Are a seller's charges for installation, troubleshooting, removal, reinstallation, and trip fees on equipment subject to Colorado sales tax?

Plain-English summary

A company that manufactures and sells GPS vehicle-tracking units asked whether its various labor charges — installation, troubleshooting, un-installation, reinstallation, and trip fees — are subject to Colorado sales tax. (Its installation charge is bundled into the unit's purchase price; the later troubleshooting, removal, reinstallation, and trip fees are billed as separately stated labor charges.)

The Department laid out the framework rather than deciding each charge:

• Services are generally not subject to Colorado sales tax.
• But when a retailer sells (or leases) taxable goods and, in connection with that sale, charges for maintenance or a service warranty, that charge is included in the sales tax calculation.
• Two exceptions: (1) if the maintenance/service is under a separate contract from the sale or lease, the retailer should not include it in the tax; and (2) even without separate contracts, the retailer can ask the Department for authorization to use a ratio of taxable goods to non-taxable services to compute the tax.
• Required services are taxable: if the retailer requires the customer to buy a service as part of buying the taxable goods, that service charge is taxable even if separately stated (the Department's example: a required transportation/delivery charge, under Special Regulation 18).

Because this is a GIL, the Department invited the company to resubmit as a private letter ruling for a determination on its specific facts.

What this means for you

Sellers who bundle installation or service with a product

Standalone services are generally untaxed, but the moment a service is tied to the sale or lease of taxable goods the analysis shifts. A warranty or maintenance charge connected to the sale is part of the taxable price unless it sits under a genuinely separate contract. Bundling installation into the product price (as this company did) generally makes it part of the taxable sale.

How to keep optional services non-taxable

Two clean paths: put the maintenance/service under a separate contract from the goods, or get Department authorization for a ratio method. And watch the "required service" trap — if buying the goods forces the customer to also buy a service, that service is taxable even when you list it separately on the invoice.

Accountants and tax professionals

The pivots are: is the charge a standalone service, or a service connected to a taxable sale/lease? Is there a separate contract? Is the service required as a condition of the sale? These mirror § 39-26-105(2) and the transportation-charge rule in Special Regulation 18. For a definitive answer on a specific billing setup, a private letter ruling is the route.

Common questions

Q: Is labor taxable in Colorado?
A: Generally no — charges for services are usually not subject to sales tax. But maintenance/service-warranty charges connected to a taxable sale or lease are included in the taxable price, and a service the seller requires as a condition of the sale is taxable even if separately stated.

Q: How can I keep a service charge out of the taxable price?
A: Use a separate contract for the maintenance/service, or request Department authorization to compute tax using a ratio of taxable goods to non-taxable services.

Q: I list installation separately — is it automatically tax-free?
A: Not necessarily. If the service is required as part of buying the goods, it's taxable even when separately stated. And here the installation was bundled into the purchase price.

Q: Can I rely on this letter?
A: Not as a binding ruling. It's a General Information Letter — general guidance only. The Department invited a private letter ruling for a determination on specific facts.

Citations and references

Statutes and rules:
- §§ 39-26-104 and 39-26-202, C.R.S. — imposition of Colorado sales and use tax
- § 39-26-105(2), C.R.S. — maintenance/service-warranty charges included in the tax base; separate-contract and ratio exceptions
- Department Regulation (39)26-105.2 — service-warranty charges on leased goods
- Department Special Regulation 18 (Transportation Charges) — required-service charges are taxable even if separately stated

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-09-027.pdf

Original ruling text

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

GIL-09-027
May 13, 2009
XXXXXXXXXXXX
Attn: XXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
Re: taxability of labor costs
Dear XXXXXXXXXXXX,
You request guidance regarding the taxability of services performed by XXXXXX (the
“Company”). The department issues general information letters and private letter rulings. A
general information letter provides a general overview of the applicable tax law, does not
provide a specific determination, and is not binding on the department. A private letter ruling is
a determination of the applicability of tax to a specific set of circumstances and is binding in the
department. A party requesting a private letter ruling must provide certain information and
remit a fee. For more information about general information letters and private letter rulings,
please refer to the Department’s regulation 24-35-103.5, C.R.S., which is available on our web
site at: www.taxcolorado.org > FYI/Publications > Rulings.
We will initially treat your request as one for a general information letter. You may resubmit
your request as a private letter ruling.
Issue
Are charges for labor for installation, troubleshooting, un-installation, reinstallation, and trip
fees, subject to sales tax?
Background
The Company is in the business of manufacturing and selling vehicle tracking units. The unit
communicates with GPS satellites to determine the vehicle’s location. Location information is
sent by the unit to the customer’s office computer via cellular communications. Units are sold
to customers as either cash sales or as a lease-to-purchase agreements. A charge for
installation of the units is included in the purchase price and is not separately stated on the
customer’s bill. Units are shipped to the customer and the Company sends an employee to the
customer’s location to install the unit. The installer disassembles the vehicle’s dashboard,
connects the unit to the battery and on-board computer, and tests communications with the
unit.

GIL 09-027
May 13, 2009
Page 2
If a problem with the unit develops later on, the Company sends an employee to the customer’s
location, disassembles the dashboard, and troubleshoots the problem. The customer is
charged for the service of troubleshooting the unit. If the problem unit must be removed and
another unit installed, each of these tasks is separately charged. The customer receives a bill
stating separately stating each labor charge and a separate trip fee to cover traveling
expenses.
Discussion.
Colorado imposes sales and use tax on the sale, use, storage, or consumption of tangible
personal property. §§39-26-104 and 202, C.R.S. Charges for services are generally not
subject to sales tax. However, when a retailer sells taxable goods and, in connection with that
sale, charges the customer for maintenance or service warranties, the charge for the warranty
is included in the sales tax calculation. §39-26-105(2), C.R.S. Similarly, if a retailer leases
goods to a lessee and, in connection with that lease, charges the lessee a fee for maintenance
or service warranty, then the charge for such service is included in the sales tax due on lease
payments. Department Regulation (39)26-105.2.
There are two exceptions to this rule. First, if the contract for maintenance or service is
separate from the contract for the sale or lease of the goods, then the retailer should not
include the charge for the maintenance or service contract in the sales tax calculation. §39-26105(2), C.R.S.
Second, even if there are no separate contracts for the sale of goods and warranty service, the
retailer may request authorization from the department to use a ratio of the values of taxable
goods and non-taxable services to calculate the sales tax. §39-26-105(2), C.R.S. Please
contact the Department’s Taxpayer Service Division if you request this authorization.
Finally, we note that if the retailer requires a customer to purchase services as part of the
purchase of taxable goods, then the charge for services is subject to sales tax. For example, a
retailer who, as part of the sale of goods, requires a customer to use the retailer’s
transportation service to take delivery, must collect sales tax on the transportation service
charge even if the charge is separately stated on the invoice. See, Department Special
Regulation 18 (Transportation Charges).
As noted earlier, you can submit your request as a private letter ruling if you would like a
specific determination regarding the circumstances set forth above.
Miscellaneous
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this redacted
version of the ruling 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 version of the ruling.

Sincerely,

2

GIL 09-027
May 13, 2009
Page 3
Office of Tax Policy
Colorado Department of Revenue

3