When a company buys parts out of state, has them assembled in Colorado into a finished unit, and then exports that unit out of the country, must it pay Colorado tax on the parts, or are they exempt wholesale purchases?

Plain-English summary

A telecommunications company buys parts from outside Colorado, ships them to a third-party contractor in Colorado that assembles them into another unit, and then exports the finished unit out of the country for use in the telecom industry. It asked whether it must pay Colorado tax on those parts, or whether they're treated as exempt wholesale purchases. The Department gave the general framework but, as a GIL, made no determination.

The component-part (ingredient) exemption. Colorado exempts property bought by a manufacturer that becomes an ingredient or component part of a product that is manufactured/compounded for sale and held for resale (§ 39-26-102(20); § 39-26-713(2)(e)(I)). The Department was explicit that this exemption applies whether the finished goods are sold inside or outside Colorado. So parts that get built into the assembled telecom unit are generally not taxable as inputs.

The finished goods. Once the unit is finished, sales tax then applies to the sale of the finished goods — but only if those goods are delivered to a buyer in Colorado. Finished goods delivered to a buyer outside Colorado for use outside Colorado are not subject to sales tax (Reg 39-26-704.2). Here the units are exported, which points away from Colorado tax on the finished product as well.

The open question. The whole analysis assumes the assembly is "manufacturing" (or fabricating/processing). Under Reg (39-)26-102.12, manufacturing/producing/fabricating/processing "is usually deemed to have occurred when tangible personal property is created, transformed or reduced to a different state, quality, form, property or thing," by hand, machine, art, chemical action, or natural means. Whether this assembly clears that bar wasn't clear from the request, so the Department made no determination.

What this means for you

Manufacturers and assemblers buying input parts

Parts that genuinely become components of a product you build for resale are exempt inputs — and it doesn't matter whether you ultimately sell the finished product in Colorado or ship it overseas. The exemption is about the parts' role (ingredient/component held for resale), not the destination.

Exporters

Two separate breaks stack here: the component parts are exempt as manufacturing inputs, and the finished goods, when delivered to an out-of-state (or out-of-country) buyer for use outside Colorado, aren't subject to Colorado sales tax either (Reg 39-26-704.2). Keep delivery/destination documentation to support the finished-goods side.

The "is it manufacturing?" hinge

Everything rides on whether your assembly is manufacturing/fabricating — i.e., does it create or transform property into a different state, form, or thing (Reg 39-26-102.12)? Light "kitting" may not qualify; real transformation does. This is the fact the Department reserved, and the place to get a private letter ruling if the answer isn't obvious.

Accountants and tax professionals

Frame it as two questions: (1) Are the parts ingredient/component property for a product held for resale? (§ 39-26-102(20); § 39-26-713(2)(e)(I)) — exempt regardless of where finished goods are sold. (2) Are the finished goods delivered out of state for out-of-state use? (Reg 39-26-704.2) — not taxable. Both hinge on the assembly being manufacturing under Reg 39-26-102.12, which the Department left open. GIL — no determination.

Common questions

Q: Do I owe Colorado tax on parts I assemble in Colorado and then export? A: Generally no, if the parts become ingredient or component parts of a product you manufacture for sale and hold for resale — that exemption applies whether the finished goods are sold inside or outside Colorado. The Department made no determination on these specific facts.

Q: What about tax on the finished, exported unit?
A: Sales tax applies to finished goods only when delivered to a buyer in Colorado. Finished goods delivered to a buyer outside Colorado for use outside the state are not subject to Colorado sales tax (Reg 39-26-704.2).

Q: What's the catch?
A: The exemption assumes the assembly is "manufacturing" (or fabricating/processing) — creating or transforming property into a different state or form (Reg 39-26-102.12). Whether your assembly qualifies is the key fact, and the Department didn't decide it here.

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 and regulations:

• § 39-26-102(20), C.R.S. — property that becomes an ingredient or component part of a manufactured product for sale is exempt
• § 39-26-713(2)(e)(I), C.R.S. — corresponding use tax exemption for ingredient/component property
• Reg. 39-26-704.2 — finished goods delivered to a buyer outside Colorado for use outside Colorado are not taxable
• Reg. (39-)26-102.12 — definition of manufacturing/producing/fabricating/processing

Department procedure:

• Reg. 24-35-103.5 (general information letters vs. private letter rulings)

Related Colorado rulings (manufacturing / wholesale / fabrication):

• [[gil-12-005-internal-and-external-fabrication-labor-costs]]
• [[gil-15-004-contract-manufacturing]]
• [[gil-13-006-resale-exemption-certificates]]
• [[plr-12-005-private-letter-ruling]]

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-12-010.pdf

Original ruling text

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

GIL-12-010

December 31, 2012

xxxxxxxxxxxxxxxxxx
ATTN:XXXXXXXXXXXXX
xxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxx
Re: Tangible Personal Property Assembled in Colorado

Dear XXXXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXX ("Company") a request for guidance to determine the applicability of Colorado sales and use tax on tangible personal property ("goods") shipped to and assembled in Colorado into other goods and then shipped out of the country. The Colorado Department of Revenue ("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.colorado.gov/revenue/tax > 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 Is the assembly of goods that are incorporated into a different good and shipped out of the country treated as wholesale sales or must Company pay tax on these goods? Background Company is a telecommunications company which purchases parts from various locations outside of Colorado and has them shipped to a third party contractor in Colorado. Once

these parts are assembled into another unit, they are exported out of the country for use in the telecommunications industry. The question at issue is whether Company is required to pay tax on parts purchased outside of Colorado that are then incorporated into other parts in Colorado before being exported out of the country, or are these parts treated as wholesale sales? Discussion Colorado generally exempts from sales and use tax tangible personal property purchased by a manufacturer who integrates the property into a finished manufactured or processed product and holds the same for resale. Specifically, sales and use tax do not apply to the:
[The sale, purchase, storage, use, or consumption of] tangible personal property by a person engaged in the business of manufacturing or compounding for sale, profit, or use any article, substance, or commodity, which tangible personal property enters into the processing of or becomes an ingredient or component part of the product or service that is manufactured, compounded, or furnished,... 1 This exemption applies regardless of whether the finished goods are sold inside or outside Colorado. However, once the goods are finished, sales tax applies to the sale of those finished goods when the goods are delivered to a buyer in Colorado. Sales of finished goods that are delivered to a buyer located outside Colorado for use outside of Colorado are not subject to sales tax.2 It is unclear from your ruling request whether the assembly of goods by Company into another unit is considered a manufacturing or fabricating process. In Department Regulation (39-) 26-102.12, these are generally defined as follows: Manufacturing, producing, fabricating or processing is usually deemed to have occurred when tangible personal property is created, transformed or reduced to a different state, quality, form, property or thing. Transformation may occur by hand, machine, art, chemical action or natural means. Miscellaneous This letter represents the good faith opinion of Department staff who are knowledgeable of 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. 1 §§39-26-102(20) and 713(2)(e)(I), C.R.S. You can view this statute by going to the Department's website at www.colorado.gov/revenue/tax > Tax Library> Statutes. 2 Department Regulation 39-26-704.2. You can view this regulation on the Department's web site at www.colorado.gov/revnue/tax > Tax Library> Rules and Regulations> Final Tax Regulations> Sales and Use Tax.

2

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.colorado.gov/revenue/tax 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

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