When a company rents out equipment and also bills customers for reimbursable expenses like lodging, airfare, and car rentals for its on-site staff, are those reimbursed expenses subject to Colorado sales tax?
Plain-English summary
A company rents two-way radios and wireless phones to customers such as sporting-event organizers, and sometimes sends its own staff to an event to handle additional communication needs. When it does, it bills the customer for "reimbursable expenses" — lodging, car rentals, and airfare — on separate invoice line items, sometimes marked up, sometimes not, sometimes on a separate invoice. The company had been taxing these reimbursed expenses and asked whether it should. The Department gave general observations but, as a GIL, made no determination (the facts were too thin on how the staff assist and how their costs are recovered).
The framework: Colorado taxes the sale and rental of tangible personal property (like radios), but generally does not tax services. The general rule for a mixed deal:
- If a retailer both rents taxable property and provides non-taxable services, and separately states the price of each, sales tax is generally calculated only on the rental charge.
- Costs for goods and services the retailer consumes to provide its service — here, the staff's lodging, airfare, and car rentals — are generally not subject to sales tax even if the retailer itemizes and recovers them from the customer.
The important exception — inseparability and "true object." If the service is so intertwined with the rental as to be inseparable, you must ask the true object of the transaction:
- If the true object is the service, then the service charges and any itemized charges related to it (the travel reimbursements) are not taxable.
- If the true object is the rental of property, then the service charges and related charges are taxable.
The Department couldn't tell from the request whether the staff service was separable from the radio rental or what the true object was, so it declined to decide and invited a private letter ruling.
What this means for you
Equipment-rental businesses billing travel reimbursements
Travel costs your staff consume to deliver a service (hotels, flights, rental cars) are generally not taxable, even when you pass them through as itemized "reimbursable expenses." The thing that flips them is inseparability: if the on-site staffing is really part and parcel of the taxable equipment rental (true object = the rental), the reimbursements ride along as taxable. Notably, this company had been taxing them — and the Department suggested that may be too conservative if the service is genuinely separable.
Structure and document the service
Separately stating the rental and the service helps, but (as the companion delivery ruling shows) separate statement alone isn't decisive — the service must be genuinely separable. Mark-ups, separate invoices, and whether receipts are provided are all facts that bear on how the Department characterizes the bundle. If real money is at stake, a private letter ruling resolves it.
Accountants and tax professionals
Two-step: (1) Are the rental and the staffing separable and separately stated? If yes, tax the rental only; pass-through costs the retailer consumed to provide the service are generally non-taxable. (2) If inseparable, apply true object — service true-object pulls the reimbursements out of tax; property true-object pulls them in. Compare the true-object/separability analysis in [[gil-12-001-medical-review-of-pharmacy-records]]. See FYI Sales 56 on leases of TPP. GIL — no determination.
Common questions
Q: Are reimbursable travel expenses (lodging, airfare, car rental) taxable in Colorado?
A: Generally not, when they're costs the company consumes to provide a non-taxable service and are separately stated — even if itemized and passed through to the customer. But if the service is inseparable from a taxable equipment rental and the true object is the rental, those charges become taxable.
Q: We've been charging sales tax on these reimbursements — is that required?
A: Not necessarily. The Department's general view is that pass-through costs for a separable service aren't taxable. Whether your facts make the service separable (or whether the true object is the rental) determines the answer, and the Department didn't decide it here.
Q: Does marking up the expenses or using a separate invoice change things?
A: They're relevant facts but not decisive. The core questions are separability and true object; mark-ups, separate invoices, and receipts all factor into how the transaction is characterized.
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 guidance:
- § 39-26-104, 202, C.R.S. — sales and use tax on the sale and use, including rental, of tangible personal property
- FYI Sales 56 — Sales Tax on Leases of Motor Vehicles and Other Tangible Personal Property
- Reg. 24-35-103.5 (general information letters vs. private letter rulings)
Related Colorado rulings (true object / separability / rental):
- [[gil-12-001-medical-review-of-pharmacy-records]]
- [[gil-13-008-fees-associated-with-company-owned-vending-machines]]
- [[gil-13-011-plumber-s-fees]]
- [[gil-13-003-rental-and-labor-charges]]
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-12-011.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-12-011
November 6, 2012
XXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
Re: Reimbursable Expenses
Dear XXXXXXXXXX,
You submitted on behalf of your company ("Company") a request for guidance to
determine the applicability of Colorado sales and use tax on reimbursable expenses such as
lodging, airfare, and car rentals.
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
Are reimbursable expenses, such as lodging, airfare and car rentals, charged to customers who
request Company's presence at an event subject to Colorado sales or use tax?
Background
Company is in the business of renting two-way radios and wireless telephones to a wide range
of customers, including organizers of professional sporting events. A rental generally includes twoway radios, accessories for the radios, and any additional equipment required
for usage. Depending on customer requirements, Company will assign its personnel to an event
to address any additional communication needs that may arise during an event. If this is the
case, Company bills customers for the "reimbursable expenses" of lodging, vehicle rental, and
airfare, in addition to the equipment rental. A separate line item for each reimbursable expense
is on the invoice as follows:
1 REIMBURSEEXP
1 REIMBURSE EXP
1 REIMBURSEEXP
Rental reimbursement of expense - car rental of 2 vehicles
+ gas
Rental reimbursement of lodging - 3 rooms 15 nights Rental
reimbursement of airfare- 5 round trip tickets
Additionally, one of the following situations applies depending on the customer:
- Expenses are not marked up, and if requested by the customer, receipts can be
provided as support for the reimbursable expense charges. - Expenses are marked-up and no receipts are provided to customer.
- The reimbursed expenses are billed on a separate invoice from the rental equipment and
may or may not include a mark-up and receipts may or may not be provided to customer.
Currently, Company is taxing the reimbursable expenses when they charge customers, whether
these expenses are billed with the rental of the radios or billed separately.
Discussion
It is unclear from the request how employees assist customers and whether and how Company
recovers the cost of employees who are sent to assist customers at an event. We can offer some
general observations, but anything more detailed will require a request for a private letter ruling.
Colorado imposes sales and use tax on the sale and use, including rental, of tangible personal
property, such as two-way radios. §39-26-104 and 202, C.R.S. See, FYI Sales 56"Sales Tax on
Leases of Motor Vehicles and other Tangible Personal Property." In general, Colorado does not
levy sales tax on services, except in certain circumstances. If a retailer both rents taxable
tangible personal property and provides non-taxable services, and separately states on the
customer's invoice or contract the price for each, then sales tax is generally calculated only on
the rental charge. Costs for goods and services consumed by the retailer to provide its services
are generally not subject to sales tax even if the retailer itemizes these costs and recovers these
costs from its customer.
There is at least one important exception to this general rule of non-taxable services and
expenses related to those services. If the service is so intertwined with the sale or rental of
goods as to be inseparable, then a determination must be made whether the true object of the
transaction is a service or the sale or rental of tangible personal property. If the conclusion is that
the true object of the transaction is a service, then charges for the service as well as any
itemized charges related to that service are not taxable.
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If, however, the conclusion is that the services are inseparable and the true object of the
transaction is the sale or rental of tangible personal property, then the charges for the services
and related charges are taxable.
There is not sufficient information in the request to determine whether the services provided by
Company personnel are separable from the rental of the equipment and the true object of the
transaction. Such determination can only be made in response to a private letter ruling request. If
you would like the Department to treat this issue as a private letter ruling request, please feel free
to contact me and we will assist you in that process.
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.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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