As an out-of-state lessor of equipment used in Colorado, do I collect from lessees both the sales tax I paid when I bought the property and use tax on their lease payments?

Plain-English summary

An out-of-state lessor (no Colorado physical presence or sales tax license, but with a Colorado retailer's use tax account) leases equipment to customers who use it in Colorado, usually on leases of 36 months or less. It had been doing two things: making lessees reimburse it for the Colorado sales tax it paid when it bought the equipment, and collecting Colorado use tax on the lease payments. It asked the Department to confirm it must collect both. The (non-binding) answer is essentially no — you pick one method, not both — and the answer depends on whether the lease is a "true" lease or a finance lease.

Scenario 1 — true lease (≤ 36 months): two alternative methods.
- Default method: the lessor pays the tax up front — sales tax if it buys the equipment in Colorado, use tax if it buys out of state — and Colorado does not require it to also collect sales/use tax from lessees. The lessor and lessee can contractually agree the lessee will reimburse that tax cost, but the lessor cannot represent that charge as a tax the lessee owes the Department or as a true "sales/use tax." Under this method the incidence of tax is on the lessor, so the tax is due regardless of whether the lessee makes payments, and the lessor cannot claim a resale exemption on its purchase.
- Permission method (requires Department approval): the lessor buys the equipment as an exempt wholesale/resale purchase and then collects use tax from lessees on the lease payments. Now the incidence is on the lessee, tax is due only as payments are made, and the lessor must continuously treat the property as inventory (it can't use the property for its own business).

The net effect: under either method the lessee ends up bearing tax once — not sales tax up front and use tax on payments.

Out-of-state purchase credit. If the lessor paid sales tax to another state when buying the equipment, that tax becomes a credit against Colorado state and local use tax (applied first to the state tax, then to special-district use tax like RTD). But only the person who paid the other state's tax can claim the credit — so only the lessor under the default (pay-up-front) method, never the lessee paying tax on lease payments.

Scenario 2 — finance lease. A finance lease isn't a true lease; it's an installment sale on credit where the lessor keeps title only as a security interest. Because it's a sale, the default "pay up front" option doesn't apply — the lessor must buy for resale (claim a resale exemption from its vendor) and collect tax on each "lease" payment (§ 39-26-111, tax on credit-sale installments). The lessor itself owes no use tax because Colorado exempts property a lessor acquires to lease to third parties (§ 39-26-713(2)(d)); the lessee pays the Colorado state and local use tax on the payments (with any other-state tax credited).

The line between a true lease and a finance lease is the key threshold (the Department points to GIL-08-023 for the distinction).

What this means for you

Lessors of equipment used in Colorado

Don't double-tax. For a true lease, choose one path: pay the tax when you buy the equipment (and, if you want, pass that cost through by contract — but not as a "tax"), or get Department permission to buy for resale and collect use tax on the lease stream. For a finance lease (a credit sale), you must buy for resale and collect tax on each installment. Picking the resale route means treating the property strictly as inventory.

Out-of-state lessors specifically

You can credit sales tax you paid to another state against Colorado use tax — but only if you paid it (i.e., the pay-up-front method). If you instead collect use tax from lessees, neither you nor the lessee can use that other-state credit on the lease payments. Without a Colorado sales tax license, document resale purchases with the license from your commercial-domicile state (FYI Sales 1).

Accountants and tax professionals

The analysis turns on (1) true lease vs. finance lease, and (2) which collection method (pay-up-front vs. permission-to-collect) the lessor elects — each with a different tax incidence, resale-exemption availability, and out-of-state credit posture. The recurring trap is the taxpayer here: collecting both up-front reimbursement and use tax on payments over-collects.

Common questions

Q: Do I collect both the sales tax I paid on my purchase and use tax on the lease payments?
A: No. For a true lease you pick one method — pay tax up front (and optionally pass the cost through by contract) or, with Department permission, buy for resale and collect use tax on the lease payments. Doing both over-collects.

Q: Can I pass my up-front tax cost to the lessee?
A: Yes, by contract — but you can't present it as a tax the lessee owes the state or as a true sales/use tax charge. It's a negotiated reimbursement of your cost.

Q: How is a finance lease different?
A: A finance lease is a credit sale, not a true lease. You buy the equipment for resale and collect Colorado use tax on each "lease" payment; you owe no use tax yourself because property bought to lease to others is exempt.

Q: I paid another state's sales tax on the equipment — can I credit it?
A: Yes, against Colorado state and local use tax, but only if you paid it (the pay-up-front method). A lessee paying tax on lease payments can't claim a credit for tax you paid to another state.

Citations and references

Statutes and references:
- § 39-26-713(2)(f), C.R.S. (credit for sales/use tax paid to another state)
- § 39-26-713(2)(d), C.R.S. (property purchased for resale exempt from use tax)
- § 39-26-111, C.R.S. (tax on credit-sale installment payments)
- GIL-08-023 (true lease vs. finance lease)
- FYI Sales 1, 5, 56, 62; DR 1002

Related rulings

• [[gil-12-012-non-resident-leases-of-passenger-cars]] — lease term thresholds; collection methods
• [[plr-11-009-private-letter-ruling]] — true vs. finance lease left open; leases of TPP
• [[gil-11-002-taxability-of-personal-property-tax-sales-tax]] — contract pass-throughs in leases

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-11-013.pdf

Original ruling text

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

GIL-11-013

June 28, 2011

xxxxxxxxxxxxxxx

Attn: XXXXXXXXXXX

xxxxxxxxxxxxxxx
xxxxxxxxxxxxxxx

Re: Taxability of leased property
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXX ("Company") a request for guidance on the
collection of sales and use tax on leases of tangible personal property. 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 of 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
Should Company, as a lessor, collect from lessees both the sales tax lessor pays when it
purchases the tangible personal property from its vendor and use tax on lease payments
made by lessees for such property?
Background
Company does not have a physical presence in Colorado and does not hold a Colorado
sales tax license. It does have a retailer's use tax account with the Department. Company
enters into either a true lease or capital lease with lessees who use the leased property in

Colorado. The lease period is normally less than 36 months. Pursuant to the terms of the
lease, Company requires lessees to reimburse it for Colorado sales tax the Company paid
when it acquired the property to be leased. Company also collects Colorado use tax from
lessees. Company would like confirmation that it must collect from lessees both the sales it
pays for the initial purchase and use tax on lease payments made by lessees.
Discussion
Scenario No. 1
There are two alternative means of collecting tax when a lease is for 36 months or less. The
default procedure requires lessor to pay sales tax on its purchase from its vendor if the sale
takes place in Colorado or pay Colorado use tax if its purchase from its vendor occurs
outside Colorado. Colorado law does not require that lessor also collect sales or use tax
from lessees in this case. However, as a matter of contract, lessor and lessee may agree
that lessee reimburse lessor for sales or use tax paid by the lessor when it first acquired the
property to be leased. The department's only interest in such contract provisions is that the
lessor cannot represent to lessees that the tax is an obligation lessee owes to the
department nor can lessor represent the tax recovery as a true sales or use tax charge.
Under the alternative approach, which requires the department's permission, lessor
purchases goods from its vendor as an exempt wholesale purchase 1 and then collects sales
or use tax, as the case may be, from lessees on their lease payments. The net result under
this alternative approach is that lessee pays tax only on its lease payments.
Note that under the default procedure, the incidence of taxation (i.e., who is legally obligated
to pay the tax) for the Colorado tax falls on the lessor, not lessee. This means, among other
things, that the tax is due regardless of whether the lessee makes lease payrnents.2
However, when lessor obtains permission to exempt its purchase from the vendor and collect
use tax on lessee's lease payments, then the incidence of taxation falls on the lessee and the
use tax is due only to the extent that the lessee makes lease payments. In this
circumstance, lessor must continuously treat the property as inventory and cannot use the
property for the company's own business needs.
It may be the case that lessor pays sales tax to another state when it purchases goods from
an out-of-state vendor.3 This out-of-state tax will typically impact lessor's obligation to
1 A resale (wholesale) exemption is allowed when a buyer purchases goods for the purpose of

reselling to a third party. A buyer wishing to make a wholesale purchase must present to the
seller a sales tax license issued by the department or another state. Company does not have a
Colorado sales tax license and, therefore, should present its license issued by the state in which
it has its commercial domicile. See, FYI Sales 1 (How to Document Sales to Retailers, Charitable
Organizations, and Direct Pay Permit Holders).
2 Because the use tax is an obligation of the lessor, not lessee, under the default approach, this
means that the lessor cannot claim a resale exemption when the lessor purchases the property
from the Colorado vendor.
3 Company states that it pays Colorado sales tax when it acquires the property from its vendor
and we assume this means that the vendor is located in Colorado. For purposes of
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Colorado by creating a credit against Colorado’s state and local use taxes.4 Because the
credit can only be claimed by the person who pays the tax, this credit is available only when
the lessor pays the tax upfront. Thus, the lessee, who did not pay the sales tax to the other
state, cannot claim the credit on the sales or use tax it (lessee) pays on the lease payments.
Please note that the department collects certain local taxing jurisdictions that also levy use
tax.5 The tax paid to another state is first applied to the state tax and, if there is any credit
remaining, then to any special district use tax (e.g., RTD use tax).
For more information on these issues, see FYI Sales 1 (How to Document Sales to Retailers,
Charitable Organizations, and Direct Pay Permit Holders), FYI Sales 5 (Sales Tax
Information For Out of State Businesses), FYI Sales 56 (Sales Tax on Leases of Motor
Vehicles and Other Tangible Personal Property), and FYI Sales 62 (Guidelines for
Determining When to Collect State-Collected Local Sales Taxes).

Scenario No. 2

In this scenario, the lease is not a "true" lease but, rather, a finance lease.6 A finance lease
is an installment sale of goods on credit and for which the seller / lessor retains title to the
goods as a security interest in the event of the buyer's / lessee’s default. A true lease is the
sale of a possessory right to use property for a limited period of time. This distinction is
important because the default procedure (lessor pays tax upfront) discussed in Scenario No.
1 only apply to leases. Because a finance lease is a sale and not a true lease, the "lessor"
must collect tax on the "lease" payments.7 The lessor should claim a resale exemption from
its Colorado vendor. The net effect is that the Company's purchase from its Colorado vendor
is an exempt sale for resale transaction and Company must collect use tax from lessees on
"lease" payments.
If Company purchases the property from a vendor located outside Colorado, then, as in
Scenario No. 1, any lawfully due sales tax paid by lessor to another state is applied as a
credit against use taxes due from the lessee. Company, itself, has no use tax obligation
because Colorado exempts from use tax property acquired by lessor for leasing to third
parties.8 Thus, Colorado requires lessees pay only the Colorado and local use taxes due on
the lease payments.

Miscellaneous

completeness, we discuss the tax treatment of transactions when the Company pays sales tax to
another state for its purchases of property to be leased in Colorado.
• 39-26-713(2)(£), C.R.S
5 For information about which local taxing jurisdictions levy use tax administered by the
department, see Department publication DR 1002.
6 See, Gll-2008-23 for a discussion of these two types of leases.
7 Tax on credit sales is paid by the buyer and collected by the seller on each installment payment
See, §39-26-111, C.R.S.
8 §39-26-713(2)((1), C.R.S. ("The storage, us, or consumption of any tangible personal property
purchase for resale in this state ..:}
3

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

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