When a contractor builds a telecommunications tower attached to a carrier's property, who owes sales/use tax on the materials—and does it change with a lump-sum vs. time-and-material contract?
Plain-English summary
A representative asked how Colorado sales/use tax applies when a contractor (and subcontractors) erects telecommunications towers for telephony companies, attaching the towers to the carrier's owned or leased real property. The Department laid out the contractor tax framework:
The general rule: contractor = consumer
A contractor is generally the consumer of the building materials and supplies it uses. When material loses its identity as tangible personal property by becoming an integral and inseparable part of the realty — irremovable without damage to the premises (Regulation 26-102.15) — the contractor pays sales tax when it buys the material (or use tax if bought out of state and brought in). The contractor's later transfer of the completed improvement to the owner is not a taxable transaction.
Is the tower realty or still TPP? (a fact-intensive question)
Whether a tower "loses its identity" and becomes part of the realty is decided on the facts, weighing: how physically integrated it is and how much removal would damage the building; how much it benefits the real property generally; and the intent of the parties (Raynor Door; International Paper v. Cohen; Andrews v. Williams; Updegraff v. Lesem). The Department said it couldn't resolve this on the facts given — it's fact-intensive and not well-suited to an information letter. One important tell: the Department will treat the tower as TPP if the carrier depreciates it as TPP for federal income tax (equitable estoppel — Colorado Revenue Determination No. 79). (Other states split on whether comm towers are TPP.)
Two exceptions: contractor = retailer
The contractor is treated as a retailer (not consumer) — meaning it buys materials tax-free for resale and then collects tax from the owner — in two situations:
- The tower does NOT lose its identity as TPP. Then the contractor resells the tower to the owner; the owner is the consumer, and the contractor collects sales tax from the owner.
- Time-and-material contract. The contractor's purchase of materials is an exempt wholesale sale, and its sale of the materials to the owner is taxable on the marked-up cost of the materials. But the contractor must still pay use tax on (a) materials not separately stated in the contract, and (b) materials not transferred to the owner that it uses/consumes in performing the contract.
(By contrast, under a lump-sum contract where materials become part of the realty, the contractor is the consumer and pays tax on acquisition.)
Subcontractors
A subcontractor is taxed the same way as a general contractor: consumer under a lump-sum contract for materials that become realty (pays tax on acquisition; transfer to the GC isn't taxable), but a retailer if the materials stay TPP or the job is time-and-material. See FYI Sales 6 and 62 on construction contracts and local tax.
What this means for you
Contractors and subcontractors
Two variables drive your tax: (1) does what you install stay tangible personal property or become part of the real estate, and (2) is your contract lump-sum or time-and-material. If it becomes realty under a lump-sum deal, you're the consumer — pay tax on your purchases, don't charge the owner. If the item stays TPP, or you're on a time-and-material contract, you're a retailer — buy for resale, then collect tax from the owner (on marked-up materials for T&M), and watch the use-tax traps on non-separately-stated or self-consumed materials.
The federal-depreciation tell
If your customer (the carrier) depreciates the tower as tangible personal property on its federal return, expect the Department to treat the tower as TPP — which pushes you into retailer treatment. Align your sales-tax position with how the asset is actually treated for income tax.
When it's genuinely unclear, get a ruling
Whether a specific tower is realty or TPP is fact-intensive; the Department declined to decide it in this letter. For a binding answer on your towers and contracts, request a private letter ruling, and remember home-rule cities/counties run their own construction-tax rules (FYI Sales 6 and 62).
Common questions
Q: Who pays sales tax on materials for a tower that becomes part of the real estate?
A: The contractor, as the consumer — it pays tax when it buys the materials, and its transfer of the finished tower to the owner isn't a taxable sale (the typical lump-sum case).
Q: When does the contractor instead collect tax from the owner?
A: When the tower stays tangible personal property, or when the work is under a time-and-material contract. Then the contractor is a retailer: it buys materials tax-free for resale and collects tax from the owner.
Q: How is tax figured on a time-and-material contract?
A: On the marked-up cost of the materials sold to the owner — but the contractor still owes use tax on materials not separately stated and on materials it consumes rather than transfers.
Q: How do I know if the tower is realty or TPP?
A: It's fact-intensive (physical integration, damage on removal, benefit to the realty, intent of the parties). A strong indicator: if the carrier depreciates the tower as TPP for federal income tax, the Department will treat it as TPP.
Q: Are subcontractors treated differently?
A: No — the same rules apply to subcontractors as to general contractors.
Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance only, not binding, and it expressly did not decide whether these towers are realty or TPP.
Citations and references
Statutes, regulations, and cases:
- § 39-26-104(1)(a); § 39-26-202(1)(a), C.R.S. — sales/use tax on tangible personal property
- Department Regulation 26-102.15 — TPP that becomes an integral, inseparable part of realty is not taxable
- Raynor Door, Inc. v. Charnes, 765 P.2d 650 (Colo. 1988)
- International Paper Company v. Cohen, 126 P.3d 222 (Colo. 2005)
- Andrews v. Williams, 173 P.2d 882 (Colo. 1946); Updegraff v. Lesem, 62 P. 342 (Colo. App. 1900)
- Colorado Revenue Determination No. 79 (1999) — estoppel where the taxpayer depreciates towers as TPP
- Department publications FYI Sales 6 and 62 (construction contracts; local tax)
Contractor / consumer cousins: [[gil-09-002-colorado-sales-and-use-tax]], [[plr-10-006-private-letter-ruling]], [[gil-09-019-use-tax-display-items]].
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-08-009.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-2008-9
XXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
February 28, 2008
Re: Taxability of telecommunications tower
Dear XXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated November 27,
2007, re: taxability of telecommunications tower. We apologize for the time it has taken to respond to
your inquiry.
Issues
You submitted the following questions:
1. Is the transfer of a leasehold improvement attached to realty subject to taxation?
2. Can a subcontractor purchase exempt from tax, qualified telecommunications equipment
billed to the general contractor on a time and material contract or lump sum contract?
3. Can the general contractor purchase exempt from tax, qualified telecommunications
equipment billed to a telecommunications company on a time and material contract or lump
sum contract?
Background
You represent a client who contracts with telephony companies to erect telecommunications towers.
The towers are attached to the real property or structures owned or leased by the telephony
company.
Discussion
1. Except as otherwise noted, a contractor is considered the consumer of building materials and
supplies and must pay tax on its purchase or use of such property. The subsequent transfer to the
owner of the completed building or improvement is not a taxable transaction.
It is not clear whether you are asking whether the contractor incurs a tax obligation when it transfers
to the telephone company title to a tower the contractor constructed on real property or structure
either owned or leased by the telephone company; or whether the transfer by the telephone company
of its leasehold interest in the real property or structure on which the towers are place is a taxable
transaction. Given the nature of your other questions, I assume you are asking the former question.
I also assume that the contractor transfers title to the tower to the telephone company at the
completion of construction and installation.
In general, Colorado imposes sales or use tax on the sale, use, storage, and consumption of tangible
personal property. §39-26-104(1)(a) and 202(1)(a), C.R.S. (tax levied on tangible personal property).
However, tangible personal property that loses its identity when it becomes an integral and
inseparable part of the realty, irremovable without damage to the premises, is not taxable.
Department Reg. 26-102.15.
A contractor using a lump sum contract is considered the consumer of the building materials if the
material loses its identity as tangible personal property and becomes an integral and inseparable part
of the realty. As the consumer, the contractor must pay sales tax when it acquires the property from
suppliers (or use tax if the property is purchased out-of-state and brought into Colorado). The
subsequent transfer of the property to the owner is a non-taxable transaction.
The Department will consider a number of factors to determine whether building material is an
inseparable part of the realty. These factors include: the extent to which the component is physically
made part of the building and the extent to which the building would be damaged by removal of the
component; the extent to which the component benefits the real property generally; and the intentions
of the parties. See, generally, Raynor Door, Inc. v Charnes, 765 P.2d 650 (Colo. 1988) (tangible
personal property does not include property that loses its identity when it becomes “an integral and
inseparable part of the realty, nonremoveable without damage to the premises,” citing Department of
Revenue Regulation 26-102.15, 1 Code Colo. Reg. 201-4; International Paper Company v. Cohen,
126 P.3rd 222 (Colo. 2005) (tangible personal property becomes nontaxable real property when it
“loses its identity by becoming an integral and inseparable part of the realty, and is removable only
with substantial damage to the premises.”); Andrews v. Williams, 173 P.2d 882, 883 (Colo. 1946);
Updegraff, et al. v. Lesem, 62 P. 342, 345 (Colo. App. 1900) (holding that mining machinery and
materials were not real property, no matter how firmly attached to the land, because they were
installed for the purpose of carrying on the business of working a mine); Marcum, Inc. v. State Tax
Commission of the State of Idaho, Docket No. 90030, Idaho District Court Ada (1990) (intention of the
parties is important factor when determining the nature of the property).
The department will treat the property as tangible personal property if the telephone company treats
the tower as tangible personal property for purposes of federal income tax (e.g., deducts depreciation
expense for the towers). See, Colorado Revenue Determination No. 79, 01/01/1999 (taxpayer
equitably estopped from claiming television broadcast towers were not tangible personal property
when taxpayer claimed depreciation expenses for the towers on its federal income tax return).
There is not sufficient information in your letter to allow us to determine whether the towers are so
permanently affixed to real property that they lose their identity as tangible personal property. This is
a fact-intensive determination and one not particularly suited for resolution in an informational letter
such as this. For your information, some states have concluded, based on an extensive review of the
facts, that communication towers are not tangible personal property. See, South Carolina Private
Letter Ruling No. 05-4, 09/22/2005; California Sales Tax Counsel Rulings No. 330.2101. But, see, All
City Communication Company, Inc. and Waukesha Tower Associates v. State of Wisconsin
Department of Revenue, 01-CV-2337, 03/20/2002 (commercial broadcast tower is tangible personal
property).
There are two exceptions to the general rule that the contractor is the consumer of the building
materials and, therefore, liable for the tax. If the tower does not lose its identity as tangible personal
property when incorporated into real property, then the contractor is considered a retailer, not a
consumer, of the property. The contractor’s purchase of building materials from a supplier is an
exempt wholesale sale because the property will be resold to the owner. The building owner is the
consumer, and the contractor must collect sales tax from the owner.
Secondly, a contractor is treated as the retailer, not the consumer, of building materials if the
contractor uses a time and material contract. The contractor’s purchase of materials from suppliers is
an exempt wholesale sale. The subsequent sale of the materials by the contractor to the owner is a
taxable transaction and the tax is calculated based on the marked up cost of the materials. However,
the contractor must pay use tax on (1) materials not separately stated in the contract and (2)
materials that are not transferred to the owner and are used or consumed in the performance of its
contractor’s contract.
2. Except in the case of a time and material contract, a subcontractor, like a contractor, is treated as
the consumer of the building materials and supplies and must pay tax on the acquisition of such
property; but the transfer of such property from the subcontractor to the general contractor is not a
taxable transaction.
A subcontractor incurs tax obligations in the same manner as a general contractor. For example, a
subcontractor using a lump sum contract is generally treated as the consumer of building materials
that lose their identity when incorporated into real property and, therefore, the subcontractor must pay
tax on the acquisition or use of such materials. On the other hand, a subcontractor is a retailer, not
the consumer, of such materials if the materials do not lose their identity as tangible personal property
when affixed to real property or if the materials are sold pursuant to a time and material contract.
See, generally, department FYIs Sales 6 and 62 for a discussion of construction contracts and how
local sales and use taxes are collected on construction projects. You can view and download these
publications and a variety of other tax publications, forms, and instructions from our web site by
visiting us at: www.revenue.state.co.us and go to “Taxation” > FYIs > Sales Tax > FYIs Sales 6 and
62.
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