In Colorado, are restocking fees, passed-through vendor travel/expense charges, on-site training, and equipment rentals subject to sales or use tax?

Plain-English summary

A company asked the Department to address four common business charges. Here's how each comes out under Colorado sales/use tax:

1. Restocking fees — no sales-tax refund if you charge one. Sales tax is a transaction tax, and later events generally don't undo it. The one exception: when a seller accepts a return and refunds the full purchase price and tax, it can take a credit on its next return (§ 39-26-102(5); Regulation (39-)26-102.5). Colorado's rule is that a retailer who charges a restocking fee is NOT entitled to any sales-tax refund, for three reasons: the statute requires refunding the "full" purchase price (a buyer charged a restocking fee got less than full); the refund is really a single transaction in which the seller refunds only part of the price (not a "full refund plus a separate, inseparable restocking service"); and this avoids the difficulty of policing whether a "restocking fee" reflects true repackaging cost versus the buyer's use, depreciation, or just a policy to discourage returns. (Other states split these into two transactions or allow partial refunds; Colorado does not.)

2. Passed-through travel and expenses — generally taxable. Where a vendor charges the company for travel/expenses and the company passes those on to its customers, costs passed on to the ultimate consumer are included in the tax base (§ 39-26-102(12): the price includes materials used and services performed in connection with the sale). Only charges for services or other non-taxable items that are genuinely "separable" from the sale are excluded (A.D. Stores, 997 P.2d 1241). The Department said real specifics would need a private letter ruling.

3. On-site training — depends on separability. Training is a service. If it is separable and separated from the sale of taxable goods/services, it is not taxable (A.D. Stores). Example: a seller of machinery that offers optional training should collect tax only on the equipment. But if the seller requires the customer to buy the training as part of buying the equipment, the training charge is taxable because it isn't separable from the sale.

4. Equipment rental — generally taxable, with a lease-length split. Rentals are generally taxable (§ 39-26-102(23), § 39-26-713):
- Leases over three years: tax is assessed on each lease payment.
- Short-term leases (three years or less): the retailer is the consumer and pays tax when it acquires the property (rather than on each payment). The retailer may instead request permission to buy the property tax-free and collect tax on the lease payments.
- Exemptions that apply to sales also apply to leases — e.g., leasing to a government entity (§ 39-26-704) or leasing exempt therapeutic devices (§ 39-26-717).

What this means for you

If you charge restocking fees

Know the trade-off: in Colorado, the moment you keep a restocking fee (refund less than 100%), you forfeit the sales-tax credit on that return. You don't get to refund the customer 85% and still reclaim the full tax. If preserving the tax credit matters, refund the full price; if you keep a restocking fee, you eat the tax consequence.

Pass-through costs ride into the tax base

Travel, expenses, and third-party costs you fold into a customer's bill for taxable goods are part of the taxable price — separately stating them doesn't automatically exempt them. Only truly separable non-taxable services come out. When the answer matters to a real deal, get a private letter ruling.

Make training (and other services) optional and separate

The recurring Colorado test is separability: an optional service, separately sold, stays untaxed; a service the customer must buy to get the goods is taxable as part of the sale — even if it's listed on its own line. Structure training, installation, and support as genuine options if you want them untaxed.

Leasing equipment? Mind the three-year line

For a short-term lease (≤3 years) you're the consumer and owe tax up front on what you bought (or elect to collect on the rental stream with the Department's permission). For a long-term lease (>3 years) you collect tax on each payment. And remember a lease inherits the same exemptions as a sale — government and exempt therapeutic devices, among others.

Common questions

Q: I charged a restocking fee on a return — can I still get the sales tax back?
A: No. Colorado allows the sales-tax credit only when you refund the full purchase price. A partial refund (because you kept a restocking fee) doesn't qualify.

Q: Are travel and expense charges I pass on to customers taxable?
A: Generally yes — costs passed on to the consumer are part of the taxable price. Only services that are genuinely separable from the sale are excluded. The specifics may warrant a private letter ruling.

Q: Is training taxable in Colorado?
A: It's a service. Optional, separately sold training isn't taxable. Training the customer is required to buy as part of the equipment purchase is taxable because it's not separable from the sale.

Q: How is equipment rental taxed?
A: Generally taxable. Leases over three years are taxed on each payment; short-term leases (three years or less) make you the consumer (pay tax on acquisition, or elect to collect on payments). Sale exemptions apply to leases too.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department, and it expressly invited a private letter ruling for fact-specific items.

Citations and references

Statutes, regulations, and cases:
- § 39-26-102(5), C.R.S. — credit for returned goods only when the FULL purchase price is refunded
- Department Regulation (39-)26-102.5 — credit for returned goods
- § 39-26-102(12), C.R.S. — purchase price includes materials used and services performed in connection with the sale
- § 39-26-102(23) and § 39-26-713, C.R.S. — lease/rental taxation; short-term vs. long-term
- § 39-26-704, C.R.S. (government exemption) and § 39-26-717, C.R.S. (therapeutic-device exemption) — apply to leases as well as sales
- A.D. Stores Co. v. Department of Revenue, 997 P.2d 1241 (Colo. 1999) — separable, separately stated services are excluded from the taxable price

Related Colorado separability/bundling letters:
- [[gil-08-001-telecommunications-computer-software-freight-training-repair]] — separability of training, freight, and repair bundled with a taxable sale
- [[gil-08-016-software-updates-and-support-services]] — required vs. optional maintenance/service charges

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-08-020.pdf

Original ruling text

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

GIL-08-020

August 26, 2008
XXXXXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
Re: taxability of certain goods and services
Dear XXXXXXXXXXXXX,
This letter is in response to your letter, dated February 1, 2008 regarding the taxability of a
variety of goods and services. I apologize that it has taken so long to reply to your request.
The Colorado Department of Revenue provides informational letters as a service to
taxpayers. These letters represent the opinion of knowledgeable and experienced
department staff and can be a valuable resource in making informed decisions regarding
your tax obligations. However, these letters are not binding on the department. §24-35103.5, C.R.S.
Issues
You ask if the following are taxable:
1. Restocking fees.
2. Travel and expenses charged by your vendor and passed on to your customers.
3. Training held on site at the customer’s address.
4. Rental of equipment.
Discussion
Restocking Charges.
Sales tax is due on the sale of a tangible personal property. Because sales tax is a tax on a
transaction, events that occur after the transaction generally do not relieve the seller or buyer
from the obligation to pay, collect, and remit the tax. One exception to this rule is when the
seller accepts the return of the goods and refunds the full purchase price and tax to the
buyer. See, §39-26-102(5) (“The taxpayer may take credit … for an amount equal to the
sales price of property returned by purchaser when the full purchase price thereof is refund
whether by cash or credit.”); DOR Regulation (39-) 26-102.5. Seller claims the credit on its
next sales tax return by subtracting the full purchase price from the net taxable sales line on
the return.

The department does not have a regulation expressly addressing restocking charges. States
differ on how they treat these charges for tax purposes. Some states separate the refund
into two transactions: the first transaction is the refund of the full purchase price and the
second transaction a charge for the service of restocking the goods. Because the restocking
service is not taxable, these states allow a refund of the full amount of tax paid on the original
sale transaction. However, these states require the seller to distinguish between restocking
charges that reflect the cost of repackaging and readying the property for resale (non-taxable
restocking charges) from taxable “restocking charges,” handling charges, or other similar fees
that are charged to reflect the purchaser’s use of the property, a repurchase of the property
by the seller at a lower purchase price, or simply a policy to refund less than the full purchase
price to discourage consumers from returning goods. Whether, and to what extent,
“restocking charges” are assessed for any one or more of these reasons can be confusing,
difficult to determine in an objective manner, and contentious. Finally, other states treat
restocking charges as a reduction in the full purchase price and, therefore, either do not allow
any tax refund (because the full purchase price was not refunded) or allow only a partial tax
refund to the extent of the net purchase price refunded to the buyer (purchase price minus
restocking fee).
In Colorado, a retailer is not entitled to any tax refund if it charges a restocking fee. This
approach is appropriate for three reasons. First, the statute expressly states that the retailer
must refund the “full” purchase price in order to receive a refund of the sales tax. The buyer
who is charged a restocking fee is, in fact, receiving less than a full refund of the purchase
price and, therefore, the express terms of the statute have not been met. The department
assumes the legislature was deliberate in using term, “full” purchase price, to express its
intentions. Had the legislature intended a more expansive refund policy allowing for partial
refunds of tax, the language of subsection 102(5) would have been more general. Compare,
Alabama Revenue Ruling 01-006, 07/03/2001.
Second, although some arguments have been made that there are actually two transactions
taking place – the first being the refund of the full purchase price and the second being a new
and separate transaction for the retailer’s service of restocking - this is not the most natural or
common understanding of the transaction. The refund is a single transaction in which the
buyer returns the goods and the retailer refunds only a portion of the purchase price. In other
words, the retailer does not first issue a full refund and then negotiate a separate transaction
for restocking charges. Nor would creating a separate transaction render a different result.
The refund of less than the full purchase price is inseparable from the restocking fee. The
retailer does not agree to accept the return of the goods without also requiring as a condition
of its refund that the buyer agree to pay the restocking fee. Moreover, the buyer receives no
benefit from the second transaction, so cannot be considered to be entering into a second,
separate, transaction.
Finally, this approach avoids the uncertainty and complexity otherwise encountered by both
the taxpayer and department in determining whether, and to what extent, the restocking fee is
truly a fee for the expense of restocking or, in fact, a fee for the buyer’s use of the property,
depreciation of the goods, or simply a reduction of the full purchase price.
Travel and Expenses
Your company apparently purchases tangible personal property from a vendor who charges
you for travel and other expenses. You pass those charges on to your customers. More
details regarding these transactions would be necessary in order to give any guidance, and

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this guidance is likely to require a private letter ruling rather than a general information
request. In general, however, charges for costs (whether directly incurred or incurred by
third-parties) that are passed on to the ultimate consumer must be included in the calculation
of tax. See, §39-26-102(12) (“[T]he sales tax imposed on the full purchase price of articles
sold after manufacture or after having been made to order and includes the full purchase
price for materials used and services performed in connection therewith,…”). Charges for
services and other non-taxable items that are “separable” from the sale transaction are not
included in the calculation of tax. A.D. Stores v. Department of Revenue, 997 P.2d 1241
(Colo.1999).
Training at customer’s address
As is the case with travel and expenses, more information is necessary in order to provide
specific guidance on the taxability of training. In addition, such guidance is likely to require a
private letter ruling. In general, however, training is a service and, if separable and separated
from the sale of taxable goods or services, is not taxable. A.D. Stores v. Department of
Revenue, 997 P.2d 1241 (Colo.1999). For example, a retailer that sells machinery and, at the
option of the customer, training for use of the equipment, should collect tax only on the
charge for the equipment. However, if the retailer requires the customer to purchase the
training as part of the sale of the equipment, then the charge for training must be included in
the calculation of tax because the training is not separable from the sale of the equipment.
Rental of equipment
Rental of equipment is generally taxable. For leases that are for more than three-years in
duration, the sales or use tax is assessed on each lease payment (as opposed to collected at
the beginning of the lease). For leases that are three-years or less (short term leases), the
retailer is considered the consumer of the goods and, therefore, must pay tax at the time the
retailer acquires the property rather than on each lease payment. The retailer who enters into
a short term lease with a customer can request permission from the department to acquire
the property without paying tax and collect the tax from the customer on the lease payments.
§39-26-102(23) and 713, C.R.S.
Exemptions that apply to the sale of goods also apply to the lease of goods. For example,
the lease of equipment to a government entity is exempt from tax because government
entities are exempt from sales tax when purchasing goods for government use. §39-26-704,
C.R.S. The lease of certain therapeutic devices is exempt because the sale of such
equipment is exempt from tax. §39-26-717, C.R.S. There are many other exemptions.
Please note that the Department of Revenue administers state and state-collected city and
county sales taxes and special district sales and use taxes, but does not administer sales and
use taxes for self-collected home rule cities and counties. Visit our web site at
www.revenue.state.co.us for more information about state and local sales taxes.
Pursuant to state law, the Department will make public a redacted version of this letter. Your
letter requesting this informational letter is not made public. See, §24-35-103.5(13), C.R.S.
The regulation governing private letter rulings and informational letters is available on our web
site at: http://www.revenue.state.co.us/taxstatutesregs/3921reg24-35-103.5.html. I enclose a
proposed redacted version of this letter. Please contact me within 60 days from the date of
this letter if you have any questions, comments or concerns about the redacted letter.
I hope this is helpful. Please feel free to contact me if you have any questions.

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Sincerely,

Office of Tax Policy
Colorado Department of Revenue

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