Yes, in some parts of the state. SaaS (software as a service) is considered “non-tangible” under Colorado law, meaning that it’s not taxable at the state level. However, some local jurisdictions in Colorado have their own taxation rules regarding SaaS products and services. So in certain areas, including Denver, some SaaS offerings are taxable.
Understanding the complexities of these laws is essential if you plan on doing business in Colorado. Failure to comply with state and local tax laws could result in penalties, fines, and other consequences. This article will cover what you need to know to stay compliant.
An overview of SaaS taxation rules in Colorado
Many states do consider SaaS to be a taxable product. But since SaaS sales or subscriptions do not involve the physical exchange or delivery of a product, Colorado considers these transactions to be non-taxable.
Under Colorado state law, computer software can be taxed when it is prepackaged for sale, it is delivered in a physical medium, and its use is governed by a non-negotiable license agreement. It is not taxable when it is delivered through an application service provider (via the Internet), through electronic computer software delivery, or is transferred by load-and-leave computer software delivery.
Understanding home rule
In Colorado, many towns, cities, and special districts have enacted a “home rule” charter, which means that they levy their own taxes. These local tax regulations may differ from state regulations.
So while your SaaS product might be considered non-taxable under Colorado state law, it might be taxable in parts of Colorado where you conduct business. If that’s the case, and if you have nexus in Colorado (more on nexus in the next section), then you’ll need to collect and remit the taxes on those transactions.
Nexus in Colorado
Businesses that have nexus in Colorado must collect and remit taxes on taxable sales. There are two types of nexus: physical and economic.
A business that has a physical presence in Colorado, such as an office, a warehouse, or employees, has physical nexus in the state.
A business that has earned at least $100,000 in sales in the state during the previous or current calendar year has economic nexus in the state. (In Colorado, exempt sales, for example, SaaS, still count towards nexus thresholds)
Example business scenario
Say that your company has an office in Colorado (and has thus established nexus), and that it offers a subscription-based SaaS product that is delivered digitally to customers.
The monthly subscription cost for your product is $100. In August, a client in Denver purchases a subscription, as does a client in Aurora. These transactions are not eligible for state tax; however, Denver taxes SaaS transactions at 5.15%, and Aurora taxes them at 3.75%. So for August, you’d need to collect $5.15 from your Denver customer and $3.75 from your Aurora customer.
Exceptions and exemptions
In June of 2020, Colorado issued a private letter stating that SaaS products delivered digitally are exempt from sales tax in the state. This exemption applies to software that is delivered through an electronic download or web-based application.
SaaS that is delivered via a physical medium (such as a USB drive), however, is not exempt.
On a local level, the delivery method may be irrelevant. In Denver, for example, SaaS is taxable at a rate of 5.15%, regardless of how it is distributed.
What about digital goods?
On July 1, 2021, Colorado state included digital goods in its definition of “tangible personal property,” which means that they are taxable. The only exception is when the method of delivery is non-tangible, in which case the service would not be taxed. Taxation can vary based on local laws, too. In some areas, digital goods are taxable regardless of the delivery method.
What about IaaS?
Infrastructure as a service (IaaS) is handled similarly to SaaS and other digital goods. When the products are tangible, they’re generally taxable. If not, then it depends on the home rule in the local area.
Navigating compliance
As a business, it’s your legal obligation to ensure that you are correctly and accurately collecting taxes on each transaction. The Colorado Department of Revenue collects state sales tax and some local (home rule) taxes. Ultimately, you’re also responsible for remitting that money to the correct tax agencies. Noncompliance can lead to financial penalties.
To ensure compliance, you need to research the local and state tax laws where you do business. Then you must charge the correct tax rate on transactions. After collecting taxes, you’ll remit the correct amount to the relevant tax agencies.
If you discover that you haven’t been collecting or remitting the right amounts on your transactions, then consulting with a professional might make the most sense. An expert can go through your business transactions and begin ensuring that you’re collecting and remitting the correct amount of taxes, regardless of where your sales are occurring.
Staying compliant with the many varying sales tax laws across the U.S. can be a time-consuming and confusing process. Compliance tools like Numeral offer automated tax collection and remittance services that help you remain compliant. Numeral handles tax collection and remittance for you, allowing you to focus on your business’s other needs.
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Additional resources for staying compliant
Under the law, if you don’t collect the correct amount of taxes, then you could be held liable for that amount as well as fines and fees. To remain compliant, you’ll need to stay up to date with the Colorado Department of Revenue tax codes and the tax laws in the local areas where you conduct business.
A comprehensive state-based resource for taxing computer software can be found here, and a general sales tax guide can be found here.
The bottom line
If you offer SaaS products or services in Colorado, it’s necessary to ensure that you fully understand the state’s taxation laws. You’ll need to charge your customers the correct percentage of tax on all your transactions, and you’ll also need to remit the correct amounts to local tax agencies.
Since you likely need to focus a lot of your attention on your business itself, it might make the most sense to outsource your tax compliance needs. Numeral’s skilled SaaS tax experts can help ensure that your business remains compliant.
Numeral offers comprehensive tax services, from registration to remittance, so you won’t have to worry about calculating the proper tax rates for the products or services you offer. Numeral can track your sales as well as keep track of the various economic nexus levels in the states where you do business.
