When a leased vehicle is first leased and taxed in another state and then moved to Colorado, does Colorado give the lessee a credit for the tax paid to that other state?

Plain-English summary

The taxpayer leases motor vehicles that are first leased in another state (the "First State"), where tax is paid, and then moved to Colorado during the lease term. Some first states tax the lessor's purchase of the vehicle; others tax all the lease payments up front at lease inception. The question: does Colorado give a credit for the tax paid to the first state? The Department answered in four parts.

1. Yes, Colorado allows a credit. Colorado levies use tax on the use, storage, and consumption of vehicles here (§ 39-26-202), and a vehicle can't be registered without paying use tax (§ 39-26-208). When a vehicle is first leased out of state and later registered in Colorado, the lessee owes Colorado use tax at registration and is entitled to a credit for sales tax paid in the first state. The Multistate Tax Compact guarantees this: § 24-60-1301 (Article V) gives a purchaser "full credit" for legally imposed sales/use taxes paid on the same property to another state, applied first against state use tax and any remainder against a subdivision's use tax. See also § 39-26-713(2)(f).

2. But only if the legal incidence of the first state's tax fell on the lessee. Both the Compact and § 39-26-713(2)(f) give credit for tax "paid by him." Colorado distinguishes the person on whom the legal incidence of a tax falls from the person who merely bears the economic burden. (By analogy, Colorado can tax a contractor on materials for a federal building even though the contractor passes that cost to the federal government — the incidence is on the contractor: Temple v. Arthur Venneri Co., 470 P.2d 576 (Colo. 1970).) So if the first state taxed the lessor (e.g., taxed the lessor's purchase of the vehicle), the lessee hasn't "paid" that tax — even though the lessor folds the cost into the lease payment — and gets no Colorado credit.

3. No reciprocity required. Neither § 39-26-713 nor § 24-60-1301 conditions the Colorado credit on the other state offering a matching credit for Colorado tax.

4. "Excise" and "titling" taxes — no answer. Without more detail, the Department declined to say whether a credit is available for "excise" or "titling" taxes paid to the first state; "excise" is a catch-all label and the Department wasn't familiar with the titling tax described.

What this means for you

Vehicle leasing companies and fleet operators

When a leased vehicle migrates into Colorado mid-lease, Colorado use tax is due at registration, but you can credit tax already paid to the origin state — if that state's tax legally fell on the lessee. Map each origin state's lease-tax mechanics before assuming a credit: a state that taxes the lessor's purchase produces no creditable lessee tax, even though the lessee economically paid it through the lease.

Lessees moving a leased car to Colorado

Expect to pay Colorado use tax to register. Bring documentation of tax you paid to the prior state — but understand that a credit depends on who the law taxed, not on what you felt in your payment. "Tax was built into my lease" isn't enough if the state taxed the leasing company, not you.

The legal-incidence rule is the whole game

This letter is a clean statement of a doctrine that recurs across Colorado tax: legal incidence, not economic burden, decides who "paid" a tax. The same idea drives results in contractor and pass-through situations.

Common questions

Q: I moved my leased car to Colorado. Do I get credit for tax I already paid another state?
A: Yes, if the other state's tax legally fell on you, the lessee. If that state instead taxed the leasing company's purchase, you get no Colorado credit — even though the cost was passed to you in the lease.

Q: What if the other state doesn't credit Colorado tax in return?
A: It doesn't matter. Colorado's credit isn't conditioned on reciprocity.

Q: Does the credit cover excise or titling taxes paid elsewhere?
A: The Department wouldn't say without more facts; "excise" covers many different taxes and it wasn't familiar with the titling tax described.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department.

Citations and references

Statutes and cases:
- § 39-26-202, C.R.S. — imposition of Colorado use tax on vehicles
- § 39-26-208, C.R.S. — no vehicle registration without payment of use tax
- § 39-26-713(2)(f), C.R.S. — credit for sales/use tax paid to another state
- § 24-60-1301 (Article V), C.R.S. — Multistate Tax Compact; full credit for taxes paid to another state
- Temple v. Arthur Venneri Co., 172 Colo. 105, 470 P.2d 576 (Colo. 1970) — legal incidence vs economic burden of a tax

Related Colorado vehicle/lease letters:
- [[gil-08-037-use-tax-exemption]] — nonresident temporary-use exemption is for individuals only; vehicles/aircraft owe use tax with a credit for other-state tax
- [[gil-08-023-ruling-request-tax-on-leases]] — taxability of motor-vehicle lease charges (amended ruling)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-001.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2007-1
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX

December 4, 2007

Re: motor vehicles, leases, credit for taxes paid to another
state
Dear XXXXXXXXX,

This letter is in response to your letter to the Colorado Department of Revenue, dated August 10, 2007, re:
taxability of leased vehicles. We apologize for the time it has taken to respond to your inquiry.
Issue
You ask whether, under a variety of different circumstances discussed below, Colorado allows a credit for taxes
paid to another state.
Background
You ask a series of questions that are premised on the following scenario. Motor vehicles are first leased in
another state (the “First State”), tax is paid to the First State, and the motor vehicle is subsequently moved to
Colorado during the term of the lease. You represent that some First States impose a tax on the lessor’s
purchase of the motor vehicle, while other First States impose a tax up front at the lease inception upon all
payments to be made under the lease. You ask us to assume that the lessor has obtained permission from the
Colorado Department of Revenue to collect tax on each lease payment, regardless of whether the lease is
more or less than three years in duration.
Discussion
1. Colorado allows a credit for the sales tax paid to the First State.
With the exceptions noted in Response 2 and 4, below, Colorado allows a credit for taxes paid to another state
on motor vehicles. Colorado levies a sales and use tax on the sale, use, storage and consumption of tangible
personal property in Colorado, including motor vehicles. §39-26-202, C.R.S.; see, also, §39-26-208, C.R.S. (no
registration without payment of use tax). In cases where the vehicle is first leased in another state, Colorado
levies a use tax on the lessee/purchaser when the vehicle is registered in Colorado. The lessee is entitled to a
credit for sales tax paid in the First State. Specifically, §24-60-1301 (article V), C.R.S. states that, “Each
purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined

amount or amounts of legally imposed sales or use taxes paid by him with respect to the same property to
another State and any subdivision thereof. The credit shall be applied first against the amount of any use tax
due the State, and any unused portion of the credit shall then be applied against the amount of any use tax due
a subdivision.” See, also, §39-26-713(2)(f), C.R.S.
2. A lessee is entitled to a credit for taxes paid another state only if the legal incidence of the First State’s tax
falls on the lessee.
Both §39-26-713(2)(f) and §24-60-1301 (Article V), C.R.S. state that a person is entitled to a credit for taxes
“paid by him.” Colorado law generally distinguishes between the person on which the legal incidence of the tax
falls and person(s) who simply bears the economic burden of the tax. For example, Colorado can levy a sale or
use tax on building and construction materials used for the construction of a federal building, notwithstanding
the fact that the contractor likely passes the economic burden of the tax onto the federal government, because
the incidence of tax is on the contractor, not the building owner. See, e.g., Temple v. Arthur Venneri Co., 172
Colo. 105 , 470 P2d 576 (Colo. 1970). Therefore, if the incidence of taxation in the First State falls on the lessor
and not the lessee, then the lessee has not paid the tax to the First State. This is true even though the lessor
likely passes the cost of the tax onto the lessee, either explicitly or implicitly within the lease payment.
3. The First State does not have to offer a reciprocal credit in order for a taxpayer to be entitled to a credit in
Colorado.
Neither §39-26-713 nor §24-60-1301 condition the Colorado credit on the other state offering a similar credit for
taxes paid in Colorado.
4. Credits for “excise” taxes and “titling” taxes paid in the First State.
Without more information about the excise and titling taxes, the department declines to offer specific advice
about whether a credit is available for “excise” or “titling” taxes paid in the First State. “Excise” tax is a very
general term in tax law and can encompass a variety of taxes. We are not familiar with titling taxes and under
what circumstances it is assessed.

Finally, the Department makes a good faith effort to provide accurate and complete answers to questions posed
to it by taxpayers. However, the information and answers provided here are not binding on the Colorado
Department of Revenue, nor do they replace, alter, or supersede Colorado law and regulations. The Executive
Director, who by statute is the only person having authority to bind the Department, has not formally reviewed
and/or approved this response.
Respectfully,

Colorado Department of Revenue
Office of Tax Policy