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modified canned programs because they are considered to be intangible property, a position that is widely considered outdated.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:
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.
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