Colorado and Taxing Software - California should do almost the same

On February 24, 2010, Colorado enacted HB 1192 which changes the way sales tax applies to software. Prior to this bill, Special Regulation 7 provided that software transferred electronically or provided by a service provider or obtained via "load and leave" is not subject to sales tax. A similar approach applies in California (Reg 1502) under the assumption that an electronic transfer is not tangible personal property.

HB 1192 repeals Special Regulation 7 effective March 1, 2010. HB 1192 clarifies that it "is not intended to alter, other than the designation of standardized software as tangible personal property, the tax treatment of what is known in the industry as "digital goods", "application service providers", "software as a service", or "cloud computing". Nothing contained in said House Bill 10-1192, including the repeal of Special Regulation 7 or the requirement that tax be apportioned in the case of a business purchase of software for its own users operating both within and outside of the state, shall be read as expressing the general assembly's intent regarding the treatment of such methods of transacting business."

I think California lawmakers should consider a similar change in California. Our current system of only applying sales tax to software obtained on tangible media violates equity and neutrality principles. For example, the tax rules do affect how you'll want to acquire software if one technique is taxable (buy the CD version) and one is not (digital download). Yet, the end result is the same - you have use of the software.

Taxing the electronic download does raise some issues though. When a customer does a digital download and pays with a credit card, the seller has no idea where the person is located UNLESS they ask and the person gives the correct answer. It is not problem to ask - that can be down on the payment webscreen. The legislation should provide that the vendor can rely on the answer given by the customer without liability. If the customer gives wrong information - they should be the ones penalized.

Another modification California should consider is to say that only software obtained by a final consumer (not a business) is subject to sales tax. California needs to start moving its sales tax to only apply to final consumption, not consumption by businesses.

California should go beyond software and tax all digital goods unless purchased by a business. With the provision that the seller may reasonably rely on information from the purchaser as to their location.

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