Does Colorado sales or use tax apply when a company leases a passenger car for more than 24 months to someone who lives outside Colorado?

Plain-English summary

A company that finances long-term car leases through Colorado dealerships asked whether Colorado sales or use tax applies when it leases a passenger car for more than 24 months to a person who lives outside Colorado. The Department, in a non-binding General Information Letter, explained the general rules but did not make a determination.

The key principle: the place where the vehicle is registered determines which state and local taxes apply. Colorado taxes both the sale and the lease of motor vehicles (it taxes each lease payment of tangible personal property), and a vehicle can't be registered until all sales or use taxes are paid.

The most important rule for this taxpayer: if the lessee is a nonresident of Colorado at the time the lease is signed and immediately takes the vehicle to another state for use outside Colorado, the dealer/leasing company is not liable to collect any Colorado tax on the leased vehicle. That follows from § 39-26-113(5)(a), which exempts the sale of a motor vehicle in Colorado to a nonresident for use outside Colorado.

The letter also spelled out the in-state rules for context: when both the lessor and lessee are in Colorado and the lease runs more than 36 months, the dealer/lessor must collect and remit sales tax on the lease payments. When the lease is less than 36 months, the lessor may either pay the sales tax when it buys the vehicles, or collect the tax from the customer through the lease payments — but it must pick one method and stick with it for every vehicle. To collect the tax from lessees, the lessor must get a Permit to Collect Sales Tax on the Rental or Lease Basis (Form DR 0440) from the Department; that free permit also lets the lessor buy the vehicles to be leased without paying tax up front.

What this means for you

Auto-lease and fleet-leasing companies

If your lessee genuinely lives out of state when the lease is signed and drives the car straight to their home state to register and use it, you generally don't collect Colorado tax — the tax follows the registration. Document the lessee's nonresident status and out-of-state registration. For Colorado-resident lessees, your duty to collect turns on the lease term (over vs. under 36 months) and the collection method you've elected.

Nonresidents leasing a car in Colorado

A long-term lease you sign in Colorado and immediately take home to another state is exempt from Colorado sales/use tax under § 39-26-113(5)(a). You'll owe whatever your own state and locality charge when you register the vehicle there.

Accountants and tax professionals

Watch three lines: the nonresident-for-use-outside-Colorado exemption (§ 39-26-113(5)(a)); the 36-month dividing line for in-state leases; and the one-method-per-lessor election (pay tax on purchase vs. collect on payments) that requires a DR 0440 permit to collect from lessees. FYI Sales 56 and 62 are the working references.

Common questions

Q: I'm leasing a car in Colorado but I live in another state — do I pay Colorado sales tax?
A: Generally no. If you're a nonresident when the lease is signed and immediately take the vehicle to another state for use there, the lease is exempt from Colorado sales and use tax. You pay the tax your home state and locality charge when you register the car.

Q: Which state's tax applies to a vehicle lease?
A: The state and locality where the vehicle is registered. The leasing company collects the taxes for the jurisdictions it shares with the lessee; otherwise the county clerk where the vehicle is registered collects any local use tax at registration.

Q: When does the leasing company have to collect Colorado tax on the lease payments?
A: For an in-state lessee, if the lease runs more than 36 months the lessor must collect and remit tax on the payments. For shorter leases the lessor either pays tax when it buys the vehicle or collects it on the payments (using a DR 0440 permit) — but must use the same method for every vehicle.

Q: Can I rely on this letter?
A: No. This is a General Information Letter — a non-binding general discussion. The Department expressly made no determination here and is not bound by it. For a binding answer on your facts you'd need to request a private letter ruling.

Citations and references

Statutes and references:
- § 39-26-104(1)(a), C.R.S. (sales tax on tangible personal property)
- § 39-26-102(23), C.R.S. (tax on lease payments for tangible personal property)
- § 39-26-113(1), C.R.S. (no vehicle registration without payment of sales/use tax)
- § 39-26-113(5)(a), C.R.S. (CO sale of a motor vehicle to a nonresident for use outside CO is exempt)
- § 39-26-713(1)(a), C.R.S. (lessor's purchase of property to be leased)
- FYI Sales 56; FYI Sales 62; Form DR 0440; 1 CCR 201-1, Reg. 24-35-103.5

Related rulings

• [[gil-13-023-lease-of-medical-equipment]] — when sales tax attaches across lease types/terms
• [[gil-12-011-reimbursable-expenses]] — rental of TPP vs. non-taxable services

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-12-012.pdf

Original ruling text

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

GIL-12-012
November 6, 2012
XXXXXXXXXXXXX
ATTN: XXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
Re: Non-resident Leases of Passenger Cars
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXX ("Company") a request for guidance to determine
the applicability of Colorado sales and use tax on leases of passenger car for greater than
twenty-four months to non-residents of Colorado.
The Colorado Department of Revenue ("Department") issues general information letters and
private letter rulings. A general information letter provides a general overview of therelevant 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 importantto 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 leases of passenger cars for greater than twenty-four months to non-residents of Colorado
subject to sales or usetax?
Background
Company finances long-term lease agreements of motor vehicles through Colorado dealerships.
Within this process, Company becomes the titleholder of the vehicle. When contracting with
non-residents of Colorado, lessees will generally take possession of their

vehicle at the Colorado dealership and drive to their respective state where they will register
the car.
Discussion
Colorado levies sales and use tax on the sale and lease of motor vehicles. §§39-26- 104(1)(a)
(tax applies to sale of tangible personal property), 102(23) (tax applies to leasepayments for
tangible personal property), and 113(1) (no motor vehicle registration without payment of all sales
1
or use taxes), C.R.S.
The place where the vehicle is registered will determine which state and local taxes apply.See,
FYI 56 Sales (Sales Tax on Leases of Motor Vehicles and Other Tangible PersonalProperty)
2
and FYI Sales 62 (Guidelines for Determining When to Collect State-CollectedLocal Sales Tax) .
Company/dealer must collect the sales taxes for the tax jurisdictions
(state, city, county, special district) it shares in common with lessee. If Company and purchaser
are not in the same local tax jurisdiction, then the county clerk for the county in which the vehicle
is registered will collect local use tax, if any, at the time the vehicle is registered to the purchaser.
If the person leasing the vehicle is, at the time the lease is executed, a non-resident of Colorado
and immediately takes the vehicle to another state foruse outside of Colorado, then
Company/dealer is not liable to collect any taxes on the leased vehicle. §39-26-113(5)(a),
C.R.S. (sale of motor vehicle in Colorado to non-resident for use outside Colorado is exempt
from sales tax).
When the lessee and lessor are both located in Colorado and the lease of the motor vehicle is
more than thirty-six months, the dealer/lessor must collect and remit sales tax on the lease
payments. When both the lessor and lessee are located in Colorado and the lease is less than
thirty-six months, the lessor may either pay the sales tax when purchasing the vehicles or may
collect the tax from the customer through the lease payments. Once the lessor choses which
method to remit the tax, the lessor must continue to use that method,regardless of the duration
of the lease contract, for each vehicle leased. If the lessor chooses to collect the tax from the
lessee, the lessor must obtain permission from the Department by submitting an application for a
Permit to Collect Sales Tax on the Rental orLease Basis (DR 0440) for each business location.
This permit is available at no charge
and entitles the lessor to purchase the property without paying state or state-collected local sales
tax on the purchases to be leased. §39-26-102(23) and 713(1)(a), C.R.S.
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.
I Statutes can be viewed by going to the Department's web page: www.colorado.gov/revenue/tax > Tax
Library > Statutes
2 FYls can be viewed at www.colorado.gov/revenue/tax > Tax Library > FYI Publications >Sales

2

The Department administers state and state-administered local sales and use taxes. Thisletter
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 ownsales 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 meknow in writing
within that 60 day period whether you have any suggestions or concernsabout this redacted
letter.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

3