Are the fees a company charges dentists for a turnkey patient-rewards program (including the mailers it sends to patients) subject to Colorado sales or use tax?

Plain-English summary

An out-of-state company offers dentists a turnkey patient-rewards program: a patent-pending, technology-driven system that promotes the practice, tracks patient behaviors that benefit oral health, and delivers travel/entertainment rewards to patients. As part of the service, the company mails each selected patient household an announcement package, processes reward deposits and customer tracking, sends monthly branded emails, runs program customer service, and reports back to the dentist. It bills the dentist a one-time setup fee and a monthly program fee, and asked whether those fees (and the mailing) are subject to Colorado sales or use tax.

The Department provided the analytical framework rather than a firm ruling:

• Colorado taxes tangible personal property and only a limited number of services (§ 39-26-104). When the "true object" of a transaction is a service, the transaction is not subject to sales/use tax even though some tangible personal property (here, the mailers) is transferred to the customer. In that case the provider — not the customer — is the consumer of that property and owes sales/use tax on it (FYI Sales 52).
• It also flagged nexus: because the provider is outside Colorado, it should review whether it is "doing business in Colorado" (FYI Sales 5), which affects collection obligations.

The Department did not squarely conclude that this specific program is a nontaxable service. Read together, the framework points toward a service (the true object is the rewards-and-marketing program, with the mailers incidental), which would make the fees nontaxable and put the mailers' tax on the provider as consumer — but a binding answer would require a private letter ruling.

What this means for you

Marketing, loyalty, and "turnkey program" vendors

When you sell a program or service and incidentally send printed materials to your customer's customers, Colorado's true-object test is what decides taxability. If the true object is the service, your program fees generally aren't taxed — but you become the consumer of the printed materials and owe sales/use tax on those mailers/supplies yourself. Don't assume the whole thing is tax-free: the service side may be untaxed while the tangible-goods side lands on you.

Out-of-state providers: check nexus first

Whether you must register and collect Colorado tax at all depends on whether you're doing business in Colorado (FYI Sales 5). That's a threshold question separate from whether your service is taxable — sort it out before worrying about the rest.

This is framework, not a verdict — get a PLR

The Department deliberately stopped at the framework. If the dollars matter, request a private letter ruling describing the program precisely (what the dentist is really paying for, how the mailers fit, how you bill) so you get a binding determination instead of guidance.

Common questions

Q: Are fees for a turnkey patient-rewards/marketing program taxable in Colorado?
A: If the true object is a service, the fees generally aren't taxable — but the Department didn't firmly decide this case. The provider would owe tax on any tangible items (like mailers) it consumes in delivering the service.

Q: We mail materials to our client's patients — who pays tax on those?
A: If the true object of your offering is a service, you (the provider) are the consumer of the printed materials and owe sales/use tax on them, rather than charging your client tax.

Q: We're based out of state — do we have to collect Colorado tax?
A: That depends on whether you're "doing business in Colorado." The Department pointed to FYI Sales 5 to evaluate nexus before anything else.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department, and it stops at the framework without deciding the specific program.

Citations and references

Statutes and publications:
- § 39-26-104, C.R.S. — Colorado taxes tangible personal property and only a limited number of services
- FYI Sales 52 — the "true object" test; when the true object is a service, the provider is the consumer of incidental tangible personal property
- FYI Sales 5 — whether an out-of-state company is "doing business in Colorado" (nexus)

Related Colorado true-object / service-enterprise letters:
- [[gil-08-010-taxability-of-school-material]] — true-object test (materials vs. service)
- [[gil-08-005-taxability-of-merchandising-and-related-services]] — labor-only services not taxed; provider owns no TPP

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-08-025.pdf

Original ruling text

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

GIL-08-025
September 17, 2008
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: XXXXXXXXXXXXX Program
Dear XXXXXXXXXX,
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.
Colorado enacted legislation governing requests for tax advice and the department
recently promulgated a regulation that sets forth the process for submitting requests.
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 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/3921reg24-35-103.5.html
It is unclear whether you are asking for a private letter ruling or a general information
letter. I will initially treat this as a request for general information letter. If you would like
a private letter ruling, please take a moment to review the regulation and resubmit your
request with the necessary information.
Issue
1. Are fees for the XXXXXXXXXXXXX Program and mailing subject to sales or use
tax?
Background
Your client is based in [two other states]. It has developed a program to provide
practicing dentists a turnkey, patent-pending technology-driven system which
automatically promotes, tracks, and delivers valuable earned rewards for patients.
Patients are given free access to XXXXXXXX travel and entertainment rewards for

behaviors that benefit their oral health and appearance and drive profits to the dentist
practice. As part of the service, your client will mail each selected patient household an
announcement package explaining their dentist is participating in the XXXXXXXXXXXXX
Program and how it works for them. Your client processes the reward deposits and
customer tracking, monthly emails with the dentist photo to reinforce their brand,
program customer service, and reporting to the dentist’s office. Your client bills the
dentist a one-time set up fee and then a monthly program fee to maintain the program.
Discussion
Colorado levies sales and use tax on the sale of tangible personal property and only a
limited number of services. See, §39-26-104, C.R.S. When the “true object” of the
transaction is a service, the transaction is not subject to sales or use tax even though
tangible personal property may be transferred to the customer. In such cases, the
retailer, not the customer, is considered the consumer of the property and must pay
sales or use tax on the property. For a more complete discussion of the true object test,
see our FYI Sales 52. You can view and download this FYI by visiting our website at
www.revenue.state.co.us and go to “Taxation” > FYIs > Sales Tax.
I note that your client is located outside of Colorado. You may wish to review our FYI
Sales 5 regarding whether your client is doing business in Colorado.
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.”
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/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.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue