This is the chapter I wrote for Professor William Byrnes' Taxation of Intellectual Property and Technology treatise. I am truly grateful for this experience and I am honored to have participated in this project.

1. 2-10A Taxation of Intellectual Property CHAPTER 10A.syn
Taxation of Intellectual Property and Technology > PART IV SPECIALIZED TAX PLANNING
APPLICATIONS > CHAPTER 10A The Imposition of Sales Tax on Computer Software
CHAPTER 10A The Imposition of Sales Tax on Computer Software
§ 10A.01 Introduction
§ 10A.02 Sales Tax Environment Faced by Large Software Companies
§ 10A.03 Home Rule vs. Non-Home Rule
§ 10A.04 Non-Home Rule Jurisdiction Example: Texas
§ 10A.05 Home Rule Jurisdiction Example: Denver, CO
§ 10A.06 Conclusion and Recommendations
Taxation of Intellectual Property
Copyright 2017, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
End of Document

2. 2-10A Taxation of Intellectual Property § 10A.01
Taxation of Intellectual Property and Technology > PART IV SPECIALIZED TAX PLANNING
APPLICATIONS > CHAPTER 10A The Imposition of Sales Tax on Computer Software
§ 10A.01 Introduction*
Determining whether a vendor’s computer software is subject to sales tax is oftentimes a complex issue that varies
by state jurisdiction. In general, computer software is taxable if it falls within a state’s definition of “tangible personal
property” (TPP). Generally, states will classify prewritten computer software (commonly described as being
intended for and sold to more than one customer/purchaser) as TPP. On the other hand, states will normally
exclude custom software (commonly described as being built and sold to the specifications of one particular
customer/purchaser) from the definition of TPP. However, this scheme becomes complicated for large software
companies because they tend to offer and/or bundle other products and services with their software. In addition, the
sales tax landscape for large software companies becomes even more complex when they fall under the jurisdiction
of home rule cities, such as those found in Colorado. This chapter seeks to provide an overview and comparison of
the sales tax challenges faced by large software companies when operating in home rule and non-home rule
jurisdictions.
Taxation of Intellectual Property
Copyright 2017, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
End of Document
*
Brent Newton, CPA, Esq. He may be contacted at brentalexandernewton@gmail.com.

3. 2-10A Taxation of Intellectual Property § 10A.02
Taxation of Intellectual Property and Technology > PART IV SPECIALIZED TAX PLANNING
APPLICATIONS > CHAPTER 10A The Imposition of Sales Tax on Computer Software
§ 10A.02 Sales Tax Environment Faced by Large Software Companies*
In this chapter, the focus of the discussion is upon large software companies with $18+ billion in annual software-
only revenue. For these companies, addressing the sales tax of their software is complicated by a number of
factors. First, the rules governing the taxability of their software vary by state (and by city in home rule jurisdictions).
Second, large software companies tend to sell a wide variety of products and services with their software packages,
such as computer hardware, optical cables, software updates, maintenance services, consulting services, technical
support services, and training services, etc. Finally, due to their sheer size and revenue generated, large software
companies tend to be “targets” for increased scrutiny in state sales tax audits; which, in turn, has required large
software companies to develop operational and legal measures to address sales tax audits. Each of these factors is
discussed in more detail below.
With regard to the first factor, there is no uniform sales tax code of rules or regulations on software. Instead, sales
tax rules on software are developed and established in each state jurisdiction (and in each city jurisdiction for home
rule cities). For the most part, rules on the taxability of software tend to follow a general pattern across jurisdictions:
prewritten or “canned” software (generally defined as software designed for and sold to more than one purchaser) is
considered tangible personal property (TPP) and is subject to sales tax; while custom software (generally defined
as software designed and sold to the specifications of one specific purchaser) is not. However, what tends to make
the taxability of software-related transactions unclear across jurisdictions is the inconsistent language existing in the
various jurisdictions’ rules. For example, some jurisdictions may clearly state that all software and services sold with
prewritten software are subject to sales tax; while other jurisdictions may provide the caveat that custom software
and consulting services sold with prewritten software are exempt from tax if they are separately charged or
separately stated on an invoice. Furthermore, some jurisdictions may clearly define consulting services and state
that they are nontaxable; while other jurisdictions may not even define or list consulting services in their category of
nontaxable services.
As for the second factor, software companies usually sell much more than just their software. In fact, software
companies will often serve as one-stop shops where customers can purchase computer hardware and software, as
well as maintenance, training, and/or consulting services for that software and hardware. As a result, contracts
between software companies and their customers tend to become very complex, in order to address the many
rights, obligations, and assumptions of each party to the bundled goods and services. This increased complexity
also makes tax compliance more difficult due to the bundling of goods and services. For instance, some
jurisdictions may state that training, support, and consulting services are nontaxable; however, these same
nontaxable services can become taxable in certain jurisdictions, if they are sold with computer hardware or
*
Brent Newton, CPA, Esq. He may be contacted at brentalexandernewton@gmail.com.

4. 2-10A Taxation of Intellectual Property § 10A.02
Page 4 of 10
prewritten software in the same transaction. Therefore, bundled contracts, although efficient and convenient, can
create additional sales tax challenges for software companies.
With regard to the third and final factor, the fact remains that large software companies are “deep pockets” and are
therefore substantial sources of sales tax revenue for the various jurisdictions they operate in. As a result, it is
common for large software companies to be subjected to sales tax audits on a frequent basis. This in turn has
resulted in software companies developing a variety of operational and legal mechanisms for addressing the
increased scrutiny of sales tax audits. For example, as previously mentioned, some jurisdictions hold that software-
related services (such as consulting services, maintenance services, support services, and training services) are
taxable if sold with prewritten software. In order to meet customer needs and respond to this rule, large software
companies will often enter into separate contracts to provide software and services to the same customer. In
addition, large software companies will often contract to require their customers’ employees to do certain work
(such as installation, repair, or modification) on hardware and/or prewritten software; while the software companies’
consultants merely “assist” or “guide” the customers’ employees in carrying out the work. By doing this, software
companies are able to argue that services were not sold with prewritten software; and that their consultants did not
perform the actual work on prewritten software.
Taxation of Intellectual Property
Copyright 2017, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
End of Document

5. 2-10A Taxation of Intellectual Property § 10A.03
Taxation of Intellectual Property and Technology > PART IV SPECIALIZED TAX PLANNING
APPLICATIONS > CHAPTER 10A The Imposition of Sales Tax on Computer Software
§ 10A.03 Home Rule vs. Non-Home Rule*
The vast majority of states are non-home rule jurisdictions where only the states make the sales tax rules. When
operating in such jurisdictions, large software companies need only follow each state’s statutes, administrative
codes, and case law on sales tax issues. However, not all states adhere to this policy. Colorado, in particular, offers
a home rule environment in which both the state and its cities have the authority to make their own sales tax rules
and collect sales tax. In fact, each of Colorado’s home rule cities do have their own municipal codes which,
although similar in some respects, provide different interpretations on the taxability of software and software-related
services. This has resulted in Colorado offering what is arguably the most complex sales tax jurisdiction in the
country. For the purposes of this chapter, it is beyond the scope for to discuss the sales tax rules for software in all
non-home rule and home rule jurisdictions. However, two examples will suffice that will illustrate the sales tax rules
for software in one non-home rule jurisdiction (Texas) and one home rule city jurisdiction in Colorado (Denver,
which is also the largest home rule city in Colorado).
Taxation of Intellectual Property
Copyright 2017, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
End of Document
*
Brent Newton, CPA, Esq. He may be contacted at brentalexandernewton@gmail.com.

6. 2-10A Taxation of Intellectual Property § 10A.04
Taxation of Intellectual Property and Technology > PART IV SPECIALIZED TAX PLANNING
APPLICATIONS > CHAPTER 10A The Imposition of Sales Tax on Computer Software
§ 10A.04 Non-Home Rule Jurisdiction Example: Texas*
Texas is one example of a non-home rule sales tax jurisdiction. As is common with other non-home rule
jurisdictions, Texas specifically imposes sales tax on computer software, which it identifies as a “computer program”
and classifies as tangible personal property (TPP). According to Sec. 151.051 of the Texas Tax Code (Tax Code),
sales tax is imposed upon sales of “taxable items.”
1
A “taxable item” is defined as tangible personal property and
taxable services.
2
Tangible personal property is in turn defined as “personal property that can be seen, weighed,
measured, felt, or touched or that is perceptible to the senses in any other manner, and, for the purposes of this
chapter, the term includes a computer program … .”
3
The Tax Code goes on to define a computer program as “… a
series of instructions that are coded for acceptance or use by a computer system and that are designed to permit
the computer system to process data and provide results and information. The series of instructions may be
contained in or on magnetic tapes, punched cards, printed instructions, or other tangible or electronic media.”
4
The
definition of a computer program is expanded somewhat in the Texas Administrative Code (TAC), which we will
examine next.
Under the TAC, “computer hardware,” “computer programs,” and “computer program maintenance” are all subject
to Texas sales tax. More specifically, charges for the sale, lease, license, and/or installation (whether or not
separately stated) of computer programs are taxable.
5
In addition, the definition of “computer program” is expanded
here to include “computer game cartridges,” the combination of “several existing program modules into a new
program,” and the “modification, installation, or maintenance charges made in connection with the sale of the
program.”
6
Charges to create or modify (customize) a computer program not sold by the party making modifications
are specifically excluded from sales tax.
7
“Computer program maintenance” includes charges for error correction,
*
Brent Newton, CPA, Esq. He may be contacted at brentalexandernewton@gmail.com.
1
Tex. Tax Code § 151.051(a).
2
Tex. Tax Code § 151.010.
3
Tex. Tax Code § 151.009.
4
Tex. Tax Code § 151.0031.
5
34 Tex. Admin. Code § 3.308(b)(2).
6
34 Tex. Admin. Code § 3.308(b)(1).
7
34 Tex. Admin. Code § 3.308(b)(4).

7. 2-10A Taxation of Intellectual Property § 10A.04
Page 7 of 10
improvements, and/or technical support, which are all taxable if provided by the party who sold the computer
program.
8
However, separately stated charges for instructions on how to use a computer program are excluded
from tax. With regard to “computer hardware,” charges for the sale, lease, rental, installation, application,
remodeling, repair, maintenance, and/or restoration of computer hardware (including central processing units and
all incidental equipment, parts, and supplies) are subject to tax.
9
As stated in the previous paragraph, the TAC is quite explicit in defining what specific software and software-related
transactions are subject to tax. Large software companies will often rely on the TAC’s explicit language in a number
of ways when drafting contracts with customers. For example, when providing consulting services, software, and
hardware to the same customer, the large software company will usually enter into separate contracts with that
same customer for each of these items. In doing so, the large software company is able to emphasize in its
consulting contracts that consulting services are separately bargained for; which in turn allows it to demonstrate that
prewritten software and/or hardware (TPP) is not being provided with the consulting services. In addition, the large
software company will normally use contractual language stressing that the consulting services provided are
intended to “assist,” “guide,” and/or “provide training” to the customer in completing a series of tasks related to their
current database system or computer network. The large software company will usually also add language
emphasizing that the customer is responsible for any modification, installation, error corrections, improvements, or
technical support of software; as well as for obtaining any necessary software licenses and/or hardware under
separate contract. By doing this, the large software company helps to ensure that its valuable consulting services
transactions will not be subject to tax under the TAC.
Taxation of Intellectual Property
Copyright 2017, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
End of Document
8
34 Tex. Admin. Code § 3.308(b)(3).
9
34 Tex. Admin. Code § 3.308(a)(1), (3), and (4).

8. 2-10A Taxation of Intellectual Property § 10A.05
Taxation of Intellectual Property and Technology > PART IV SPECIALIZED TAX PLANNING
APPLICATIONS > CHAPTER 10A The Imposition of Sales Tax on Computer Software
§ 10A.05 Home Rule Jurisdiction Example: Denver, CO*
Denver is the largest home rule city in Colorado and, unlike traditional non-home rule jurisdictions, levies sales tax
on both canned and custom software. According to the Denver Revised Municipal Code (DRMC), sales tax is
imposed on the purchase price for digital products, software programs, software-as-a-service (SaaS), software
license fees, and software maintenance agreements.
1
“Software program” is defined as “a sequence of instructions
that can be measured, interpreted, and executed by an electronic device,” regardless of how it is accessed, and
includes the following: a “custom software program;” a “prewritten software program;” “modified software;” and
“updates,” “upgrades,” “patches,” and “user exits.”
2
“Software maintenance agreement” is defined as “an
agreement, typically with a software provider, that may include (1) provisions to maintain the right to use the
software; (2) provisions for software upgrades including code updates, version updates, code fix modifications,
enhancements, and added or new functional capabilities loaded into existing software; or (3) technical support.”
3
Also, please note that the purchase price of “tangible personal property” (TPP) in all sales and purchases at retail is
subject to tax.
4
TPP is defined here as personal property that can be “seen, weighed, measured, felt, touched,
stored, transported, exchanged, or that is in any other manner perceptible to the senses.”
5
As described in the preceding paragraph, Denver’s sales and use tax definitions on software and software-related
items are rather broad. However, large software companies will note that, with regard to software and hardware,
two elements must be present for a transaction to be taxable in Denver: (1) the sale or use of software and/or
hardware must actually occur in Denver; and (2) the transaction at issue must actually be a retail sale. In other
words, for the first element, sales or use tax is due for software actually used in Denver, irrespective of whether the
software is actually located in Denver. However, if software is located on a server outside of Denver, but is being
accessed and used by customers within Denver, then only the charges related to the Denver users would be
subject to tax. To illustrate, if Company X has 50 licenses to use a software program located on a server outside of
Denver, but only 10 of those licenses are for employees situated in Company X’s Denver workplace, then only the
charges for the 10 licenses related to the Denver employees would be subject to sales or use tax in Denver.
*
Brent Newton, CPA, Esq. He may be contacted at brentalexandernewton@gmail.com.
1
Denver, Colorado, Revised Municipal Code § 53-25(7).
2
Denver, Colorado, Revised Municipal Code § 53-24(28).
3
Denver, Colorado, Revised Municipal Code § 53-24(31).
4
Denver, Colorado, Revised Municipal Code § 53-25(1).
5
Denver, Colorado, Revised Municipal Code § 53-24(34).

9. 2-10A Taxation of Intellectual Property § 10A.05
Page 9 of 10
With regard to the second element, a transaction qualifies as a retail sale if it is any sale other than a wholesale
sale.
6
In other words, a software transaction is a retail sale here if there is a retailer and a purchaser at retail; a
transfer of title or possession in the software; and a transfer of consideration in exchange for the title or possession.
There are two important notes to make here with regard to software. First of all, service charges related to acquiring
title or possession of software in a retail sale are subject to tax, unless they are not mandatory (not included in the
purchase price of software) and are separately stated.
7
In addition, Denver sales or use tax is not imposed on
software-related services where the service provider does not have title or possession in the software being
serviced.
8
As a result, consulting services, feasibility studies, training services, and code-writing services would not
be subject to tax if provided by a software company without any rights of ownership or use in the software.
Taxation of Intellectual Property
Copyright 2017, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
End of Document
6
Denver, Colorado, Revised Municipal Code § 53-24(26).
7
Denver, Colorado, Revised Municipal Code § 53-24(21).
8
Denver, Colorado, Revised Municipal Code § 53-24(27).

10. 2-10A Taxation of Intellectual Property § 10A.06
Taxation of Intellectual Property and Technology > PART IV SPECIALIZED TAX PLANNING
APPLICATIONS > CHAPTER 10A The Imposition of Sales Tax on Computer Software
§ 10A.06 Conclusion and Recommendations*
Determining the taxability of software-related transactions can be a very challenging task for large software
companies, especially when they are operating in both home rule and non-home rule jurisdictions. Intense legal
research and analysis is often required to resolve the many complex multistate sales tax issues that arise on a daily
basis. The practitioner should be mindful of the many nuances present in software-related definitions across state
and city tax codes. In addition, special care should be taken when working within the complex home rule jurisdiction
of Colorado. For example, when analyzing software-related transactions in Colorado cities, it will not be sufficient to
just review zip codes when determining where transactions occurred; you will need to look at full addresses in order
to determine whether transactions actually occurred within a particular Colorado city’s boundaries. Finally, please
keep in mind that the examples provided in this chapter are limited and only provide a sample representation of
home rule and non-home rule jurisdictions. Sales tax rules and regulations are subject to change; so independent
research and analysis should still be conducted on a case-by-case basis.
Taxation of Intellectual Property
Copyright 2017, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
End of Document
*
Brent Newton, CPA, Esq. He may be contacted at brentalexandernewton@gmail.com.