Topic No. 18
The Denver Revised Municipal Code (“DRMC”) imposes sales or use tax on the purchase price or charge for data processing equipment and data processing programs. See, DRMC Section 53-25(7) and Section 53-96(6).
DATA PROCESSING EQUIPMENT
processing equipment is taxable as tangible personal property when the
equipment is sold in
DATA PROCESSING PROGRAMS
1. Data Processing Program: A data processing program is a set of statements or instructions in machine readable format that is capable of causing a machine or device having information processing capabilities to indicate, perform, or achieve a particular function, task, or result, and includes, but is not limited to, software.
2. “Custom” Data Processing Program: Includes data processing programs designed, created and/or modified to meet the needs of a specific user or set of users.
3. “Pre-Written” Data Progressing Program: Includes, but is not limited to, “canned”, “shrink-wrapped”, “off-the-shelf” or any other data progressing program developed for sale or license to multiple users. Pre-written data processing programs include data processing program modules or components that are designed to be integrated into a larger data processing package.
B. Taxable Sales: The DRMC imposes sales or use tax on the sale, storage, use, distribution, or consumption of data processing programs, no matter how defined including “custom” and “pre-written” data processing programs, regardless of the method of delivery and whether purchased in tangible or intangible form. The data processing program is taxed as a service since the true essence of the transaction is the purchase or use of the intangible data processing program, not the purchase or use of the medium.
C. Taxable Portion: The taxable portion of a data processing program is the aggregate of all amounts associated with the creation of the data processing program, including, but not limited to, the following:
1. Conceptualizing and designing the program;
2. Planning program requirements;
3. Project management;
4. Writing the code of the program;
5. Testing and evaluating the program;
6. Implementing the program;
7. Creating or writing manuals, instructions, and any other documentation; and
8. Any customer support or maintenance agreement that is required by the purchase contract or that includes the rights to program updates or modifications.
D. Separately Stated Non-taxable Charges: Non-taxable charges, when separately stated, that relate to a data processing program would include the following:
1. Separately stated labor for training charges; and
2. Follow-up customer support that is not required by the purchase contract for the software, and which does not include the right to program updates or modifications.
E. Taxable Data Processing Programs vs. Non-Taxable Services
A distinction exists between the sale of data processing programs, including “custom” data processing programs, which are taxable, and the sale of other certain personal services, which are not taxable. Data processing programs are taxable services which are generally the culmination of a programmer’s logic and knowledge. The personal services to design, write, test, implement, and otherwise create data processing programs are subject to sales or use tax.
1. Examples of “custom” data processing programs which are subject to sales or use tax include, but are not limited to, the following:
a. A new module or new stand alone instruction set is created;
b. An instruction set or module is created that adds functionality or new features to an existing data processing program or module;
c. A new data processing program is created. This would not only include the creation of a completely new data processing program, but also combining prewritten procedures from a “library” to create a new data processing program;
d. Modifications are made to existing “pre-written” or custom data processing programs to upgrade to the desired specifications of the customer;
e. Modifications are made related to an initial data processing program purchase to meet the purchase requirements of the customer; and/or
f. Programmer owns the work in progress, including “works made for hire.”
2. Examples of other personal services, which are not subject to sales or use tax when separately stated, include the following:
a. A correction to an instruction set that the customer already owns, which does not add functionality or new features to the data processing program. An example of a personal service correction is changing the date field in a program from a two-digit year to a four-digit year;
b. Changing the configuration or “settings” of a data processing program when not in conjunction with the purchase of the data processing program, which do not allow rights to use new functions or features of the data processing program, and when the source code is not modified. An example of a personal service change of configuration is changing the default file location setting, or the security settings assigned to a particular user; and
c. Data retrieval by a programmer, where a programmer writes the code to “query” the customer’s database and produce an output for the customer, but the customer has no right to re-run or re-use the query language, nor does the customer obtain ownership rights to the query language.
F. Taxable Right or License to Use: Denver’s
Sales or Use tax is also imposed on the right to use or license to use a data
processing program or data processing equipment in the City and County of Denver
(“Denver”). The use of a data processing
program or equipment in
G. Batch Processing:
1. A data processing program or data processing equipment is not considered to be used by a customer in Denver, and as such is not subject to sales or use tax, if all of the following conditions occur: the customer transmits its records electronically in a “batch” format to a computer processor; the customer’s records are stored by the computer processor until the computer processor processes them at a later time in a separate action; the customer has no control over the “run time” or processing of its records, other than a general expectation of when its records will be processed; the computer processor uses a data processing program that they (and not their customers) own, have a right to use, or a license to use; and the output produced is based solely upon the data in the customer’s records and is in the nature of reports, hard-copy outputs, or third-party directives.
When a computer processor located in
H. Maintenance Agreements: Data processing programs are sometimes sold, or are licensed for use, with an additional periodic fee, generally called a maintenance fee. If the periodic fee is mandatory to maintain the right to use the data processing program, then the periodic fee is subject to sales or use tax. If the periodic fee is not mandatory to maintain the right to use the data processing program, then the substance of what the fee entitles the customer to receive must be considered. If the periodic fee includes updates to the data processing program, or the rights to updates and modifications if they occur, then that fee is part of the charge for a data processing program and is subject to tax. If the periodic fee is only for technical support, and does not entitle the customer to updates and modifications, then it is not subject to tax.
I. Taxable Downloads or Taxable Access: The method of delivery of, or access to, a
data processing program does not affect the taxability of the program for
Deluxe Accommodations, which operates a hotel in
GMO Oil Exploration Company, which has their
administrative and engineering offices in
C. GMO also contracts with
PRU Payroll to provide payroll services to their employees worldwide. GMO collates all the time and pay information
for each pay cycle, assembles the information in a batch file, and transmits
the batch file to PRU, which is located in
D. After years of paying
exorbitant fees to HT Software for the rights to use the DrillFinder data
processing program, GMO decides to develop their own version of the
software. GMO contracts with Software
Solutions of Atlanta, GA to design, program, and implement a data processing
program that will perform the same tasks as DrillFinder. Software Solutions has never done a project
this specialized before, but they hire programmers, petroleum engineers, and
subcontractors to conceptualize the project, develop the specifications and
logic, write and test the data processing program, and implement the data
processing program for GMO. Most of the
software is custom developed by Software Solutions, but to save money, they
also included some source code modules that were configured to perform common
utilities. The data processing program
was developed both at Software Solution’s
* DRMC Section 53-25(1),(6),(7). Imposition of tax.
* DRMC Section 53-96(1),(5),(6). Imposition of tax.
THE ABOVE INFORMATION IS A SUMMARY IN LAYMAN'S TERMS OF THE