For Immediate Release
April 4, 2005

Colorado – DOR Tries Again to Revise Software Taxation Rules

Colorado – DOR Tries Again to Revise Software Taxation Rules

Colorado – DOR Tries Again to Revise Software Taxation Rules

Three years after a failed attempt to change the rules on software taxation, the Department of Revenue is trying again, but with a little help this time.

Colorado currently taxes canned software, but exempts custom and modified canned programs because they are considered to be intangible property, a position that is widely considered outdated. Current regulations do not address alternative service providers, electronic software delivery, or load-and-leave software delivery. Colorado auditors often narrowly interpret the rules to mean that only software written for a specific purchaser is exempt custom software, despite language in the regulations contradicting that position.

In 2002, the Department tried to restrict exempt status to only customized software sold through an exclusive license. Had the regulation passed, all software would be taxable, except for software that was developed specifically for a particular customer who purchased it through an exclusive use license. The DOR also tried to tax software maintenance agreements unless they separated the cost of upgrades from the cost of support services.

This go-round, the DOR is soliciting comments from taxpayers. It is asking for feedback on several issues. Some of the questions posed are:

  1. Is there a distinction between “canned” and custom software? What are the criteria to determine whether software is canned or custom?
  2. If there is a distinction, does it matter who customizes the software? If a third party performs customization, does it matter whether the purchaser or seller contracts with the third party?
  3. When would software provided by an applications service provider be taxable? Is downloaded software taxable tangible personal property?
  4. Under what circumstances should software maintenance contracts be subject to sales and use tax?

Another issue to be addressed is whether or not software should be considered intangible, and therefore not subject to tax unless certain conditions are met, a position taken by some independent industry associations.

The Department will consider all input before issuing a draft regulation. Their goal is to come up with a bright-line test that will, at a minimum, be more taxpayer friendly than previous attempts to rewrite the rules.

If you would like additional information on this topic or have any questions, please contact the


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