When a steel fabricator does internal fabrication work, or buys fabrication services from a third party, are those labor costs subject to Colorado sales and use tax?

Plain-English summary

A Colorado steel manufacturer that punches, drills, welds, paints, and cuts steel — sometimes hiring third parties for extra capacity or special processes — asked three things: does it qualify as a "modifier" (and so escape being a "fabricator"); if not a fabricator, is tax due on its internal fabrication; and are external (third-party) labor costs taxable? The Department gave the general rules but, as a GIL, made no determination.

There is no "modifier." The Department knows of no statute that creates or defines a "modifier," so it read the real question as: are the labor charges for these activities included in the sales/use tax base?

The general rule: fabrication labor is taxable. Sales tax is imposed on the full purchase price of articles "sold after manufacture or after having been made to order," and that price "includes the full purchase price for material used and the service performed in connection therewith" (§ 39-26-102(12)). Per FYI Sales 14, any operation that changes the form or state of property is fabrication; a fabricator selling at retail collects tax on the total charge, including labor, even if labor is separately stated (the classic examples: a machine part made to order, or custom drapes). If the fabricator converts the goods to its own use, it instead remits tax on its acquisition cost.

The separability exception (A.D. Stores). Where the sale of goods is genuinely separable from related services — as in A.D. Stores, where a garment was already in a finished state and alterations were optional — the service charge is excluded. So one fact that matters is whether the material is in a finished state before the "modification." The Department lacked facts to decide and, again, doesn't make specific determinations in a GIL.

The detailed rules (from GIL-08-030) for a steel fabricator:
- Internal fabrication labor on goods the fabricator later converts to its own use → not in the use-tax calculation (tax is on acquisition cost).
- Fabrication labor is in the sales-tax calculation if the fabricator sells the fabricated goods at retail.
- Third-party fabrication charges are in the fabricator's retail sales-tax calculation if the third party provides BOTH the materials and the fabrication.
- Those third-party charges are also in the fabricator's use-tax calculation if the fabricator converts the goods to its own use.
- Labor-only third-party fabrication (where the fabricator supplied the raw materials) is NOT in the fabricator's use-tax calculation.

The contractor exception. If the taxpayer, acting as a contractor, installs the fabricated steel as a fixture into real property and title passes after the work is complete, the taxpayer is the consumer of the steel and pays use tax on its acquisition cost (FYI Sales 18).

What this means for you

Steel fabricators and made-to-order manufacturers

Your default is that fabrication labor is taxable — bundled into the price when you sell at retail, even if you itemize labor separately. The result then flips with the destination of the goods: sold at retail (labor in the sales-tax base), converted to your own use (your own labor out; tax on acquisition cost), or installed as a real-property fixture (you're a contractor/consumer paying use tax on acquisition cost).

Buying fabrication from a third party

The pivotal fact is who supplies the materials. If your subcontractor provides both materials and labor, those charges ride into your tax base. If you hand them your materials and buy labor only, that labor stays out of your use-tax base. Structure and document third-party jobs with that line in mind.

Accountants and tax professionals

Start from § 39-26-102(12): purchase price includes the service of making goods to order. Then layer the three variables from GIL-08-030 — internal vs. external labor, materials supplied by whom, and retail sale vs. own-use vs. fixture installation. The escape hatches are separability (A.D. Stores — finished goods + optional service) and labor-only third-party work. There's no "modifier" status. Contractor/fixture jobs convert the fabricator into a consumer (FYI Sales 18). GIL — no determination.

Common questions

Q: Is fabrication labor taxable in Colorado?
A: Generally yes. When goods are made to order, the taxable price includes the fabrication labor, even if labor is separately stated. A fabricator selling at retail collects tax on the total charge including labor.

Q: What if I use the fabricated item myself instead of selling it?
A: Then your own fabrication labor isn't added to the use-tax base — you remit tax on your acquisition cost of the goods. Third-party charges still count if the third party supplied both materials and labor.

Q: Are third-party (external) fabrication charges taxable to me?
A: Only if the third party provides both the materials and the fabrication. If you supply the materials and buy labor only, that labor-only charge is not included in your use-tax calculation.

Q: What if I install the fabricated steel into a building?
A: If you install it as a fixture into real property as a contractor and title passes after completion, you're treated as the consumer and pay use tax on your acquisition cost of the fabricated steel (FYI Sales 18).

Q: Can I rely on this letter?
A: No. This is a General Information Letter — a general good-faith discussion that makes no specific determination and binds no one. For a binding answer, request a private letter ruling under Reg. 24-35-103.5.

Citations and references

Statutes:
- § 39-26-102(12), C.R.S. — purchase price includes material used and the service performed in making goods to order

Department guidance and cases referenced:
- FYI Sales 14 (Fabrication Services)
- FYI Sales 18 (contractors — when contractors pay sales/use tax)
- GIL-08-030 (sales/use tax treatment of a steel fabricator's internal and third-party fabrication)
- A.D. Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001) — separability of goods and services
- Reg. 24-35-103.5 (general information letters vs. private letter rulings)

Related Colorado rulings (fabrication / contractors / separability):
- [[gil-25-004-sales-and-use-tax-due-on-the-fabrication-and-installation-of-a-stairca]]
- [[gil-13-018-entry-towers]]
- [[gil-15-015-contractor-pay-tax-when-billing-on-a-time-and-material-contract]]
- [[gil-15-004-contract-manufacturing]]
- [[gil-12-001-medical-review-of-pharmacy-records]]

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-12-005.pdf

Original ruling text

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

GIL-12-005
April 4, 2012
XXXXXXXXXXXXXXXX
ATTN: XXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
Re: Internal and External Fabrication Labor Costs
Dear XXXXXXXXXX,
You submitted on behalf of a client a request for guidance on the application of sales and use
tax on internal and external fabrication labor costs of a client company.
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 on 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 > Tax Library > 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
1. Does Taxpayer qualify as a modifier and, is therefore, excluded from the definition of fabricator?
2. If Taxpayer is not a fabricator, would Colorado sales and use taxes be due on the internal
fabrications?
3. If the Taxpayer purchases fabrication services from a third party, are the external labor costs
subject to Colorado sales and use taxes?
Background
Taxpayer is a steel manufacturer with a facility in Colorado. Taxpayer performs a number of
activities, including punching, drilling, welding, painting and cutting steel. Taxpayer sometimes
contracts with third parities to perform some of these activities, primarily because of limited internal
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capacity or a need for a special process. Taxpayer may affix the resulting steel product to real
property, resell the steel product at wholesale, or sell the steel product at retail.
Discussion
We are unaware of any statutory provision that creates or defines a “modifier.” We assume that the
crux of the questions is whether labor charges relating to activities you characterize as
modifications are included in sales and use tax calculations. In general, and except as otherwise
noted below, a retailer must collect sales tax on the purchase price paid by the customer, including
any separately stated charges for retailer’s labor, overhead, or other costs associated with, and
inseparable from, making goods to order. See, §39-26-102(12), C.R.S., which states, in part,
Except as otherwise provided in this subsection (12), the sales tax is imposed on the full
purchase price of articles 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 ...
This general rule is reflected in FYI Sales 14 (Fabrication Services),1 in which we state,
"Fabricating, producing, and processing" includes any operation which results in the
creation or production of an article of tangible personal property, or which is a step in a
process or series of operations resulting in the creation or production of such an article;
the terms exclude operations not so related for the creation or production of such an
article.
An operation which changes the form or state of tangible personal property is one of
fabrication. Persons regularly engaged in the fabrication or production of articles for sale
at retail shall collect and remit the tax on the sales price. If the fabricator converts such
property to his own use, he shall remit the tax based on his acquisition cost.
The tax applies to the total charges for the fabrication or production of an article of
tangible personal property made to order. For example, if a manufacturer orders a
machine part from a machine shop, the tax shall be paid on the total charge for the part,
including labor, although charges for labor may be segregated from the cost of the
materials. Similarly, the total charge for making drapes is subject to tax.
However, when the sale of goods is “separable” from the sale of related services, the charge for
services is excluded from the sales tax calculation. AD Stores v Department of Revenue, 19 P.3d
680 (Colo. 2001). There, the court determined that a garment was brought to market in a relatively
finished state and that the alteration services were optional. Thus, among other things, we would
consider whether materials at issue are, before the modification services are rendered, properly
viewed as in a finished state. In any event, there are not sufficient facts to allow us to determine
whether the modification or “alteration” services described in the letter are separable. Moreover,
the Department does not make specific determinations of such issues in the context of general
information letters such as this one.
The Department has previously addressed the application of sales and use tax to a variety of
common transactions engaged in by a steel fabricator, including transactions that appear to be
1 You can view this FYI on the Department’s web site at www.colorado.gov/revenue/tax >Tax Library > FYI Publications >

Sales

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similar to the ones you describe. See, GIL-08-030.2 There, we held that, as a general rule,
fabrication labor cost performed by a fabricator on goods that the fabricator later converts to its own
use are not included in fabricator’s use tax calculation; but fabrication costs are included in the
sales tax calculation if the fabricator sells its fabricated goods at retail. Charges for fabrication
services performed by a third party are included in the sales tax calculation of the fabricator’s retail
sale of the fabricated goods to the ultimate consumer if the third party provides the fabricator both
the materials and fabrication services. The third party fabrication charges are also included in the
fabricator’s use tax calculation if the fabricator converts the fabricated goods to its own use. Finally,
fabrication services are not included in the fabricator’s use tax calculation if the third party provided
only fabrication services and did not supply the raw materials.
There is at least one significant exception to the Taxpayer’s obligation to collect sales tax on
fabrication services it performs. If Taxpayer, as a contractor, installs fabricated steel as a fixture
into real property and title passes to the customer after the work is complete then Taxpayer is
considered the consumer of the fabricated steel and must pay use tax on its acquisition costs for
the fabricated goods. For more information about when and how contractor’s pay sales and use
tax, see, FYI Sales 18.3
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 home-rule 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.revenue.state.co.us for more
information about state and local sales taxes.
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

2 You can view this GIL on the Department’s web site at www.colorado.gov/revenue/tax > Tax Library > Rulings.

3 You can view this FYI on the Department’s web site at www.colorado.gov/revenue/tax >Tax Library > FYI Publications >
Sales.

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