CO GIL 07-022 Sales & Use Tax 2007-12-04

Is carbon dioxide sold to a retailer to carbonate fountain drinks taxable, and is the rental of the tank system that ships and stores it taxable?

Short answer: The carbon dioxide is exempt — it becomes an ingredient of the soft drink, so the supplier's sale to a retailer is an exempt sale for resale. The shipping tank is also exempt as the container for an exempt ingredient, if it's primarily for shipping the CO2. But a 'tank system' that bundles in other, more-than-incidental equipment makes that part of the rental taxable; the company should separately state the tank vs. other equipment and tax only the latter (and can't understate the taxable part). (General Information Letter: general guidance only, not binding on the Department.)

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 company supplies liquid carbon dioxide and rents the tank systems that store the CO2 used to carbonate fountain drinks at customers' locations. It's been charging tax and passing the cost on, but some customers feel it's a "tax on a tax." It asked whether (1) the CO2 sale and (2) the tank-system rental are taxable.

1. The CO2 is exempt — it becomes an ingredient of the drink. Colorado exempts property that enters into the processing of, or becomes an ingredient or component part of, a manufactured product — and the container, label, or shipping case (§ 39-26-713(2)(e)(I)). For food products, that covers property intended to become an integral part of a food product sold at retail for human consumption, or a chemical/agent that induces a chemical or physical change (or makes the food more marketable) and is consumed in processing. CO2 that becomes part of a soft drink fits. So the supplier's sale to the retailer is an exempt sale for resale (Department Reg (39-)26-102.20 says outright that CO2 a retailer uses to carbonate soft drinks is not subject to sales tax).

2. The shipping tank is exempt; a "tank system" with extra equipment is not. Colorado taxes the sale of tangible personal property, and a "sale" includes a rental (§ 39-26-104(1)(a); § 39-26-102(23)). But § 713(2)(e)(I) exempts the container in which an exempt ingredient is shipped. So if the tank is primarily for shipping the CO2, its rental is exempt (the Department cited Coca-Cola Bottling of Memphis v. Tennessee Dep't of Revenue — tanks shipping CO2 and syrup to retailers aren't taxable). But "tank system" suggests more than just tanks. If the system includes a variety of equipment:

if the other components are merely incidental to the tanks, the whole rental is not taxable;
if they're more than incidental, the rental is taxable — and the company should separately state the tank rental vs. the other equipment and tax only the other equipment.

The Department warned it's improper to understate the taxable rental and overstate the exempt property. And if the CO2 price and tank rental aren't separately stated, tax is computed on the entire price.

What this means for you

Beverage-gas and ingredient-gas suppliers

CO2 (and similar gases) that become part of the product your customer sells are exempt ingredients — sell them tax-free for resale, and don't collect tax you'd then have to refund. The container that ships an exempt ingredient rides along exempt too.

"System" rentals need an itemized invoice

The exemption protects the shipping container, not a whole package of dispensing/processing equipment. If you rent a bundle, separately state the bare tank (exempt) from the other equipment (taxable). Lump it together and the entire rental becomes taxable — and you can't fix that by shifting price onto the exempt line.

The "tax on a tax" concern

Customers worried about double tax are partly right to push back: the CO2 itself shouldn't be taxed (it's a resale ingredient). The live question is the equipment in the tank system, not the gas.

Common questions

Q: Is CO2 sold to carbonate drinks taxable in Colorado?
A: No. It becomes an ingredient of the soft drink, so the sale to the retailer is an exempt sale for resale (Reg (39-)26-102.20).

Q: Is the tank rental taxable?
A: The bare shipping tank is exempt as the container for an exempt ingredient. But a "tank system" that includes more-than-incidental other equipment is taxable as to that equipment — separately state it and tax only that part.

Q: What if I don't separately state the CO2 and the tank?
A: If the tank rental is taxable and you don't separately state the prices, the tax is computed on the entire combined price.

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 cases:
- § 39-26-713(2)(e)(I), C.R.S. — exemption for property that becomes an ingredient/component, plus the container/label/shipping case
- § 39-26-104(1)(a), C.R.S. — imposition of sales tax on tangible personal property
- § 39-26-102(23), C.R.S. — a "sale" includes a rental
- Department Regulation (39-)26-102.20 — CO2 used by a retailer to carbonate soft drinks is not taxable
- Coca-Cola Bottling of Memphis v. Tennessee Dep't of Revenue (Tenn. 1993) — tanks shipping CO2/syrup not taxable

Related Colorado ingredient / rental / resale letters:
- [[gil-07-024-taxability-of-electricity-manufacturing]] — manufacturing inputs and the processing exemption
- [[gil-07-013-rental-of-various-items]] — separating taxable from non-taxable components of a rental
- [[gil-08-033-xxxxxxxxxxxxxxxxx]] — sale-for-resale / wholesale framework

Source

Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-022.pdf

Original ruling text

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

GIL-2007-22

XXXXXXXXXXXXX.
Attn: XXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
December 4, 2007

Re: sale of CO2 and rental of tank systems
Dear XXXXXXXXXX:
This letter is in response to your letter to the Colorado Department of Revenue, dated June 25, 2007, re:
applicability of sales tax to sale of CO2 and rental of tank systems. We apologize for the time it has taken to
respond to your inquiry.
Issue
1. Is the sale of carbon dioxide taxable?
2. Is the rental of tank systems taxable?
Background
You state that your company is in the business of supplying liquid carbon dioxide along with the rental of tank
systems that stores the carbon dioxide used to carbonate fountain drinks located at your customers’ locations.
It is not clear from your letter what you mean by a “tank system.” I assume that, among other things, the tanks
in which the carbon dioxide is shipped to the customer are part of the tank system. You have been collecting
the tax and passing that cost on to customers. However, some of your customers feel that this is a tax on a tax.
Discussion
1. The sale of carbon dioxide to a retailer who uses the gas to carbonate soft drinks is exempt from tax.
The sale of carbon dioxide which becomes an integral part of a soft drink is exempt from taxation. Specifically,
§39-26-713(2)(e)(I), C.R.S., provides that:
(I) The storage, use, or consumption of tangible personal property by a person engaged in the
business of manufacturing or compounding for sale, profit, or use any article, substance, or commodity,
which tangible personal property enters into the processing of or becomes an ingredient or component
part of the product or service that is manufactured, compounded, or furnished, and the container, label,
or the furnished shipping case.
(II) As used in subparagraph (I) of this paragraph (e) with regard to food products, tangible personal
property enters into the processing of such products and is therefore exempt from taxation when:
(A) It is intended that such property become an integral or constituent part of a food product that is
intended to be sold ultimately at retail for human consumption; or

(B) Such property, whether or not it becomes an integral or constituent part of a food product, is a
chemical, solvent, agent, mold, skin casing, or other material; is used for the purpose of producing or
inducing a chemical or physical change in a food product or is used for the purpose of placing a food
product in a more marketable condition; and is directly utilized and consumed, dissipated, or destroyed,
to the extent it is rendered unfit for further use, in the processing of a food product that is intended to be
sold ultimately at retail for human consumption.
Such a sale by a supplier to a retailer is an exempt sale for resale. See, Department Regulation (39-)26-102.20
(sale by a supplier of carbon dioxide used by the retailer for the carbonation of soft drinks is not subject to sales
tax). You can view and download this regulation by visiting our web site at:
www.revenue.state.co.us (go to Taxation > Publication and Resources > Regulations > Final Tax Regulations >
Sales and Use Tax > Regulation (39-)26-102.20)
2. Tanks used to ship non-taxable carbon dioxide are also not taxable. It is not clear whether the tank system
includes equipment other than the shipping tanks.
It is not clear whether the rental of the tanks is taxable based on the limited facts set forth in your letter. In
general, Colorado levies a tax on the sale of tangible personal property. §39-26-104(1)(a), C.R.S. A “sale”
includes the rental of such property. §39-26-102(23), C.RS. However, subsection 713(2)(e)(I), quoted above,
exempts the container in which an exempt ingredient is shipped. If the tank system you rent is primarily for the
shipping of the carbon dioxide, then the rental of the tank is exempt. See, for example, Coca Cola Bottling of
Memphis v. Tennessee Department of Revenue, Docket No. 02S01-9111-CH-00054 (93343-2 R.D. and 932992 R.D. Below), Tennessee Supreme Court (1993) (tanks used to shipped carbon dioxide and syrup to retailers
are not taxable). However, “tank system” suggests that you provide more than just tanks for shipment. If the
tank system includes a variety of equipment, then the rental of the tank system is taxable. If the other
components can be characterized as merely incidental to the tanks, then the rental is not taxable. If the other
equipment is more than incidental, you might consider separately stating on the invoice the rental price for the
tanks and other equipment, and calculate the tax only on the rental of the latter. Please note that it is improper
to understate the rental price for the taxable rental and overstate the rental price for the exempt property.
If the tank rental is taxable and if you separately state the price for the carbon dioxide and the rental of the tank
system, then you should charge tax only on the rental. If the prices for the carbon dioxide and tank rental are
not separately stated, then the rental tax is computed on the entire price (i.e., the prices for both the carbon
dioxide and tank rental).
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