Colorado recently enacted HB 1192 which impacts companies who develop, sell and/or purchase software in Colorado.
One of the biggest changes is the definition of "tangible personal property" for sales tax purposes. Tangible personal property NOW includes standardized software without regard to how such standardized software is acquired by the purchaser or downloaded to the purchaser's computer.
Another main change impacts developers of standardized software. Developers of software are now considered "manufacturing" for the purposes of the machinery and machine tools exemption. This creates opportunities for developers of standardized software to purchase qualifying machinery or machine tools exempt from sales tax.
HB 1192 clarified Colorado's definition of "standardized software" to include:
- Prewritten upgrades, that is not designed or developed to the specifications of a specific purchaser;
- Software designed and developed to the specifications of a specific purchaser but then sold to another purchaser.
- Standardized software that is modified or enhanced even if modifications or enhancement is designed and developed to the specifications of a specific purchaser, UNLESS such standardized software is a de minimis component of such software.
- The combination of two or more standardized software programs or portions thereof.
"Standardized software" does NOT include:
- Software or information technology services that modify or enhance standardized software if there is a reasonable, separately stated charge, invoice, or other statement of price given to the purchaser for such software or information technology services that modify or enhance the standardized software.
- Maintenance agreements for the maintenance of standardized software.
- Software developed for a person's or affiliates own use. However, if such software is subsequently sold, such software sold shall be considered standardized software.
KEY TAKEAWAYS - SELLERS OF SOFTWARE
If a company sells "standardized software" to Colorado purchasers (regardless of how the software is delivered),and the seller has nexus in Colorado, the seller will be required to collect sales tax.
A seller should also separately state information technology services and maintenance agreements on any contracts and invoices to avoid be required to charge and collect sales tax on those pieces of the sale.
KEY TAKEAWAYS - PURCHASERS OF SOFTWARE
Companies that purchase software in Colorado will want to verify what type of software they are purchasing, and make sure that any information technology services and maintenance agreements are separately stated on contracts and invoices before signing any purchase agreement.
KEY TAKEAWAYS - DEVELOPERS OF SOFTWARE
Companies that develop or create "standardized software" may now be able to purchase machinery or machine tools exempt from sales tax. Developers of standardized software should review the types of equipment they purchase and determine if it qualifies for the exemption. Then they should take the necessary steps to utilize the exemption on current and future purchases.
Note, all of the above changes took effect March 1, 2010.
If you would like assistance in helping your company determine the impact of these changes and/or take advantage of the machinery exemption, please contact me at [email protected].