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Tr 11: Computer Software

The retail sale of computer software is subject to the City of Boulder sales/use tax unless the cost of modification of the software is greater than 25 percent of the price of the unmodified software. Therefore, custom made software is exempt from sales/use tax. The Boulder Revised Code at section 3-1-1 includes the following definition of computer software:

"Computer software means digital products, software programs, software as a service, internet subscription service, software license fees, software maintenance agreements, and software contained on cards, tapes, discs, coding sheets or other machine-readable or human-readable form, including software that has been modified so long as the price of the modifications does not exceed twenty-five percent of the price of the unmodified software and excluding software created specifically for the user."

A lease, lease purchase agreement, rental or the grant of a license to use software is subject to sales/use tax. The full amount paid for the right to use the software is subject to sales/use tax regardless of how the software is obtained. The Boulder Revised Code at section 3-1-1 includes leases, rentals and grants of a license to use taxable services under its definition of "purchase or "sale":

"(b) A lease, lease-purchase agreement, rental or grant of a license, including royalty agreements, to use tangible personal property or taxable services, including without limitation access services and linen services;"

Examples:

  1. A Boulder business purchases an accounting software package for $50,000.00 which includes the standard accounting software and modifications. The standard software sells for $35,000.00 and the modifications charge is $15,000.00. The purchase of the software is exempt from sales/use tax because the modifications charge is greater than 25 percent of the standard software package.
  2. A Boulder business enters into a licensing agreement with a software company to pay $10,000.00 per month for the right to use the software company's new inventory control package. The full $10,000.00 per month is subject to sales/use tax.
  3. A Boulder business purchases Secure Socket Layer (SSL) Website encryption certificates, which are down loaded on a server at the business by remote access to the encryption code coming from the seller’s source.  The business also purchases and downloads anti-virus software updates through a web based retailer.  Both of these transactions are subject to sales/use tax.