Ezel / Tax Rulings / CO
CO GIL 07-019 Sales & Use Tax 2007-12-04

Is a service contract bought together with rented office equipment taxable in Colorado?

Short answer: It depends on whether it's a separate contract. If the equipment rental and the service contract are one bundled deal, the entire consideration is taxable unless the retailer gets Department permission to apportion the taxable and non-taxable parts. If the rental and the service agreement are two genuinely separate and distinct agreements, the service agreement isn't taxed — but the retailer must then pay sales or use tax on the parts it uses to perform the service. (General Information Letter: general guidance only, not binding on the Department.)
Currency note: this ruling is from 2007
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is a Colorado Department of Revenue General Information Letter (GIL) — a general discussion of the tax law that represents the good-faith opinion of Department personnel. A GIL is NOT binding on the Department and CANNOT be relied upon as a ruling by any taxpayer. It does not address sales or use taxes administered by self-collected home-rule cities and counties. This summary is informational only and is not legal or tax advice. Consult a licensed Colorado tax professional about your situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.
View original ruling (PDF)

Plain-English summary

A firm rents office equipment and, with that rental, also bought a service contract from the same lessor/retailer. The retailer charges tax on both the rental and the service contract. The firm asked whether the service contract should be taxed.

The answer depends on whether the service contract is part of the rental or a separate agreement:

  • Colorado taxes the sale and rental of tangible personal property (§ 39-26-104(1)(a); a "sale" includes a rental, § 39-26-102(23)). Services are generally not taxed.
  • If one deal covers both the rental and the servicing of the equipment, the entire consideration is taxable — unless the retailer gets Department permission to apportion the taxable (rental) and non-taxable (service) components (§ 39-26-105(2)).
  • If the rental and the service agreement are two separate and distinct agreements, the service agreement is not taxed (DOR Reg (39-)26-105.2). In that case, the retailer must pay sales or use tax on the property (e.g., parts) it uses to fulfill the service contract.

What this means for you

Customers buying equipment rentals with service plans

Whether you owe tax on a service plan turns on the paperwork: if it's rolled into the rental as one deal, expect the whole thing taxed (absent an approved apportionment). If the service plan is a genuinely separate contract, it shouldn't be taxed. If you think you were taxed on a separable service plan, check how the agreements were structured.

Retailers/lessors offering service contracts

To treat a service contract as non-taxable, keep it a separate and distinct agreement from the rental — or get Department permission to apportion. And remember: once the service contract is non-taxable, you become the consumer of the parts used to perform it and owe sales/use tax on those parts.

The trade-off

Making the service contract separate (non-taxable to the customer) shifts the tax onto the retailer's own purchases of repair parts. Either the customer pays tax on the bundled charge, or the retailer pays tax on the parts — the tax doesn't disappear, it moves.

Common questions

Q: Is a service contract on rented equipment taxable in Colorado?
A: If it's bundled into the rental as one deal, yes — the whole charge is taxable unless the retailer has Department permission to apportion. If it's a separate, distinct agreement, the service contract isn't taxed.

Q: How do I keep the service contract non-taxable?
A: Make it a genuinely separate and distinct agreement from the rental (DOR Reg (39-)26-105.2), or obtain Department permission to apportion the bundled charge.

Q: If the service contract isn't taxed, is there any tax at all?
A: Yes — the retailer must pay sales or use tax on the parts it uses to perform the service.

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 regulations:
- § 39-26-104(1)(a), C.R.S. — sales tax on the sale and rental of tangible personal property
- § 39-26-102(23), C.R.S. — a "sale" includes a rental
- § 39-26-105(2), C.R.S. — apportioning taxable and non-taxable components requires Department permission
- DOR Regulation (39-)26-105.2 — separate and distinct service agreements are not taxed

Related Colorado bundling / service-contract letters:
- [[gil-08-016-software-updates-and-support-services]] — required maintenance taxable even if separately stated; optional support separable
- [[gil-07-013-rental-of-various-items]] — servicing of rented equipment taxable unless a separate contract with a realistic option
- [[gil-08-020-taxability-of-certain-goods-and-services]] — required vs optional bundled charges

Source

Original ruling text

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

GIL-2007-19

XXXXXXXXXXXXX
Attn: XXXXXXXXX
XXXXXXXXXXXXX.
XXXXXXXXXXXXX
December 4, 2007

Re: Taxability of service contracts
Dear XXXXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated August 3, 2007 and
November 15, 2006 re: taxability of service contracts. We apologize for the time it has taken to respond to your
inquiry.
Issue
Are service contracts for rented tangible personal property taxable in Colorado?
Background
You state that your firm rents certain office equipment and, in connection with that rental, also purchased a
service contract from the lessor/retailer. The lessor/retailer collects tax on both the rental of equipment and the
service contract.
Discussion
1. Service contracts are taxable unless the service contract is separate from the rental contract.
Colorado levies sales tax on the sale and rental of tangible personal property. §39-26-104(1)(a) and §39-26102(23), C.R.S. Services, in general, are not subject to sales or use tax. If a sale includes the both the rental
of tangible personal property and servicing of the tangible personal property, then the entire consideration paid
under the contract is taxable, unless the retailer obtains permission to apportion the taxable and non-taxable
components of the sale. §39-26-105(2), C.R.S. If, however, the rental transaction and service agreement are
two separate and distinct agreements, then the service agreement is not subject to tax. DOR Regulation (39)26-105.2. The retailer must pay sales or use tax on property (e.g., parts) used to fulfill the service contract.
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