Colorado – Court Determines that Use Tax Applies to Downloaded Software

SALT Report 1872 – The Colorado Court of Appeals reversed a lower court’s ruling and upheld a use tax assessment imposed on a Taxpayer.  The Department conducted an audit of the Taxpayer’s company for the period of February 1, 2006 through January 31, 2009 and assessed use tax on the Taxpayer’s purchases of two types of software.

The first type is software that the Taxpayer downloaded over the Internet.  These transactions involved purchases of new software, as well as periodic charges for maintenance and support services for software that the Taxpayer had previously purchased.

The second type was purchases of online databases that included:

  • Technical journal articles, conference materials, and papers
  • Federal government contract opportunities and market analysis, and
  • Medical hazard 2 and risk reference information

The Taxpayer also purchased access to an online calendar hosting service, which it used to schedule and manage events and training initiatives.

Upon completion of the audit, the Taxpayer was assessed use tax on both the downloaded software and the online data services.  The Taxpayer paid the amount owed and filed an appeal. The trial court ruled in favor of the Taxpayer, however the City appealed.

The Court of Appeals reversed the trial court’s decision and found that the Taxpayer’s purchases of downloaded computer software and access to the online data services were taxable under the City’s tax code which levies use tax on computer software that is:

  • Leased or purchased at retail
  • Contained in an enumerated form or other machine-readable or human-readable form, and
  • The buyer has any right, power, dominion, or control

Therefore, because the City’s tax code does not require the transfer of ownership before the software is subject to tax, the use tax assessment was enforced. Further, the Judge stated that the way in which the software was transferred was irrelevant to the case because the City imposes use tax on any software that is contained on a machine-readable form at the time the buyer exercises any right, power, dominion or control over the software.

Also, by paying to access the online data services, the Taxpayer purchased the right to use, from a remote location, the computer software that was located on the service providers’ servers. Therefore, the Judge ruled that remote access to the online service providers’ software was a taxable use of computer software under the city’s tax code.

For Further Information:

Colorado Court of Appeals – Docket Number 11CA2129