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

The Department held that this company's stated ERP software maintenance and support charges, including electronically delivered updates, were not subject to Colorado sales or use tax. The clients licensed the underlying software from other vendors. The Department concluded that this company was selling maintenance and support services, and that any tangible property conveyed in providing them was de minimis compared with the service.

The ruling binds the Department only for this company's complete and accurate represented facts. It does not establish that every third-party software-support arrangement or bundled flat fee receives the same treatment.

What this means for you

The ruling illustrates the Department's true-object analysis for one ERP support contract. Another provider should not treat it as a ruling on its own software, updates, contract, or fees.

Common questions

Q: What did the Department decide for this company's contract?
A: It held that the stated maintenance and support charges, including updates, were not subject to Colorado sales or use tax because the true object was a service.

Q: Did the bundled fee change that result?
A: No. On these represented facts, the Department treated the whole charge as a service. It did not rule on all bundled software-support contracts.

Q: Can another provider rely on this PLR?
A: No. It binds the Department only for the addressed taxpayer and accurate stated facts.

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)