Select State and Local Tax Highlights
Presented by Bruce Nelson
Manager of Tax Policy
Colorado Department of Revenue
March 8, 2006
Some Colorado Highlights –
Legislation.
The following bills have been PI’d (postponed indefinitely):
HB 06-1052 Income Tax Modification for Bad Debts (cash basis medical providers
wanted a deduction for bad debts)
HB 06-1117 Sales Tax on Tangible Personal Property (sought equal treatment of store
coupons and manufacturer coupons and rebates)
HB 06-1129 U.S. Armed Forces Income Tax Exemption (exempts from state income tax
the income earned for serving in the Armed Forces)
HB 06-1155 Government Competition with Private Enterprise (exempts from sales and
income tax private enterprise where government agencies offer the same goods and
services)
HB 06-1173 Voice Over Internet Tax Exempt (exempts VoIP from sales taxes)
HB 06-1241 Mesa Verde Nat’l Park Income Tax Check-off (creates voluntary income tax
check-off on state income tax return)
HB 06-1279 Oil Shale Severance Tax Revenues (excess revenue to be used for
transportation projects and property tax relief)
HB 06-1298 Long-term Insurance Tax Credit (increases the amount of federal taxable
income to qualify for state tax credit for long-term care insurance)
SB 06-103 Reduction of Telecommunication’s Tax (expands exemptions from sales and
use taxes for equipment used in telecommunications)
1
The following bills are still alive:
HB 06-1013 Elderly and Disabled Assistance Grants (increases yearly income threshold
for eligibility)
HB 06-1017 Incentive for New Jobs (additional credits for new employee wages – in
addition to any enterprise zone credits)
HB 06-1019 Easter Seals Income Tax Check-off (creates voluntary income tax check-off
on state income tax return)
HB 06-1050 Budget Stabilization Fund (creates fund from three sources – general fund;
excess reserve; and severance tax)
HB 06-1060 Horticultural and Floricultural Sales Tax Exemption (adds these to items to
agricultural sales tax exemption)
HB 06-1074 Waste Tires Fee Recycling Grants (extends fund and requires grants from
fund go to R&D in waste diversion and recycling)
HB06-1091 Enterprise Zone Credit – Commercial Vehicles (clarifies and expands
exemption for vehicles used in enterprise zones)
HB 06-1105 Reestablish Dynamic Modeling Pilot Program (mandates use of dynamic
modeling in addition to fiscal notes to analyze the impact of bills that changes tax policy)
HB 06-1200 Low-Income Energy Assistance Funding (assistance from operational
account of severance tax trust fund – signed by the Governor on February 3.)
HB 06-1209 Colorado Special Olympics Fund (extends current income tax check-off)
HB 06-1297 Multiple Sclerosis Income Tax Check-off (creates voluntary income tax
check-off on state income tax return)
HB 06-1308 Bioscience Net Operating Loss (creates a cash fund to purchase future tax
benefits from qualifying companies; state provides assistance in exchange for company
foregoing carry-forward of NOLs)
HB 06-1311 Species Conservation Trust Fund (transfers funds from severance tax fund
for programs designed to conserve endangered species)
HB 06-1312 Private Letter Ruling (authorizes the DOR to issue binding PLRs)
2
HB 06-1322 Clean Energy Development Fund Seed Capital (allocates funds from the
severance tax to Office of Energy Management and Conservation)
SB 06-012 Family Resources Centers Fund (extends current income tax check-off)
SB 06-047 Health Assurance Districts (allows the creation of special districts to levy
sales tax for the provision of health care services)
SB 06-048 Dynamic Model Pilot Program (adds dynamic modeling to fiscal notes to
analyze the impact of bills that changes tax policy)
SB 06-172 Motor Vehicle Fees (removes fees and taxes for one set of military valor and
Pearl Harbor survivor special license plates)
SB 06-178 Redevelopment Land Tax Credit (eliminates 10,000 population requirement
for redeveloping contaminated land)
Computer Software Regulation
Paperwork should be filed within the next week to implement the regulation.
Delay has been due to rewrite of the regulation’s statement of basis and purpose.
Kenna v. Cooke, Case No. 05CV119 (Dist. Ct. LaPlata County, 2/10/06).
Court rules that while the $100,000 (now $260,000) conservation easement credit
may be limited in the aggregate to $100,000 with respect to pass-through entities,
married couples filing separately, and taxpayers filing joint returns, it is not so
limited to tenants in common. The DOR will appeal the decision.
Bruce v. City of Colorado Springs, No. 05SA365 (Colo., 2/27/06)
The Colorado Supreme Court rules that an extension of a tax is not a tax increase.
Thus the election to extend an existing Colorado Springs sales tax was not invalid.
3
Special Regulation 7: Computer Software
(1) Application of Tax
Computer software will be subject to sales or use tax if it meets all of the
following criteria:
(a) The software is pre-packaged for repeated sale or license;
(b) The use of the software is governed by a tear-open non-negotiable license
agreement;
(c) The software is delivered to the customer in a tangible medium. Software is
not delivered to the customer in a tangible medium if it is provided through an
application service provider, delivered by electronic software delivery, or
transferred by load and leave software delivery.
(2) Definitions
(a) Application Service Provider: An application service provider or “ASP” is an
entity that retains custody over (or “hosts”) software for use by third parties.
Users of the software hosted by an ASP typically will access the software via the
Internet. The ASP may or may not own or license the software, but generally will
own and maintain hardware and networking equipment required for the user to
access the software. The ASP may charge the user a license fee for the software
(in instances where the ASP owns the software) and/or a fee for maintaining the
software/hardware used by its customer.
(b) Computer Software: A set of coded instructions designed to cause a
computer or automatic data processing equipment to perform a task.
(c) Electronic Software Delivery: Software transferred by remote
telecommunications to the purchaser’s computer, where the purchaser does not
obtain possession of any tangible medium in the transaction.
(d) “Load and Leave” Software Delivery: Delivery of software to the purchaser
by use of tangible medium where the title to or possession of the tangible medium
is not transferred to the purchaser, and where the software is manually loaded by
the vendor, or the vendor’s representative, at the purchaser’s location.
4
(e) “Pre-packaged for repeated sale or license”: Software that is pre-packaged for
repeated sale or license in the same form to multiple users without modification,
and is typically sold in a shrink-wrapped box.
(f) “Tangible medium”: Tapes, disks, CDs, cards, and comparable physical
medium.
(g) “Tear-open non-negotiable license agreement”: A license agreement
contained on or in the package, which by its terms becomes effective upon
opening of the package and accepting the licensing agreement. This term does
not include a written license agreement or contract signed by the licensor and the
licensee.
(3) Miscellaneous
(a) The internalized instruction code which controls the basic operations (e.g.,
arithmetic and logic) of the computer causing it to execute instructions
contained in system programs is an integral part of the computer and is not
normally accessible or modifiable by the user. Such internal code systems are
considered part of the hardware and are taxable. The fact that the vendor does
or does not charge separately for it is immaterial.
(b) Multiple Points of Use: In the event a vendor sells software to a Colorado
purchaser that is taxable under this regulation, and the Colorado purchaser
pays the vendor for a quantity of software licenses with the intent to distribute
the software to any of the purchaser’s locations outside of Colorado, the
measure of Colorado sales tax due is the total of the license fees associated
only with the licenses that are actually used in Colorado. The Colorado
purchaser shall provide a written statement to the vendor, attesting to the
amount of the license fees associated with Colorado and with points outside of
Colorado. This written statement shall relieve the vendor of any liability
associated with the pro-ration.
5
And a couple of National Highlights –
Cuno v. DaimlerChrysler, Inc., 383 F.3d 379 (6th Cir. 2004)
The U.S. Supreme Court heard arguments last week on whether Ohio's investment
tax credit was unconstitutional because it violated the Commerce Clause. The
Sixth Circuit held that the credit affected interstate commerce because it
encouraged in-state investment at the expense of investment in other states.
Plaintiffs include more than a dozen small businesses, citizen-taxpayers, tax
reform activists, and homeowners that lost homes to make way for the
DaimlerChrysler plant. If the Supreme Court upholds the Circuit Court’s opinion,
look for challenges to Colorado’s capital gain modification and other exemptions,
modifications, and credits.
Louisiana v. Dell International, Inc., No. 2004 CA 1702 (La. Ct. App., 2/15/06).
Three years ago Connecticut used the Multistate Tax Commission's Bulletin 95-1
in its unsuccessful attempt to assert that Dell Catalog Sales had nexus with the
state. Dell sold computer service contracts that were to be fulfilled by an
independent third party, BancTec, with whom Dell had an exclusive contract.
Although the court found that BancTec was an independent contractor operating
on Dell behalf, it held that the "missing ingredient" in determining whether Dell
had nexus was the "frequency, if any, of the number of on-site service calls." In
other words, Connecticut failed to show that BancTec, Dell’s independent thirdparty contractor, "had sufficient substantive physical presence in the state" to
create nexus. "Isolated and sporadic physical contacts are insufficient to establish
a substantial nexus [with] Connecticut." Dell Catalog Sales v. Comm'r of Rev.
(Conn. Super. Ct., Judicial Dist. of New Britain, July 10, 2003)] Connecticut
decided not to appeal the decision.
Dell has now lost a similar case in Louisiana. The Louisiana Court of Appeal
determined that, based on the U.S. Supreme Court decisions in Scripto and Tyler
Pipe, the key question was, not a question of agency, but whether BancTec’s
activities helped Dell to establish and maintain a market for its goods in
Louisiana. The Court found that BancTec’s computer repair services of Dell
computers, and the fact that Dell controlled significant aspects of the services
provided by BancTec, was sufficient to create sales tax nexus for Dell. [See
Scripto v. Carson, 362 U.S. 207 (1960) and Tyler Pipe v. Washington, 483 U.S.
232 (1987).]
6