Hardware and pre-written software is tangible personal property and
subject to city tax. Hardware and software may be sold as a package or
sold separately. The taxability of software is not dependent upon where
the software program physically resides but rather is based on the right to
access, use, store, or consume the property.
The sale or purchase of software may be taxable or exempt as
circumstances indicate. Software may be broadly classified into two
categories; pre-written software and custom software.
Taxable software
Physical, electronically delivered, or accessed through a subscription.
Pre-written software, commonly known as "canned" or "off-the-shelf"
software, is subject to tax. This includes software developed for sale to
multiple users or as components for integration into larger packages.
Software pre-loaded on computers is taxable.
Additionally, purchases of software downloaded, accessed, licensed, or
consumed by other means, including Software as a Service (SaaS)
through online subscriptions, are taxable.
In cases where the sale involves both pre-written software and services for
customization, the entire charge is taxable unless the price for the pre-
written component and labor are separately stated.
Creation of Custom Software
Taxable to the Developer
The creation of custom software is generally a non-taxable service.
Custom software is written or designed to meet the needs of one specific
user, and its value lies in the creation or development of the program.
Pre-built software that is modified or altered is not custom software.
The purchase of tangible personal property by the custom software
developer used in the performance of a ‘nontaxable service’ is
taxable to the developer.
The purchase of any custom software programs must be evaluated in
detail to determine the full extent of the taxability.
CS CODE SECTION
2.7.104 Words and Phrases:
Price or Purchase Price,
2.7.201, 2.7.312, 2.7.438
Related Tax Guides
Service Sales
Agilent Technologies v. City of
Colorado Springs 2005
This Tax Guide provides an
overview of specific
subject matter and is not
intended to be substituted
for the full text of the City
of Colorado Springs
Tax Code
01/2024
Question? email us at:
salestax@springsgov.com
City of Colorado Springs
Tax Guide
TAX ISSUE-167
CITY OF COLORADO SPRINGS
Software
Software Maintenance Agreements
Software is sometimes sold or licensed for use with a maintenance agreement. The agreement
may be sold as a mandatory agreement or optional agreement.
A mandatory maintenance agreement that accompanies the sale of software or grant of a
license is considered part of the selling price and is taxable.
An optional maintenance agreement to maintain computer software may be taxable or exempt
depending on what is provided within the agreement. If an optional agreement entitles the
customer to program enhancements such as upgrades, modifications, patches, revisions,
discounts on additional software purchases, the agreement is taxable. If the agreement only
includes technical support or other non-taxable services, the service portion of the agreement is
not taxable if separately stated on the invoice.
Computer Software Services
Charges for manipulation of client-owned data such as payroll services and computer accounting
services are data processing services and are not taxable. However, charges for a physical
product that results from data processing services are taxable. City tax is due on the sale of
products such as non-custom mailing lists or informational reports regardless of how the data is
accessed.
Common Examples
1.
A business purchases personal computers, software, and Short Message Service (SMS)
software for its own use. They also purchase software maintenance agreements that
entitle the company to all future revisions. The personal computers, software, and
maintenance agreements are all taxable.
2.
A business purchases an optional maintenance agreement that only includes 24-hour
telephone support. No tangible personal property or taxable service is to be provided, so
the agreement is not taxable.
3.
A business employs a software consultant to modify their existing software. The consultant
supplies programmers to write modifications to the software for a fixed rate fee.
Throughout the modifications, the business owns all of the work for hire or work in progress.
The fixed rate for the consulting services is not taxable because there is not a transfer of title
or possession of the software program.
4.
A software company has a contract to provide software and license foundation codes,
and services to modify the ERP platform. The sale of the software and license foundation
codes, even if later modified, is taxable. The sale of the service to modify the software is not
taxable if separately stated. See Agilent Technologies v. City of Colorado Springs 2005.