
ruling is made.
Issue
Is Company’s charge for computer program maintenance and support services, including
charges for tax, legal, and regulatory updates (“Updates”), subject to sales or use tax?
Conclusion
Company’s charge for computer program maintenance, including charges for Updates, is
not subject to sales or use tax.
Background1
Company works with businesses ("Client") that license enterprise resource planning
("ERP") software from other vendors, but decide to forego the additional maintenance and
support services beyond the initial vendor maintenance and support period. ERP software
contains modules, such as manufacturing management, financial management, supply
chain management, human resource management, and customer relations management.
Company's enterprise support service represents 99 percent of its total revenue. As part of
this service, Company provides Updates to Clients. Company provides the Updates by
accessing Client' s development environment remotely and making changes or advising the
Client how to do the same. Updates can include modification to the functionality of the
ERP or new data (e.g., tax rates). The Updates are designed to help ensure that Client is
current with the latest legislative, regulatory, and other legal changes that impact the ERP
1
Company provided a detailed description of its business activity which is only summarized in the Background.
system it is using. Updates are delivered electronically. Company's services include
telephonic support and on--boarding services. These services are bundled by Company
and invoiced with a single non-itemized fee.
Company provides Client with a XXXXXXXX ("XXX") as the main point of contact between
Client and Company. Initially as part of the on-boarding process, the XXX determines which
functional upgrades are available under Client's existing maintenance and support contract
and then assist Client with downloading the desired upgrades from the ERP vendor. The
XXX then provides ongoing support to Client and provides solutions to issues Client is
having, such as a report not running or trouble running a process.
The remaining one percent of Company's revenue is generated from other services (e.g.,
global security services, account management services, strategic roadmap services,
certain solutions, etc.).
Discussion
Company is not selling taxable computer software. Moreover, even if there is some
tangible personal property conveyed in the provisioning of its computer maintenance
services, the property is de minimis and the true object of the agreement is the provisioning
of a service. Therefore, Company’s charges for its computer program maintenance and
support services, including charges for its Updates, are not subject to sales or use taxes.
Miscellaneous
This ruling is premised on the assumption that Company has completely and accurately
disclosed all material facts and that all representations are true and complete. The
Department reserves the right, among others, to independently evaluate Company’s
representations and assumptions. The ruling is null and void if any such assumption and
representation is incorrect and has a material bearing on the conclusions reached in this
ruling and is subject to modification or revocation in accordance to Department Regulation
24-35-103.5.
This ruling is binding on the Department to the extent set forth in Department Regulation
24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the
ruling is made.
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
This ruling cannot be relied upon by any other taxpayer other than the taxpayer to
whom the ruling is made.
2
DR 4010A (06/11/14)