Is gas, electricity, and water used in manufacturing exempt in Colorado — and how do R&D, packaging, residential use, nursing homes, and restaurants fit?

Plain-English summary

An engineering firm that does utility studies asked a six-part question about when gas, electricity, and water are exempt for manufacturers, and how related categories are treated.

1. Energy used in manufacturing is exempt. Colorado exempts the sale and use of electricity, steam, wood, nuclear fuel, coal, gas, fuel oil, and coke used for processing, manufacturing, mining (including oil & gas), refining, irrigation, construction, telegraph/telephone/radio communication, street and railroad transport, and all industrial uses (§§ 39-26-102(21), 715(2)(b)). The exemption reaches state, special-district, and state-administered city/county sales/use tax. "Manufacturing" means producing an item of tangible personal property with a distinctive name, character, or use from the raw materials (§ 39-26-709(1)(b)(III)); it begins when raw material stored contiguous to the plant is moved to the first machine and ends when alteration is complete (packaging can be a completion step — FYI Sales 10). Mixed-use facilities must apportion exempt from non-exempt uses (Reg Sales 71): non-exempt uses include parking-lot lighting, office cooling/lighting, lunchrooms, labs, maintenance and computer rooms, lounges, and customer areas. The 75% rule: if exempt use is 75% or more, the utility bills without tax and the taxpayer files a return for the non-exempt portion; if under 75%, the utility bills tax and the taxpayer files a refund claim.

2. R&D and packaging are not "manufacturing." Because manufacturing begins when raw material is moved to the first machine, research & development (which precedes it) and packaging (which follows completion) don't qualify for the energy-for-manufacturing exemption. There's a separate R&D exemption (§ 39-26-602(2)), but it's contingent on a state revenue surplus, covers only tangible personal property used in R&D — so gas, coal, coke, wood, and steam qualify but electricity does not (electricity isn't TPP) — and the legislature suspended it from July 1, 2005 to June 30, 2010, implemented as a refund of state tax (no local). (See FYI Sales 52; FYI Income 22 for the enterprise-zone R&D credit.)

3. Rate and time limits. The Colorado state sales/use tax rate is 2.9% (§ 39-26-106(1)(a)(II)). The statute of limitations for assessments is three years from when the tax was payable (§ 39-26-125) — unless no return is filed, or a false/fraudulent return or evasion — and a refund claim must be filed within three years of payment.

4. Local taxes. State-administered cities, counties, and special districts (listed in DRP 1002) have the same exemptions as the state, but cities/counties may elect to tax certain state-exempt transactions (e.g., residential electricity and gas) (§ 29-2-105). Home-rule jurisdictions administer their own taxes (also listed in DRP 1002).

5. Residential energy is exempt. Gas and electricity for residential use are exempt from state tax (and from state-administered local tax unless the locality elects to tax it) (§ 39-26-715(1)(a)(II)). Water is not exempt. "Residential use" is domestic use in a private home or individual living unit (single meter or master-metered multi-unit). Nursing homes generally qualify if a preponderance of occupants reside there 30+ consecutive days (FYI Sales 66); hospitals do not qualify, and hospital-like or office portions of a nursing facility may not.

6. Exempt organizations and restaurants. Charitable organizations (§ 39-26-713(2)(d)), the U.S. and Colorado governments and their subdivisions, and public/nonprofit private schools (§ 39-26-704) can buy energy tax-free. Restaurants get a partial exemption of up to 55% for gas/electric used to process food for immediate consumption (FYI Sales 30).

What this means for you

Manufacturers and industrial facilities

Your process energy — electricity, gas, steam, fuel — is exempt, but only the part actually used in manufacturing/industrial operations. Run the apportionment: offices, parking lots, labs, lunchrooms, and customer areas are non-exempt. The 75% threshold decides your mechanics — bill-exempt-and-remit vs. pay-and-refund. A utility study that nails the exempt percentage is what makes this work and survives audit.

R&D and packaging operations

Don't assume R&D or packaging energy rides the manufacturing exemption — it doesn't. The separate R&D exemption is narrow, surplus-contingent, excludes electricity, and was suspended through mid-2010. Plan around the manufacturing line (first machine to completed alteration), and look to enterprise-zone credits for R&D if eligible.

Property owners, care facilities, and restaurants

Residential gas and electricity are exempt (water isn't). Nursing homes usually qualify (30-day residency test); hospitals don't. Restaurants can exempt up to 55% of energy used to cook food for immediate consumption. Watch for local elections to tax otherwise-exempt residential energy.

Common questions

Q: Is electricity used in manufacturing taxable in Colorado?
A: No — energy used in manufacturing and industrial processes is exempt from state, special-district, and state-administered local sales/use tax. You must apportion out non-manufacturing uses (offices, parking, labs, etc.).

Q: How does the apportionment work?
A: If 75% or more of the energy is exempt, the utility bills you tax-free and you remit tax on the non-exempt part. If under 75%, the utility bills tax and you file a refund claim for the exempt part.

Q: Do R&D and packaging count as manufacturing?
A: No. Manufacturing starts at the first machine and ends when the product is complete, so R&D (before) and packaging (after) don't qualify for the energy exemption. A separate, suspended R&D exemption may cover some tangible inputs but not electricity.

Q: Is residential energy exempt? What about nursing homes?
A: Residential gas and electricity are exempt (water isn't). Nursing homes generally qualify if most occupants live there 30+ consecutive days; hospitals don't.

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 publications:
- §§ 39-26-102(21), 39-26-715(2)(b), C.R.S. — exemption for energy used in manufacturing/industrial uses
- § 39-26-709(1)(b)(III), C.R.S. — definition of manufacturing and its start/end points
- § 39-26-602(2), C.R.S. — R&D exemption (surplus-contingent; suspended 7/1/2005–6/30/2010)
- § 39-26-106(1)(a)(II), C.R.S. — 2.9% state sales tax rate
- § 39-26-125, C.R.S. — three-year statute of limitations
- § 39-26-715(1)(a)(II), C.R.S. — residential energy exemption
- §§ 39-26-704, 39-26-713(2)(d), C.R.S. — exempt organizations
- § 29-2-105, C.R.S.; DRP 1002 — local taxes and elections
- Reg (39-)26-102.21; Reg Sales 71; FYI Sales 10, 30, 52, 66; FYI Income 22

Related Colorado exemption letters:
- [[gil-07-022-sale-of-co2-and-rental-of-tank-systems]] — the ingredient/processing exemption for manufacturing inputs
- [[gil-07-002-energy-drinks]] — the residential/home-consumption and local-tax-election framework for food
- [[gil-08-018-inquiry-re-sales-and-use-taxes]] — exemption boundaries for consumables

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-024.pdf

Original ruling text

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

GIL-2007-24

XXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
December 4, 2007
Re: Taxability of electricity, manufacturing
Dear XXXXXXXXXX,
This letter is in response to your letters to the Colorado Department of Revenue, dated May 21, 2007, re:
taxability of electricity used in manufacturing. We apologize for the time it has taken to respond to your inquiry.
Issues
1. Is there an exemption to state sales tax or city fees available to manufacturers for the use of gas,
electricity and water in the manufacturing process?
2. If yes, are research and development activities and packaging operations considered manufacturing?
3. What is your sales tax rate and statute of limitations?
4. Can local cities impose their own tax and are they subject to any exemptions?
5. If yes, are nursing homes and apartment buildings considered residential?
6. Are there any other circumstances where utilities could be considered exempt from tax?
Background
You are a professional engineering company that provides utility studies for clients.
Discussion
1. Electricity and gas used in manufacturing is exempt from state and special district sales and use taxes
and state-administered city and county sales taxes.
Colorado exempts the sale and use of electricity, steam, wood, nuclear fuel, coal, gas, fuel oil, and coke when
used for any of the following purposes: processing, manufacturing, mining (including oil and gas exploration and
production), refining, irrigation, construction, telegraph, telephone and radio communication, street and railroad
transportation services, and all industrial uses. §39-26-102(21) and 715(2)(b), C.R.S.
Gas” means natural or manufactured gas used in the production of energy or used in industry to heat
greenhouses, used by industrial plants engaged in manufacturing or used for melting metal in foundries, for
firing brick kilns, or for other industrial uses. Department regulation (39-)26-102.21.
“Manufacturing” means the operation of producing an item of tangible personal property different from and
having a distinctive name, character, or use from raw materials. §39-26-709(1)(b)(III), C.R.S. Manufacturing
begins at the point raw material stored at a location contiguous to the plant site is picked up to be moved

directly to the first machine, and ends at the point alteration of the product is complete. Packaging can be a
completion step in the manufacturing process. Department publication FYI Sales 10.
“Industrial uses” means the use of electricity, coal, gas, fuel oil, coke, or nuclear fuel, in a continuing business
activity of manufacturing or producing tangible personal property or services as set forth in C.R.S. 39-26-104(c),
(d), (d.1) and (d.2). Department regulation (39-)26-102.21
When a manufacturing or industrial facility also uses energy for administrative offices or other non-exempt uses,
the taxpayer must apportion the exempt and non-exempt uses. See, Department Regulation Sales 71 (Sales
Tax Exemption on Industrial Usage). Nonexempt uses of utilities include: parking lot lighting; cooling and
lighting in office portions of a building, lunch rooms, laboratories, maintenance rooms, computer rooms,
lounges, waiting areas and any customer- used areas. Department publication FYI Sales 71. If exempt energy
use is seventy-five percent or more, then the energy utility will bill the taxpayer without assessing sales or use
tax and the taxpayer will file a tax return for the non-exempt use. If exempt usage is less than seventy-five
percent, then the energy utility will bill the taxpayer sales and use tax and the taxpayer files a claim for refund
from the department.
Special districts sales and use taxes and state-administered cities and counties sales taxes apply to energy
sales on the same transactions to which state sales and use taxes apply. §29-2-105, C.R.S.; Department
publication (DRP) 1002.
2. Research and development activities and packaging operations are not considered manufacturing.
The exemption for energy for manufacturing does not include research and development because
manufacturing begins at the point the raw material is stored at a location contiguous to the manufacturing plant.
§39-26-709(1)(b)(III), C.R.S.; FYI Sales 10. Research and development are activities that precede the actual
manufacturing of the tangible personal property.
Similarly, packaging is not part of the process of manufacturing tangible personal property because it follows
after the alteration of the tangible personal property is complete. §39-26-709(1)(b)(III), C.R.S.; FYI Sales 10.
There is, however, another exemption for research and development, but only if there is a surplus of state
revenues for the year the tax is incurred. §39-26-602(2), C.R.S. The exemption applies only to tangible
personal property used in research and development. Electricity is not tangible personal property and,
therefore, it is not exempt under this statute. However, gas, coal, coke, wood and steam are tangible personal
property and, therefore, these items are exempt. In order to qualify for the exemption, the property must be
used in Colorado directly and predominantly for research and development or in a combined activity of research
and development and manufacturing that is exempt pursuant to section §39-26-709 (1), discussed in paragraph
1, above.
The legislature suspended the operation of this exemption beginning July 1, 2005 until June 30, 2010. The
exemption is available after that date, but, again, only if there is a revenue surplus of a certain amount. The
exemption is not available at the time of the sale, use storage, or consumption, but, rather, is implemented as a
refund of state taxes paid. The exemption does not include local sales and use taxes.
See, also FYI Sales 52 (Service Enterprises) for additional discussion of research and development contracts
and custom manufactured products; and FYI Income 22 for tax credits for research and development activities
within an enterprise zone.
3. State sales and use tax rate is 2.9% and there is a 3 year statute of limitation for refunds and
assessments.
The sales tax rate for Colorado is currently 2.9%. §39-26-106(1)(a)(II), C.R.S. The statute of limitations for
assessments is three years from the date the tax was payable (§39-26-125, C.R.S.), unless the taxpayer fails to
file a return, files a false or fraudulent tax return, or otherwise attempts to evade tax (§39-26-125, C.R.S.). A
refund claim must be filed within three years of the date the tax was paid. Department Regulation (39-)21108(1)(b)(i), C.R.S.

4. Cities, counties, and special districts impose sales and sales taxes and are subject to certain
exemptions.
The Department administers the sales tax for certain cities and counties, and the sales and use tax of special
districts. These state-administered local jurisdictions are listed, together with their tax rates, in Department
publication DRP 1002. They have the same exemptions that the state has, but cities and counties have the
option to levy tax on certain transactions that are exempt from state sales and use tax (e.g., electricity and gas
for residential use). §29-2-105, C.R.S. These options are also listed in DRP 1002.
In addition, Colorado has a number of home-rule cities and counties. The sales and use taxes levied by these
jurisdictions are not administered by the department. Home rule jurisdictions are listed on DRP 1002.
5. Residential use of electricity and gas is exempt from state tax, and exempt from state-administered city
and county sales tax, unless the city or county elects to impose a tax.
Gas and electricity are exempt from sales tax when to occupants of residences, whether owned, leased, or
rented by said occupants, for the purpose of operating residential fixtures and appliances that provide light,
heat, and power for such residences. “Gas” includes natural, manufactured, and liquefied petroleum gas,
such as butane, propane, and fuel oils. §39-26-715(1)(a)(II), C.R.S.; Department Regulation 39-26715(1)(a)(II). Water is not exempt from tax.
As noted above, electricity and gas are exempt if for residential use. “Residential use” means the use of gas or
electricity by the individual customer exclusively for domestic purposes such as lighting, refrigeration, cooking,
water heating, space heating and air conditioning, in a private home or individual living unit served through a
single meter or a master metered multi-unit apartment, condominium, townhouse or mobile/trailer home used
exclusively for domestic purposes. Department regulation (39-)26-715(1)(a)(II).
Users in a private home or individual living unit, such as apartments, condominiums, townhouses and
mobile/trailer homes, who are served through a single meter and whose rate has been classified by the
Colorado Public Utilities statute (title 40, articles 1 to 9, C.R.S. or the Colorado Public Utilities Commission’s
regulation as residential, are automatically exempt. Department regulation (39-)26-715(1)(a)(II).
Users in multi-unit apartments, mobile/trailer home parks or condominium and townhouse associations, who are
billed through a master meter and are taking service under a commercial rate may, nevertheless, qualify for this
exemption providing the gas or electricity is used for residential use as defined herein. Department regulation
(39-)26-715(1)(a)(II).
Nursing homes will generally qualify for the residential exemption. They must have a preponderance of
occupants who reside there for 30 consecutive days or longer. See, FYI Sales 66 (Sales Tax Exemption on
Residential Energy Usage). Hospitals do not qualify as residences. Some portion of a nursing facility may not
qualify if it is substantially the same as a hospital, or has other non-exempt facilities such as offices.
6. Sales to exempt organizations and utilities used by restaurant to process food for immediate
consumption are exempt or partially exempt.
Certain entities can purchase tax free goods and services, including gas and electric services. These include
charitable organizations (§39-26-713(2)(d), C.R.S.), the United States government, state of Colorado and its
political subdivisions, and public and non-profit private schools. §39-26-704, C.R.S. There is also a partial
exemption (up to 55%) for gas and electric service to restaurants, but only to the extent that the energy is used
to process food for immediate consumption. See FYI Sales 30 (Gas and Electric Services).
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