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July 2, 2021

Colorado expands sales and use tax to cover digital goods, mainframe computer access, and packing and crating

On June 23, 2021, Colorado Governor Jared Polis signed HB21-1312 (Bill), which makes several changes to the state's sales and use tax laws. Effective July 1, 2021, the Bill, among other changes, (1) codifies the definition of tangible personal property for sales and use tax purposes to include digital goods, and (2) specifies that the tax on sales and purchases of tangible personal property includes amounts charged for mainframe computer access, photocopying, and packing and crating. The Bill also disallows the state sales tax vendor fee for retailers with a substantial amount of taxable sales during the filing period.

Details on Bill's provisions

In 2020, the Colorado Department of Revenue (the Department) adopted changes to Colo. Rule 39-26-102(15), which became effective on January 30, 2021. The Bill codified those changes, which specify that the "method of delivery does not impact the taxability of a sale of tangible personal property." The Bill also (1) included examples of methods used to deliver tangible personal property under current technology, including electronic downloads and internet streaming, and (2) specified that monthly subscription fees for streaming services are taxable.

Under Section 9 of the Bill, the state and state-collected local sales taxes apply to amounts charged for mainframe computer access, photocopying, and packing and crating.

The Bill defines the term "mainframe computer access" as "the provision of access to computer equipment for the purpose of storing or processing data." The definition does not include the provision of access to computer equipment (1) "for the purpose of examining or acquiring data maintained by the vendor" or (2) "incident to electronic computer software delivery … or incident to the use of computer software hosted by an application service provider … "

While additional guidance on the taxation of digital goods will likely be forthcoming from the Department, the fiscal note attached to the Bill indicates that the focus of this sales tax imposition is on mainframe computer access used for "cloud-based data storage services." The Bill did not specifically address how "mainframe computer access" will be sourced; as this access appears to be classified as tangible personal property, it is likely that the sourcing rules for tangible personal property will apply.

The Bill defines the term "packing and crating" as "tangible personal property furnished to prepare tangible personal property purchased at retail for delivery to a location designated by the purchaser." There remains an exemption in Colo. Rev. Stat. Section 39-26-102(20)(a) for the sale or purchase of containers, labels, and shipping cases purchased by manufacturers. Further, Colo. Special Rule 201-5:SR-9 specifies that "containers, labels, tags, cartons, packing cases, wrapping paper, twine, wire, pallets, skids, bags, shipping cases, bottles, cans, similar articles and receptacles sold to manufacturers, producers, wholesalers, jobbers, retailers, or other licensed vendors, for use as containers, labels, and furnished shipping cases for articles sold by them are not taxable."

Regarding the vendor collection fee, current law allows any retailer collecting state sales tax to retain 4% of the state sales taxes collected as compensation for expenses incurred in collecting and remitting the tax, up to $1,000. Effective January 1, 2022, however, the fee is eliminated for any filing period that a retailer's total taxable sales were greater than $1 million.


With the enactment of HB21-1312, Colorado becomes the latest state to formally expand its sales and use tax to cover digital goods. Most recently, Maryland adopted changes to its sales and use tax laws to cover most digital goods and services, including non-custom software and Software-as-a-Service (SaaS) (see Tax Alert 2021-0805). While currently excluding electronically-delivered software and SaaS from sales tax, Colorado is clearly moving toward expanding its tax base. Given the growing global trend toward taxing the digital economy, more states can be expected to follow.

The taxation of these types of cloud-based offerings creates complex sourcing issues and uncertainty for purchasers required to pay use tax with inadequate location information. Both sellers and purchasers of cloud-based offerings should evaluate availability of sourcing information and consider appropriate sourcing methodologies.


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For additional information concerning this Alert, please contact:
State and Local Taxation
   • Rachel Quintana (