If my equipment lease requires me to reimburse the lessor for the personal property tax on the equipment, is that reimbursement subject to Colorado sales tax — even when it's billed separately?

Plain-English summary

A company that leases manufacturing equipment asked a clean question: its lease requires it to reimburse the lessor for the county personal property tax on the equipment, and the lessor bills that reimbursement separately from the rent (and even adds sales tax to it). Is the reimbursement really subject to Colorado sales tax? The Department's answer (in non-binding but clear guidance): yes.

The mechanics: Colorado counties may levy a business personal property tax, and that tax legally falls on the owner (here, the lessor), not the lessee. The parties are free to agree the lessee will reimburse the lessor for it. The question is whether that reimbursement gets folded into the sales tax base on the lease.

Colorado taxes the "purchase price" on all sales and leases of tangible personal property (§ 39-26-104(1)(a)), and the Department's longstanding position — stated in FYI Sales 56 and Colorado Revenue Bulletin 99-19 — is that anything the lessee is required to pay under the lease contract is a "lease payment" and therefore taxable. That sweeps in property taxes, warranties, and similar charges, "regardless of who receives the payments," because all amounts paid to obtain uninterrupted use of the leased property are lease payments.

The key point for taxpayers: billing the property-tax reimbursement separately does not take it out of the tax base. If the obligation arises from the lease contract, it's a taxable lease payment.

What this means for you

Lessees of equipment and other property

If your lease makes you reimburse the lessor's personal property tax, expect that reimbursement to be subject to sales tax as part of your lease payment — even on a separate line item or separate invoice. The same goes for other contract-required charges like warranty costs passed through in the lease.

Lessors and leasing companies

When you pass through property taxes (or warranties, or similar costs) that the lessee is obligated to pay under the lease, collect sales tax on those amounts. The Department treats them as lease payments; separately stating them doesn't make them exempt.

Accountants and tax professionals

The operative concept is the broad definition of "lease payment": anything paid pursuant to the lease contract to obtain uninterrupted use of the property. Don't assume a separately stated property-tax pass-through is excludable the way a genuinely separable optional service might be — the Department's authority (FYI Sales 56; CRB 99-19; § 39-26-713(1)(a)) treats it as taxable.

Common questions

Q: My lease bills the property-tax reimbursement on a separate line — is it still taxable?
A: Yes. Billing it separately doesn't remove it from the sales tax base. Because the lease contract requires you to pay it, the Department treats it as a taxable lease payment.

Q: Doesn't the property tax fall on the owner, not me?
A: Legally, yes — the personal property tax is the owner's/lessor's. But the parties can agree you'll reimburse it, and when you do under the lease, that reimbursement is part of your taxable lease payment.

Q: What other charges get swept into the lease tax base?
A: Anything you're required to pay under the lease to keep using the property — the Department specifically mentions warranties and property taxes. The test is whether the charge is required by the lease contract.

Q: Can I rely on this letter?
A: It's a General Information Letter — non-binding general guidance, not a ruling. It's a clear statement of the Department's position, but a binding answer on your facts would require a private letter ruling.

Citations and references

Statutes, rules, and references:
- § 39-26-104(1)(a), C.R.S. (sales/use tax on the purchase price of sales and leases of TPP)
- § 39-26-102(7), C.R.S. (definition of "purchase price")
- § 39-26-713(1)(a), C.R.S. (tax on lease payments; formerly § 39-26-114(1)(a)(XII))
- FYI Sales 56 (lessor's property tax reimbursed by lessee is in the tax base)
- Colorado Revenue Bulletin 99-19 (6/1/1999) (anything paid under the lease is a "lease payment")

Related rulings

• [[gil-12-011-reimbursable-expenses]] — when pass-through reimbursements are/aren't taxable
• [[gil-11-003-taxability-of-administrative-fees-sales-tax]] — separately stated charges still in the tax base
• [[gil-12-012-non-resident-leases-of-passenger-cars]] — lease payments and motor vehicles

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-11-002.pdf

Original ruling text

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

GIL 11-002
March 23, 2011
XXXXXXXXXXXXXX
ATTN: XXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Taxability of Personal Property Tax / Sales Tax
Dear XXXXXXXXXX,
You submitted on behalf of XXX (“Company”) a request for guidance on the application of sales tax
to county personal property tax. The department issues general information letters and private letter
rulings. A general information letter provides a general overview of the relevant tax issues and is not
binding on the department. A private letter ruling provides a specific determination for a specific set
of facts, is binding on the department but not the taxpayer, and requires payment of a fee. For more
information about general information letters and private letter rulings, please see Department
regulation 24-35-103.5 at www.taxcolorado.org > FYI/Publication > Rulings.
The department initially treats your request as one for a general information letter. If you would like
the department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with regulation 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Issue
When a lessor leases tangible property or equipment, pays the applicable property taxes, and bills
the lessee for reimbursement, is the reimbursement paid by the lessee subject to sales tax, even if it
was billed separately from the lease payment as a separate cost?

Background
Company leases manufacturing equipment from XXXXXXXXXX (“Partnership”). Pursuant to the
lease agreement, Company is required to reimburse Partnership for county personal property tax.
Partnership bills Company separately from the lease payments for the county personal property tax.

At the time Partnership requests reimbursement for county personal property tax, Partnership
additionally charges sales tax on this amount.
Discussion
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 can agree that the lessee will
reimburse the lessor an amount equal to the property tax. The question then becomes whether the
reimbursement is included in the sales tax calculation.
Colorado imposes sale and use tax on the purchase price paid on all sales and leases of tangible
personal property. §39-26-104(1)(a), C.R.S. “Purchase price” means,
the price to the consumer, exclusive of any direct tax imposed by the federal government or
by this article [sales tax statute], and, in the case of all retail sales involving the exchange
of property, also exclusive of the fair market value of the property exchanged at the time
and place of the exchange.
Section §39-26-102(7), C.R.S.
In FYI Sales 56, the department explicitly states that property tax levied against the lessor and
reimbursed by the lessee is included in the sales tax calculation.
When sales taxes are collected on the lease payments, generally all payments required to
be paid by the lessee pursuant to the lease contract are sales taxable. These payments
can include such things as warranties and property taxes, regardless of who receives the
payments. All amounts paid to any party to obtain uninterrupted use of leased property are
lease payments.
This rule is also set forth in Colorado Revenue Bulletin 99-19 (6/01/1999) which states:
C.R.S. 39-26-114(1)(a)(XII) [renumbered as §39-26-713(1)(a), C.R.S.] imposes a sales tax
on “lease payments.” It is the Department's position that anything paid by the lessee
pursuant to the lease contract is a “lease payment.” Therefore, if the lessee's
reimbursement of the property taxes is made pursuant to the terms of the lease contract, it
is a “lease payment” and is subject to tax.
When a lessor leases tangible property or equipment, pays the applicable property taxes, and bills
the lessee for reimbursement, the reimbursement paid by the lessee is subject to sales tax, even if it
was billed separately from the lease payment as a separate cost.
Miscellaneous
Pursuant to state law and department regulation 24-35-103.5, noted above, the Department will
make public a redacted version of this letter. Your letter requesting this general information letter is
not made public. 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 objection concerning 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