For an equipment lease, are the purchase option, insurance premiums, documentation fees, late-payment fees, and reimbursed personal property taxes subject to Colorado sales/use tax?

Plain-English summary

Amended letter. The Department first answered this in a GIL dated October 6, 2008, then revisited it and issued this amended version on April 29, 2013. The amendment reversed one conclusion: late-payment fees are now treated as not taxable (the 2008 letter had said they were). The PDF contains both letters; this summary follows the amended conclusions.

An equipment lessor asked whether six lease-related items are subject to Colorado sales/use tax. Colorado taxes leases of tangible personal property:
- Short-term leases (3 years or less): the lessor is the consumer and pays tax when it acquires the property — unless it gets the Department's prior permission to instead collect tax on the lease payments.
- Long-term leases (more than 3 years): the lessor collects tax on each lease payment (§ 39-26-102(23), § 39-26-713(1)).

1. Leases with a purchase option (fair-market or nominal) — taxable. Both true leases and "finance" leases (credit sales) are subject to tax, and the purchase-option price is taxable — whether fair market or nominal — because it's consideration paid to acquire the property. A "finance lease" here means a sale disguised as a lease: the lessee can't terminate early, takes on ownership-type risks (loss, insurance, property tax, maintenance, depreciation deduction), and buys the property at the end for nominal or below-market value (UCC test, § 4-1-203; In re Mesa Refining). Title doesn't have to pass to create a taxable sale (§ 39-26-111(1); § 39-26-102(10)). Because Colorado taxes both leases and credit sales, you usually don't have to characterize the deal — except on transfer: when a true lease is assigned to a third party, the lessee's tax obligation continues and the transferee collects/remits tax on the remaining payments; when a finance lease is assigned, the seller's tax obligation accelerates — the seller is deemed to have received full consideration (§ 39-26-111(2)) and must remit the entire remaining balance of tax (so a later option exercise isn't taxed again).

2. Insurance premiums — taxable only if inseparable. Under A.D. Stores (19 P.3d 680), separable services aren't taxed. If the lessee could buy insurance from someone other than the lessor and the premium is separately stated, it's separable and not taxable — even if the lessee chooses the lessor's insurance.

3. Documentation fees — taxable. A doc fee is part of the lessor's overhead/cost of doing the lease, so it's inseparable and included in the taxable price (§ 39-26-102(12)). Unlike insurance, the lessee can't get it elsewhere.

4. Late-payment fees — NOT taxable (the amended conclusion). Under Regulation 39-26-102.7(a)(4), a charge on an unpaid balance isn't part of the purchase price unless it's rolled into the principal of a promissory note. A late fee that reflects the vendor's carrying cost of money is essentially a finance charge, so it's not taxable if separately stated from the unpaid principal. (This is the change from the 2008 letter, which had included late fees in the base.)

5. Reimbursed business personal property tax — taxable. Colorado counties may levy a business personal property tax, which falls on the owner (the lessor). If the lease makes the lessee reimburse the lessor for it, that reimbursement is included in the sales tax base. Colorado excludes direct federal taxes from the base but has no exclusion for reimbursed property taxes — and unlike insurance, property tax is an unavoidable cost inseparable from the lessor's rental, so it stays in.

What this means for you

Equipment lessors

Build your tax handling around three buckets: (a) the rental stream and any purchase option are taxable (option price counts whether nominal or fair-market); (b) doc fees and reimbursed property taxes ride into the taxable base because they're inseparable lessor costs; (c) optional, separately stated insurance and separately stated late-payment fees stay out of the base. Watch the 3-year line for whether you pay tax up front (short-term, lessor is consumer) or collect on each payment (long-term).

If you assign or factor leases

The true-lease vs. finance-lease characterization is mostly irrelevant to whether tax applies, but it's decisive on timing when you transfer the deal. Assigning a finance lease accelerates your entire remaining tax liability (you're deemed paid in full); assigning a true lease shifts ongoing collection to the transferee. Know which you have before you sell the paper.

Make insurance genuinely optional and separate

Insurance escapes tax only if the lessee has a real alternative source and you separately state it. Bundle it as mandatory, or fold it into the rental, and it becomes a taxable, inseparable charge — the same separability test from A.D. Stores that governs doc fees and property-tax reimbursement.

Note the amendment on late fees

If you're relying on older guidance, the rule changed: separately stated late-payment fees that reflect carrying cost of money are not taxable. Treating them as finance charges (kept off the principal) is what keeps them out of the base.

Common questions

Q: Is the purchase-option payment at the end of a lease taxable?
A: Yes — whether it's a fair-market or nominal amount, it's consideration to acquire the property and is taxable.

Q: Are insurance charges on my lease taxable?
A: Only if inseparable. If you can buy the insurance elsewhere and the lessor separately states it, it's not taxable even if you choose the lessor's coverage.

Q: What about the documentation fee?
A: Taxable. It's part of the lessor's overhead in doing the lease, inseparable from it, so it's in the tax base.

Q: Are late-payment fees taxed?
A: No, under the amended letter — when they reflect the vendor's carrying cost of money and are separately stated from the unpaid principal (treated like a finance charge).

Q: My lease makes me reimburse the lessor's property tax — is that taxed?
A: Yes. Reimbursed business personal property tax is an unavoidable, inseparable lease cost and is included in the sales tax base (unlike optional insurance).

Q: Does it matter if my deal is a "true lease" or a disguised sale?
A: For whether tax applies, usually not — Colorado taxes both. It matters mainly for timing when the lease is assigned: a finance-lease transfer accelerates the full remaining tax.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department, and it states the Department made no specific determination.

Citations and references

Statutes, regulations, and cases:
- § 39-26-102(23) and § 39-26-713(1), C.R.S. — lease taxation; short-term (lessor is consumer) vs. long-term (collect on payments)
- § 39-26-111, C.R.S. — credit sales; tax on installment payments without title passing; acceleration of tax on transfer of a finance lease (§ 39-26-111(2))
- § 39-26-102(10), C.R.S. — "sale" includes installment and credit sales
- § 39-26-102(12), C.R.S. — purchase price includes services performed in connection with the sale/lease (documentation fee)
- § 4-1-203, C.R.S. — UCC test distinguishing a true lease from a credit sale/security interest
- Department Regulation 39-26-102.7(a)(4) — a charge on an unpaid balance is not part of the purchase price (late-payment/finance charge)
- A.D. Stores Co. v. Department of Revenue, 19 P.3d 680 (Colo. 2001) — separable services are not taxable

Related Colorado lease/separability letters:
- [[gil-08-020-taxability-of-certain-goods-and-services]] — equipment rental basics and the separability test for services
- [[gil-08-011-hostess-dollars]] — separability of transportation/shipping under A.D. Stores

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-08-023.pdf

Original ruling text

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

GIL-08-023 (Amended)
April 29, 2013
XXXXXXXXXXXXXXXX
ATTN: XXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX

Re: Ruling Request - tax on leases
Dear XXXXXXXXXX,
The Department previously provided you a general information letter (GIL-08-023) dated
October 6, 2008. The Department has had an opportunity to revisit this issue and has
concluded that late payment fees are not included in the purchase price, and therefore, are not
subject to sales or use tax. This general information letter supersedes our October 6,2008
general information letter.
Issue
You asked whether the following types of transactions are subject to sales and/or use tax.

1.
2.
3.
4.
5.
6.

Leases with a fair market value option.
Leases with a nominal value option
Insurance premiums
Documentation fees
Late payment fees
Personal property taxes assessed against your company, but subject to
reimbursement under the lease
Discussion

1. Taxability of leases with either a market value purchase option or nominal value
   purchase options.
   1
   Colorado levies sales and use tax on leases of tangible personal property. In general, a
   lessor must pay sales or use tax when it acquires the property if the lessor intends
   1

§ 39-26-102(23) and 713(1), C.R.S.

to lease the property to a lessee for three years or less, unless the lessor obtains prior
permission from the Department to collect the tax on lease payments. In contrast, the
lessor must collect the tax on each lease payments, rather than pay tax at the time of
lessor's acquisition of the property, if the lessor leases the property for more than three
years.
In some instances, a lease is not a "true" lease, but a credit sale in which the lessor
retains title to the property until the lessee completes the "lease" payments. These
leases are sometimes referred to in tax literature as a "finance" lease or
"capital" lease.2 True leases and finance leases are similar in that both are subject to
state and state-administered sales and use taxes. Moreover, the price paid on a
purchase option, whether at fair market value or a nominal price, is taxable. This is
because the option payment is consideration paid in acquisition of the property.3
However, there are a few important differences in how tax is administered for these two
types of leases, particularly with respect to application of § 39-26-111, C.R.S. (Credit
Sales). As noted above, a finance lease is not a true lease but, rather, a credit sale.
The Colorado UCC sets forth criteria to distinguish between a true lease and a credit
sale subject to a security interest. See, § 4-1-203, C.R.S. In general, a "lease" is a
credit sale if the buyer/lessee cannot terminate the transaction before it expires. The
buyer also often assumes all or many of the responsibilities typical of ownership, such
as risk of loss, insurance, property taxes, maintenance, and claims a depreciation
expense on its federal income tax return. The seller/lessor in a finance lease creates a
security interest in the property during the term of the "lease," typically by retaining at
least nominal title to the property. At the expiration of the finance lease, buyer typically
"purchases" the property for nominal consideration or for less than fair market value.
See, In re Mesa Refining, Inc., 52 Bankr. 359 (Bankr. D. Colo. 1985). See,
also, Lease Equipment Company of Maryland, Inc. v. Ala. Dept. Rev., Admin. Law Div.,
Dkt. No. S. 06-558, 02121/2007. The facts of each case should be carefully examined
to determine the appropriate characterization of the transaction. See, § 4-1-203(1),
C.R.S.

2 It 1s helpful to note some potential confusion regarding terminology. The Colorado Uniform Commercial
Code (CUCC) regulates, among other things, the rights and obligations of parties to what is referred to as
a "finance lease." See, generally, § 4-2.5-103(1 )(g), C.R.S. A CUCC finance lease is typically a three-party
transaction involving a finance company, supplier, and buyer. The requirements of CUCC relating to "finance
leases" apply only to true leases and do not apply to sales disguised as leases. See Official
Comments, § 4-2.5-103(1 )(g), C.R.S. See, Official Comment to § 4-2.5-103(1 )(g) ("For a transaction to
qualify as a finance lease it must first qualify as a lease. Section 2A-103(1)U) (§ 4-2.5-103(1)U), C.R.S.J...
This definition (of a finance lease] focuses on the transaction, not the status of the parties; to avoid
confusion it is important to note that in other contexts, e.g., tax and accounting, the term finance lease has
been used to connote different types of lease transactions, including leases that are disguised secured
transactions. M. Rice, Equipment Financing, 62-71 (1981)."). Conversely, a Finance Lease is a sale
disguised as lease and, therefore, does not include a "finance lease" as that term is used in the CUCC.
3
§ 39-26-102(5) and (7)(a) and 39-26-102(5) and (7)(a), C.R.S (tax computed based on
consideration
paid by purchaser).
2

Although passage of title often signals that a sale has occurred for purposes of the
CUCC, title passage is not required in order to create a sale for tax purposes. In
Colorado, title does not have to pass from seller to buyer in order to create a taxable
sale. See, § 39-26-111(1), C.R.S. ("[Tax is due on installment payments on a] sale on
credit, or a contract for sale wherein it is provided that the price shall be paid in
installments and title does not pass until some future date ..."); § 39-26-102(10) (a
"sale" includes installment and credit sales); see, also, § 4-1-203, C.R.S. (credit sales
disguised as a "lease").
Other states have adopted substantially the same approach. See, e.g., Cal. Code Reg.
1641(b) (finance lease treated as credit sale); California Taxation Code Section 6006.3
and California State Board of Equalization Regulation 1660(a)(2)(A), Title 18, California
Code of Regulations; California FTB Legal Ruling No. 419, 12/03/1981; Massachusetts
Department of Revenue, LR 01-8, 9-11-2001; Nevada Admin. Code 372.086
(Finance Lease is a sale); West Virginia Code of State Rules 110-15-129 (Leases of
Tangible Personal Property).
As noted above, it is not always necessary to determine whether a transaction
is
a lease or a credit sale because Colorado levies sales and use tax on both leases and
sales. However, under certain circumstances, it will be important to determine the type
of transaction at issue because there are important differences in how the tax, including
the tax on the purchase option, is administered. The principal difference occurs when a
seller/lessor assigns, factors, or otherwise transfers its interest in a finance lease.
When a true lease is transferred to a third party, the lessee's obligation to pay tax
continues (including the tax on the option purchase price) and the third-party transferee
undertakes the obligation to collect, report, and remit the tax due on the remaining
installment payments. In contrast, a transfer of a finance lease to a third party
accelerates the seller's/lessor's tax obligation and the seller must remit to the
Department the entire balance of tax due. This is because, pursuant to § 39-26-111(2),
the seller is deemed to have received full consideration from the transferee. See, § 3926-111(2). Therefore, if the purchase option is exercised after the finance lease is
assigned, the additional consideration is not taxable because the seller will have
already paid the tax in full at the time of transfer.
2. Insurance premiums.
Insurance premiums charged by the lessor are included in the calculation of the sales
tax if the premiums are inseparable from the rental of the property. In A.D. Stores v.
Department of Revenue, 19 P3d 680 (Colo.2001), the Colorado supreme court held
that services that are separable from the sale of tangible personal property are not
taxable. Inseparable services are generally those that the customer has no realistic
option but to acquire from the retailer. Therefore, if the lessee has the option to
purchase insurance from a party other than the lessor, then the insurance premium is
considered separable from the sale of the property and is not taxable, even if the
lessee elects to purchase insurance through the lessor, but only if
the insurance premium is separately stated in the contract or invoice. Compare,

3

e.g., Tri-City Rentals, Inc. d/b/a Hertz Rent-A-Car vs. Joe 8. Huddleston (Tennessee
07/01/1991).
3. Documentation Fee
It is not clear what is meant by documentation fee. I assume this is a service fee charged to
the lessee by either the lessor or by a finance company to the lessor who passes the fee
onto the lessee. Although services are generally not taxable in Colorado, Colorado does
'impose a sales tax on charges for services rendered in connection with the sale or lease of
tangible personal property. Section 39-26-102(12), C.R.S., states in pertinent part,
"the full purchase price of article sold after manufacture or after having been
made to order and includes the full purchase price for material used and the
service performed in connection therewith, .... Except as otherwise provided
..., the sales price is the gross value of all materials, labor, and service, and
the profit thereon, included in the price charged to the user or consumer."
A documentation fee is part of the retailer's I lessor's overhead cost incurred in connection
with the lease and is, therefore, included in the calculation of sales tax. See, e.g., California
Sales Tax Counsel Ruling No. 330.1 874.200 (bank's documentation fee passed on to
lessee by lessor included in sales tax calculation). This is in contrast to insurance that a
purchaser may have the option to obtain from sources other than the lessor.
The documentation fee is inseparable from the lease and, therefore, included in the tax
calculation. See, A.O. Stores v. Department of Revenue, 19 P3d 680 (Colo.2001);
compare, also, Ve/de Ford Sales, Inc. v. The Department of Revenue., 136 Ill App 3d
589 91 Ill Dec 375 483 NE2d 721 (IL 1985).
4. Late Payment Fee
In Department Regulation 39-26-102.7(a)(4), we state that an amount charged on an unpaid
balance of a purchase price is not part of the purchase price unless the amount is included
in the principal amount of a promissory note. Late payment fees that reflect the vendor's
carrying cost of money are substantially the same as a finance charge. Therefore, a late
payment fee, if assessed to reflect the vendor's carrying cost of money, is not subject to
sales tax if the charge is separately stated from the unpaid principal balance of the
purchase price.4

4 Many states do not include late payment fees in the tax base. See, e.g., Iowa Admin. Code 701-16.50 (422, 423) ("The amount of any charge, commonly called a "late payment charge," imposed by
a public utility on its customers. shall not be subject to tax if the charge is in addition to any charge for
the utility's sale of its commodity or service and is imposed solely for the privilege of deferring
payment of the purchase price of the commodity or service and furthermore is separately stated and
reasonable in amount".); and Okla. Admin . Code 710:65-19-341 Natural or artificial gas and electric
utility services. ("Charges which are separately stated and are unrelated to the amount of gas or
electricity used such as charges for returned checks or for late payment are not subject to sales
tax.").
4

5. Business personal property tax
Colorado counties have the option to levy a business personal property tax. The incident of
taxation falls on the property owner, not the lessee. Parties to a private lessor sales
contract can agree that the lessee I purchaser reimburses the lessor I seller an amount
equal to the tax. The question then becomes whether the reimbursement is included in the
sales tax calculation. Although Colorado law requires that a seller exclude direct federal
taxes paid by the retailer I lessor from the sales tax calculation, there is no similar provision
to exclude other types of taxes reimbursed by the purchaser / lessee. Personal property
taxes are costs a seller I lessor incurs in connection with the sale or lease of taxable
property. Unlike insurance premiums that the purchaser I lessee may acquire separately
from the sale or lease of property, these property taxes are unavoidable costs incurred in
the lessor's rental of taxable property. Therefore, these property taxes are inseparable from
the lease and must be included in the sales tax calculation.
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. For a complete list of statecollected local jurisdictions and home-rule cities and counties, see Department publication
1002 (DRP 1002) which is on our website under "Taxation" > "Forms" > "Businesses" >
"Sales and Use."
The Department's web site offers a wide range of resources regarding tax issues. These
include tax publications, a tax index, FYls, regulations and a variety of on-line services
such as sales tax license verification, filing, local tax rates by address, and others. You can
view these resources on our web site at: www.revenue .state.co .us and click on "Taxation."
Pursuant to state law, the Department is required to make publish redacted responses to
requests for general informational letters. Your letter requesting this informational letter is
not made public. See, § 24-35-103.5(13), C.R.S. The regulation governing informational
letters is available on our web site at: http://www .revenue.state.co.us > Tax Library >
Rulings > Department of Revenue regulation 24-35-103.5.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are
knowledgeable on state taxes issues. However, the Department does not make a specific
determination here on any of the issues raised and the Department is not bound by this
general information letter.
The Department administers state and state-administered local sales and use taxes. This
letter does not address sales and use taxes administered by home-rule cities and homerule counties. You may wish to consult with local governments which administer their own
sales or use taxes about the applicability of those taxes. Visit our web site at
www.colorado.gov/revenue/tax for more information about state and local sales taxes.

5

Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this
redacted letter will be made public within 60 days of the date of this letter. Please let me
know in writing within that 60 day period whether you have any suggestions or concerns
about this redacted letter.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

6

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

October 6, 2008
XXXXXXXXXXXXX
ATTN: XXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
Re: Ruling Request -tax on leases
Dear, XXXXXXXXXXXXXXX
The department has reviewed your letter dated April 3, 2008. I apologize for the delay
in responding to your request. The department recently acquired the staff needed to
respond to these types of requests. The department also recently enacted a
regulation governing requests for tax advice. See, §24-35-103.5, C.R.S. and
Department regulation (24)-35-103.5. Pursuant to this regulation, the department
issues both private letter rulings and general information letters. Private letter rulings
are issued in response to tax issues raised in specific factual settings, are binding on
the department, and require payment of a fee. General information letters are issued
in response to general tax questions and are not binding on the department. You can
view this regulation on-line at:
http://www.revenue.state.co.us/taxstatutesregs/3921 reg24-35103.5.html
I will initially treat your request as one for a general information letter. If you would like
a private letter ruling, please take a moment to review the regulation and resubmit
the request with the required information.
Issue
You ask whether the following types of transactions are subject to sales and/or use tax.
1. Leases with a fair market value option.
2. Leases with a nominal value option

3. insurance premiums
4. documentation fee
5. late payment fee
6. personal property taxes assessed against your company, but subject
to reimbursement under the lease
Discussion
1. Taxability of leases with either a market value purchase option or nominal
value purchase options.
Colorado levies sales and use tax on leases of tangible personal property. §39-26102(23) and 713(1), C.R.S. In general, a lessor must pay sales or use tax when it
acquires the property if the lessor intends to lease the property to a lessee for three
years or less, unless the lessor obtains prior permission from the department to
collect the tax on lease payments. In contrast, the lessor must collect the tax on
each lease payments, rather than pay tax at the time of lessor's acquisition of the
property, if the lessor leases the property for more than three years.
In some instances, a lease is not a "true" lease, but a credit sale in which the lessor
retains title to the property until the lessee completes the "lease" payments. These
leases are sometimes referred to in tax literature as a "finance" lease or "capital"
lease.1 True leases and finance leases are similar in that both are subject to state
and state- administered sales and use taxes. Moreover, the price paid on a purchase
option, whether at fair market value or a nominal price, is taxable. This is because
the option payment is consideration paid in acquisition of the property. §39-26-102(5)
and (?)(a),
C.R.S (tax computed based on consideration paid by purchaser).
However, there are a few important differences in how tax is administered for these
two types of leases, particularly with respect to application of §39-26-111, C.R.S.
(Credit Sales). As noted above, a finance lease is not a true lease but, rather, a credit
sale. The Colorado UCC sets forth criteria to distinguish between a true lease and a
credit sale subject to a security interest. See, §4-1-203, C.R.S. In general, a "lease"
is a credit sale if the buyer/lessee cannot terminate the transaction before it expires.
The buyer also often assumes all or many of the responsibilities typical of
ownership, such as risk of
loss, insurance, property taxes, maintenance, and claims a depreciation expense on
its federal income tax return. The seller/lessor in a finance lease creates a security
interest in the property during the term of the "lease," typically by retaining at least
nominal title to
1 II is helpful to note some potential confusion regarding terminology. The Colorado Uniform Commercial Code
(CUCC) regulates, among other things, the rights and obligations of parties to what is referred to as a "finance lease."
See, generally, §4-2.5-103(1 )(g),
C.R.S. A CUCC finance lease is typically a three-party transaction involving a finance company, supplier, and buyer. The
requirements of CUCC relating to "finance leases" apply only to true leases and do not apply to sales disguised as
leases. See Official Comments, §4- 2.5-103(1 )(g), C.R.S. See, Official Comment to §4-2.5-103(1)(g) ("For a transaction
to qualify as a finance lease it must first qualify as a lease. Section 2A-103(1 )0) (§4-2.5-103(1)0), C.R.S.J... This
definition (of a finance lease] focuses on the transaction, not the status of
the parties; to avoid confusion it is important to note that in other contexts, e.g., tax and accounting, the term finance
lease has been used to connote different types of lease transactions, including leases that are disguised secured
transactions. M. Rice, Equipment Financing, 62-71 (1981)."). Conversely, a Finance Lease is a sale disguised as lease
and, therefore, does not include a "finance lease" as that term is used in the CUCC.

the property. At the expiration of the finance lease, buyer typically "purchases" the
property for nominal consideration or for less than fair market value. See, In re Mesa
Refining, Inc., 52 Bankr. 359 (Bankr. D. Colo. 1985). See, also, Lease Equipment
Company of Maryland, Inc. v. Ala. Dept. Rev., Admin. Law Div., Dkt. No. S. 06-558,
02/21/2007. The facts of each case should be carefully examined to determine the
appropriate characterization of the transaction. See, §4-1-203(1), C.R.S.
Although passage of title often signals that a sale has occurred for purposes of the
CUCC, title passage is not required in order to create a sale for tax purposes. In
Colorado, title does not have to pass from seller to buyer in order to create a taxable
sale. See, §39-26-111 (1), C.R.S. ("[Tax is due on installment payments on a] sale on
credit, or a contract for sale wherein it is provided that the price shall be paid in
installments and title does not pass until some future date ..."); §39-26-102(10) (a
"sale" includes installment and credit sales); see, also, §4-1-203, C.R.S. (credit sales
disguised as a "lease").
Other states have adopted substantially the same approach. See, e.g., Cal. Code
Reg. 1641(b) (finance lease treated as credit sale); California Taxation Code Section
6006.3and California State Board of Equalization Regulation 1660(a)(2)(A), Title 18,
California Code of Regulations; California FTB Legal Ruling No. 419, 12/03/1981;
Massachusetts Department of Revenue, LR 01-8, 9-11-2001; Nevada Admin. Code
372 .086 (Finance Lease is a sale); West Virginia Code of State Rules 110-15-129
(Leases of Tangible Personal Property).
As noted above, it is not always necessary to determine whether a transaction is a
lease or a credit sale because Colorado levies sales and use tax on both leases
and sales.
However, under certain circumstances, it will be important to determine the type of
transaction at issue because there are important differences in how the tax, including
the tax on the purchase option, is administered. The principal difference occurs when
a seller/lessor assigns, factors, or otherwise transfers its interest in a finance lease.
When a true lease is transferred to a third party, the lessee's obligation to pay tax
continues (including the tax on the option purchase price) and the third-party
transferee undertakes the obligation to collect, report, and remit the tax due on the
remaining installment payments. In contrast, a transfer of a finance lease to a third
party accelerates the seller's/lessor's tax obligation and the seller must remit to the
department the entire balance of tax due. This is because, pursuant to §39-26-111
(2), the seller is deemed to have received full consideration from the transferee. See,
§39-26-111 (2). Therefore, if the purchase option is exercised after the finance lease
is assigned, the additional consideration is not taxable because the seller will have
already paid the tax in full at the time of transfer.
2. Insurance premiums.
Insurance premiums charged by the lessor are included in the calculation of the
sales tax if the premiums are inseparable from the rental of the property. In A.O.
Stores v. Department of Revenue, 19 P3d 680 (Colo.2001), the Colorado supreme
court held that services that are separable from the sale of tangible personal
property are not taxable.

Inseparable services are generally those that the customer has no realistic option
but to acquire from the retailer. Therefore, if the lessee has the option to purchase
insurance from a party other than the lessor, then the insurance premium is
considered separable from the sale of the property and is not taxable, even if the
lessee elects to purchase insurance through the lessor, but only if the insurance
premium is separately stated in the contract or invoice. Compare, e.g., Tri-City
Rentals, Inc. dlb/a Hertz Rent-A-Car vs. Joe B. Huddleston (Tennessee 07/01/1991).
3. Documentation Fee
It is not clear what is meant by documentation fee. I assume this is a service fee
charged to the lessee by either the lessor or by a finance company to the lessor who
passes the fee onto the lessee. Although services are generally not taxable in
Colorado, Colorado does impose a sales tax on charges for services rendered in
connection with the sale or lease of tangible personal property. Section 39-26102(12), C.R.S., states in pertinent part,
"the full purchase price of article sold after manufacture or after having been
made to order and includes the full purchase price for material used and the
service performed in connection therewith,
Except as otherwise provided
..., the sales price is the gross value of all materials, labor, and service, and
the profit thereon, included in the price charged to the user or consumer."
A documentation fee is part of the retailer's / lessor's overhead cost incurred in
connection with the lease and is, therefore, included in the calculation of sales tax.
See,e.g., California Sales Tax Counsel Ruling No. 330.1874.200 (bank's
documentation fee passed on to lessee by lessor included in sales tax calculation).
This is in contrast to insurance that a purchaser may have the option to obtain from
sources other than the lessor. The documentation fee is inseparable from the lease
and, therefore, included in the tax calculation. See, A.O. Stores v. Department of
Revenue, 19 P3d 680
(Colo.2001); compare, also, Ve/de Ford Sales, Inc. v. The Department of Revenue.,
136 Ill App 3d 589 91 Ill Dec 375 483 NE2d 721 (IL 1985).
4. Late Payment Fee
Late payment fees are included in the calculation of sales tax. Gross taxable sales
"means the total amount received in money, credits, or property, .... or other
consideration valued in money from sales and purchases at retail with this state.... "
39- 26-102(5), C.R.S. There is no statutory basis that excludes this consideration
from sales tax computation.
5. Business personal property tax
Colorado counties have the option to levy a business personal property tax. The
incident of taxation falls on the property owner, not the lessee. Parties to a private
lease or sales contract can agree that the lessee I purchaser reimburses the lessor I
seller an amount equal to the tax. The question then becomes whether the
reimbursement is included in the sales tax calculation. Although Colorado law
requires that a seller exclude direct federal taxes paid by the retailer I lessor from the
sales tax calculation,

there is no similar provision to exclude other types of taxes reimbursed by the
purchaser I lessee. Personal property taxes are costs a seller I lessor incurs in
connection with the sale or lease of taxable property. Unlike insurance premiums that
the purchaser I lessee may acquire separately from the sale or lease of property,
these property taxes are unavoidable costs incurred in the lessor's rental of taxable
property. Therefore, these property taxes are inseparable from the lease and must
be included in the sales tax calculation.
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. For
a complete list of state-collected local jurisdictions and home-rule cities and counties,
see Department publication 1002 (DRP 1002) which is on our website under
"Taxation" > "Forms" > "Businesses" > "Sales and Use."
The Department's web site offers a wide range of resources regarding tax issues.
These include tax publications, a tax index, FYls, regulations and a variety of on-line
services such as sales tax license verification, filing, local tax rates by address, and
others. You can view these resources on our web site at: www.revenue.state.co.us
and click on "Taxation."
Pursuant to state law, the Department is required to make publish redacted responses
to requests for general informational letters. Your letter requesting this informational
letter is not made public. See, §24-35-103.5(13), C.R.S. The regulation governing
informational letters is available on our web site at:
http://www.revenue.state.co.us/taxstatutesregs/3921 reg24-35-103.5.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 contact me if you have any questions or
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

concerns.