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Colorado Taxation of Cloud Computing or “SAAS”

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Several readers have asked about how Colorado and its Home Rule cities tax cloud computing, SAAS, PAAS and other online software (or hardware) transactions. In general, if the Department of Revenue (“DOR”) considers a transaction to be the provision of a service, it will be non-taxable. Also, computer software used by a consumer which is provided through an “Application Service Provider” (ASP) is not taxable software because it is not considered delivered to the consumer in a tangible medium. {Colo. Rev. Stat. §39-26-102(15)(c)(I)(C)}. An “application service provider” or “ASP” is an entity that retains custody over or hosts computer software for use by third parties. Users of the computer software hosted by an ASP typically will access the computer software via the internet. {Colo. Rev. Stat. §39-26-102(15)(c)(II)(A)}.

Online software/hardware transactions are not explicitly defined as service transactions, however. The DOR will consider each transaction on its own merits to determine whether it is the provision of a service, the sale (including rental) or use of tangible personal property, or a mixed transaction of both. The Department will normally review the “totality of the circumstances” and whether the transaction is commonly viewed as a sale of services or a sale of goods. Factors it will consider include whether the “true object, dominant purpose, or essence” of the transaction is, in fact, corporeal tangible property or an intangible service. It will also consider the degree of control exercised by the user. An example often cited is the situation where a person 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 over where and when it is operated. Colorado and many states view the transaction as the provision of a service and not the rental of property.

Colorado’s Home Rule cities each have their own rules related to online software transactions. Many Denver Metro Area cities consider them, and most other “data processing” types of transactions, to be fully taxable. However, each city administers its own sales and use taxes and must be considered individually.

The taxation of software and hardware transactions in Colorado is complex, just like many other issues. Accordingly, it is always beneficial to consult with a tax professional who is knowledgeable about Colorado issues before undertaking any transactions in Colorado or its Home Rule cities.

Do you have any comments or questions? If so – please feel free to submit using the "Comment" feature near bottom of page.

(P.S. If Colorado (or SAAS) taxation interests you, there are a number of other recent items on SalesTaxSupport.com for you to consider including the "Cloud, Software & Digital Tax" blog by Carolynn Iafrate Kranz - as well as Sylvia Dion's recent post regarding Colorado and Marketplace Fairness .

Other recent “Local Sales Tax / Home Rule Issues” posts by Keith Crichton, CPA:

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