Sales, Use and International Tax Activity Update - November 2013
Colorado "Tears" Into Software Licensing
A general information letter issued by the Colorado Department of Revenue explains that a software license renewal fee for continuing use of prewritten, canned software is subject to sales or use taxes when the original license was delivered through a tangible medium.
The Company is a supplier of tax compliance software for the telecommunication and utility industries.
The principal issue is whether the client's agreement to the license and the license itself must be on a tangible medium. Company obtains clients' agreement to the license by electronic means and presumably makes the license available for viewing by electronic means. Unlike the software itself, there is no requirement that the agreement to renew the license or the license itself be made into a tangible medium. The Colorado DOR ruled in PLR-13-003 that a nonnegotiable license that is presented electronically to a customer meets the statutory criteria of a "tear-open nonnegotiable" license even though the retailer offers the license online.PLR-13-003 states in pertinent part:
"Tear-open, nonnegotiable" license agreements are those most commonly found when a customer purchases a CD of a software program from a store. Once the plastic packaging is torn off the CD case, the buyer can find the license agreement, which is generally not negotiable. However, it is not essential that the buyer has to actually tear something open in order to meet this criterion. For example, we believe this provision applies to licenses presented on the Internet when the buyer only has the option to click "I Agree" in order to purchase the software program.
In addition, the tangible personal property in question (i.e., computer software) is and remains tangible personal property under the statute. The license renewal agreement is merely a means by which the cost of the charge for the tangible personal property is measured. The purchase price, on which sales tax is calculated, is the total amount of money received in consideration for the purchase. The subsequent renewal fee is simply a further charge for the continuing right to use what has already been established to be tangible personal property.