For short-term rentals of oilfield living quarters, water/sewer systems, generators, transportation, cleaning, and consumables, who owes Colorado tax and on what?

Plain-English summary

A company rents portable living quarters to oil-drilling operations on a day-to-day basis, plus accessories — water systems, sewer systems, generators, light plants, and the like. It sent an invoice and asked which line items are taxable.

The governing rule — the "three-year" test for leases. Colorado taxes the sale of tangible personal property, and a "sale" includes a lease or rental (§ 39-26-102(23)). For rentals over three years, the lessor collects sales tax on each rental payment. For rentals of three years or less (this company's day-to-day rentals), the lessor is treated as the end user: there's no sales tax on the rental payments, but the lessor must pay sales or use tax on its acquisition, use, or storage of the property. Alternatively, a short-term lessor can ask the Department for permission to buy the property tax-free and instead collect tax on the rental payments. (Special districts/cities/counties may add tax — DRP 1002; home-rule jurisdictions aren't administered by the Department.)

Item-by-item results:

• Mobile home — tangible personal property (not permanently affixed); day-to-day = a ≤3-year lease. The company (not the lessee) pays use tax on the full acquisition price (assuming it was bought outside Colorado), with a credit for sales/use tax paid to another state (Reg 39-26-713.2(f)); or it can get permission to collect tax on rental payments. (Colorado also taxes hotel/living accommodations under § 39-26-102(11), but the true object here is equipment rental, so the personal-property rental rules govern.)
• Satellite system, electric water cooler, 3000-gallon water system, trailer-mounted generator + fuel cell — same treatment as the mobile home.
• Bottled water (5 gallons) — not taxable; bottled water is classified as non-taxable food (Reg (39-)26-102.4.5(1)(a)(3)).
• Bulk water delivered by water truck (3000 gallons) — taxable (Colorado Revenue Determination No. 23 (1993); Reg 26-102(15)); whether the specific "delivery charge" is for the water or only transportation is unclear on the facts.
• Diesel fuel — taxed at the supplier level; no additional tax on the company's resale of fuel to end users.
• Transportation charges — presumably not taxable if separable and separately stated; the key factor is whether the lessee has a realistic option to rent the property without using the lessor for transport (e.g., could hire a third party).
• Cleaning fee, sewer pump-out, generator servicing/warranty — taxable if part of the rental and not separable/separately stated. The Department presumes a service is not separable unless the lessee has a realistic option to skip it or get it elsewhere; service/warranty work is taxable unless under a separate contract, with a realistic option, and separately stated.
• Chlorine, enzyme & bacteria tablets — taxable; if the company uses them to maintain the sewer system, the company is the end user and pays the tax (it can recover the cost in the rent).

When in doubt, collect. If it's genuinely unclear whether something is taxable, the company should collect the tax and remit it, and the lessee can apply to the Department for a refund.

What this means for you

Equipment-rental and oilfield-services companies

For your short-term (≤3-year) rentals, you're generally the consumer: pay sales/use tax on what you paid for the gear, and don't charge tax on the rental payments — unless you ask the Department for permission to flip it and collect on the payments. Bought the equipment out of state? You owe Colorado use tax on the full acquisition price, with a credit for tax already paid elsewhere.

Bundled charges live or die on separability

Transportation, cleaning, pump-outs, and servicing are taxable when baked into the rental. To keep an ancillary charge non-taxable, make it genuinely optional (the customer has a realistic option to decline it or buy it from someone else) and separately stated. A "service" the customer can't avoid is treated as part of the taxable rental.

Watch the special line items

Bottled water = exempt food, but bulk water delivered by truck = taxable. Diesel is taxed upstream at the supplier, so don't tax it again on resale. These category quirks are easy to get wrong on a mixed oilfield invoice.

Common questions

Q: I rent equipment day-to-day. Do I charge my customers sales tax on the rent?
A: Generally no, for rentals of three years or less — you're the end user and pay tax on your own purchase of the equipment instead. You can ask the Department for permission to collect tax on rental payments instead, but that's the exception.

Q: I bought the equipment out of state. Do I owe Colorado tax?
A: Yes — use tax on the full acquisition price when you use it in Colorado, with a credit for sales/use tax you already paid another state.

Q: Are delivery, cleaning, and pump-out charges taxable?
A: They're taxable if they're part of the rental and not separable. To keep them non-taxable, the customer must have a realistic option to decline or source them elsewhere, and they must be separately stated.

Q: Is bottled water taxable? What about bulk water?
A: Bottled water is exempt as food. Bulk water delivered by a water truck is taxable.

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, regulations, and determinations:
- § 39-26-102(23), C.R.S. — a "sale" includes a lease/rental; the three-year rule
- § 39-26-102(11), C.R.S. — tax on hotel and other living accommodations
- Department Regulation 39-26-713.2(f) — credit for sales/use tax paid to another state
- DOR Regulation (39-)26-102.4.5(1)(a)(3) — bottled water is non-taxable food
- DOR Regulation 26-102(15); Colorado Revenue Determination No. 23 (01/01/1993) — bulk water delivered by truck is taxable
- Department publication DRP 1002 — special districts, cities, counties, and home-rule jurisdictions

Related Colorado lease/rental letters:
- [[gil-08-020-taxability-of-certain-goods-and-services]] — leases over vs under three years; required vs optional charges
- [[gil-08-023-ruling-request-tax-on-leases]] — taxability of lease charges (amended)
- [[gil-07-007-satellite-receiver-rental]] — lessor/consumer treatment of rented equipment used for marketing

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-013.pdf

Original ruling text

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

GIL-2007-13

XXXXXXXXXXXXX
Attn: XXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
December 4, 2007
Re: rental of various items
Dear XXXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated July 31, 2007, re:
taxability of services. We apologize for the time it has taken to respond to your inquiry.
You state that you provide living quarters for oil drilling operations on a day to day basis. You also rent
accessories, such as water systems, sewer systems, generators, light plants and any other equipment needed
for the drilling location. You attach an invoice with a list of rentals and ask whether the rentals listed are
taxable.
In general, Colorado imposes sales and use tax on the sale of tangible personal property. A “sale” includes a
lease or rental of that property. §39-26-102(23), C.R.S. For rentals that are more than three years in duration,
the lessor must collect from the lessee sales tax on each rental payment. For rentals that are three years or
less in duration, the lessor is considered the end user. Therefore, there is no sales tax due on rental payments
(except as otherwise noted immediately below), but the lessor must pay sales or use tax on the acquisition,
use, storage or consumption of the property. However, the department may, at the request of the lessor who
leases the property for three years or less, allow the lessor to acquire, use, store, or consume the property
without first paying sales or use tax and, in lieu thereof, collect tax on rental payments.
In addition to state sales and use tax, special districts, cities and counties also levy sales and use taxes. See,
Department publication DRP 1002 for a list of special districts, cities and counties that levy sales and use taxes.
You can view and download this publication by visiting our web site at: www.revenue.state.co.us (go to
Taxation > Forms > Businesses > Sales and Use Tax > DRP 1002). Please note that taxes levied by “home
rule” cities and counties are not collected by the department. We encourage you to contact such jurisdictions if
you are doing business within their jurisdiction.
Mobile Home – a mobile home is tangible personal property because it is not permanently affixed to real
property. The rental period appears to be on a day-to-day basis and, therefore, the rental agreement falls
within the rules for leases of three years or less in duration. The company, not the lessee, must pay use tax
(assuming that the property was acquired by your company outside Colorado) on the use of the property in
Colorado. The use tax is based on the full acquisition price of the property. You may claim a credit for sales or
use tax paid to another state. Department Regulation 39-26-713.2(f). Alternatively, and in lieu of this use tax,

the company can request permission from the Department to collect sales tax from the lessee on rental
payments.
I should note that Colorado also taxes the service of providing hotel and other living accommodations. §39-26102(11), C.R.S. It appears, however, that the true object of your company’s business is the rental of equipment
and, therefore, is more properly taxed under the rules governing rental of personal property.
Satellite system – Same response as response to No. 1, above.
Transportation charges – Transportation charges are presumably not taxable if they are separable from the
rental of the property and are separately stated on the invoice. In determining whether a transportation charge
is separable from the rental of the property, the department will consider, among other things, whether the
lessee has a realistic option to rent the product without using the lessor to provide the transportation service
(e.g., lessee has the option of hiring a third-party to transport the property).
Cleaning fee upon return of the trailer – if this service is part of the rental of the mobile home and is not
separable and separately stated on the invoice, then it is taxable. In general, the department will presume that
such service is not separable from the rental of the mobile home if the lessee does not have a realistic option of
obtaining this service from someone other than the company.
Electric Water Cooler – Same as No. 1, above.
Bottled water (5 gallons) – not taxable because bottled water is classified as non-taxable food. See, DOR Reg.
(39-)26-102.4.5(1)(a)(3).
3000 gallon water system – Same as No. 1, above.
Transportation charge for water tank – Same as No. 3, above.
Delivery charge for 3000 gallons load bulk water – It is not clear whether this charge is for the water itself or
only for the transportation of water. Water delivered in bulk by a water truck is taxable. See, Colorado
Revenue Determination No. 23, 01/01/1993; DOR Regulation 26-102(15). See Response No. 3 re:
transportation charges.
Transportation sewer system – Same as No. 3, above.
Chlorine, enzyme & bacteria tablets – Taxable. If the company uses these tablets as part of its service of
maintaining the sewer system, the company is considered the end user of these tablets and the company, not
the lessee, must pay this tax. Although the company is liable for the tax, there is nothing in the tax statutes that
prohibits the company from recovering the cost of the tax in the rental paid by the lessee.
Pump out of sewer system – if this service is part of the rental of the sewer system and is not separable and
separately stated on the invoice, then it is taxable. In general, the department will presume that such service is
not separable from the rental of the sewer system if the lessee does not have a realistic option to not acquire
the service or to acquire the service from someone other than the company.
Trailer mounted generator with additional 180 gallon fuel cell – Same as No. 1, above.
Transportation charge (miscellaneous equipment) – Same as No. 3, above.
Diesel fuel – Diesel fuel is taxed at the supplier level. No additional tax is due on the resale of the fuel by the
company to end users.
Servicing generator – Service and warranty work on rented equipment is taxable unless the service contract is
a separate contract from the rental contract, the lessee has a realistic option to not acquire the service or to
acquire the service from another vendor, and the service charge is separately stated on the invoice.
If there is a reasonable doubt about whether a service or property is taxable, the company should collect the tax
and remit it to the department. The buyer or lessee may apply to the department for a refund.

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,

Office of Tax Policy
Colorado Department of Revenue