Are charges for renting equipment, for the on-site labor of an operator who runs it, and for chemicals used with it subject to Colorado sales or use tax?

Plain-English summary

An out-of-state company rents motors and tooling to Colorado customers for their oil-drilling operations. It also charges for disposable chemicals that help the equipment work, and it sends employees on-site to supervise and assist with running the rental equipment, billing the customer for that labor. One customer objected to being taxed, arguing the materials were "used within the service and [are] not a specific material purchase." The company asked whether its rental, labor, and chemical charges are subject to Colorado sales/use tax.

The Department gave only general guidance — it could not make a determination in a General Information Letter with so few facts. The framework:

• Colorado taxes the sale and rental of tangible personal property, but generally does not tax services (with limited exceptions).
• When a retailer provides both taxable property and a non-taxable service, the question is whether some, all, or none of the price is taxable — answered by the "true object" of the transaction, weighing several factors.
• The Department's key example: when a retailer provides a truck and an operator, the deal is generally not a taxable rental. If the operator controls the equipment, the Department tends to see the true object as a non-taxable service (Regulation 39-26-102.23).
• But if the retailer separately states the charge for the equipment and the operator, the transaction is generally treated as a taxable rental of property plus a non-taxable service.

So whether the company's bundled equipment-plus-operator charges are taxable depends on who controls the equipment and how the charges are stated — a fact- and contract-specific call the Department wouldn't resolve here.

What this means for you

Equipment-rental and oilfield-service companies

If you just hand over equipment, that rental is taxable. If you supply equipment with your own operator who runs it, the deal can flip to a non-taxable service — but the Department looks hard at the contract terms and at who actually controls the equipment. Be deliberate about how you bill: separately stating the equipment charge tends to make that piece a taxable rental even when the operator's labor is a service.

Customers renting equipment with an operator

Don't assume "it's a service, so no tax." A bundled charge where you direct the work can look like a taxable rental; a charge where the provider's operator controls the equipment can be a non-taxable service. The wording of the invoice and the control of the equipment both matter.

Accountants and tax professionals

This is a classic true-object / mixed-transaction analysis under § 39-26-104 and Regulation 39-26-102.23 (the truck-and-operator rule). Watch the separately-stated wrinkle — itemizing the equipment can convert it into a taxable rental — and note that consumables (here, chemicals) ride along with the true-object analysis. Same true-object reasoning runs through [[gil-14-001-promotional-videos]] and [[plr-13-002-private-letter-ruling]]; for the rental side compare [[gil-16-011-vehicle-rentals]] and [[gil-18-007-scaffolding-rental]]. Watch the home-rule-city caveat below.

Common questions

Q: Is renting equipment taxable in Colorado?
A: Yes — Colorado taxes the rental of tangible personal property. The wrinkle arises when an operator is supplied with the equipment, which can turn the deal into a non-taxable service.

Q: When does equipment-plus-operator become a non-taxable service?
A: When the true object is the service — typically when the operator controls the equipment. The Department's truck-and-operator rule treats that as a non-taxable service rather than a taxable rental.

Q: What if I separately state the equipment and the labor?
A: Then the equipment charge is generally a taxable rental and the operator's labor a non-taxable service. Separately stating tends to split the transaction.

Q: Are the chemicals taxable?
A: It follows the same true-object analysis. The Department wouldn't resolve it on these facts; whether consumables are a taxable sale of property or part of a non-taxable service depends on the overall transaction.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, is not binding on the Department, and here the Department expressly declined to make a determination. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes and rules:
- § 39-26-104, C.R.S. (sales tax, including on rentals/leases of tangible personal property)
- § 39-26-202, C.R.S. (use tax)
- Department Regulation 39-26-102.23 (truck-and-operator; not a taxable rental when the operator controls the equipment; true-object test)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-13-003.pdf

Original ruling text

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

GIL-13-003
February 6, 2013
XXXXXXXXXXXXXXXXX
ATTN: XXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
Re: Rental and Labor Charges
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXX (“Company”) a request for guidance to
determine the applicability of Colorado sales and use tax on the rental of Company’s
equipment, labor charges in connection to the rental, and charges for chemicals used in
connection with the rental of Company’s equipment.
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. However, we note
that you have requested a specific determination regarding your transactions. Such a specific
determination is made only in private letter rulings. 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. Is the rental of Company’s equipment subject to Colorado sales and use tax?
2. Are labor charges for the supervision and assistance of Company’s equipment subject to
Colorado sales and use tax?
3. Are charges for chemicals that are required for the proper use of Company’s rental
equipment subject to Colorado sales and use tax?
Background

1

Company is headquartered outside of Colorado, but has customers in Colorado who rent motors
and tooling for their oil drilling needs. Company also charges for the use of disposable products,
such as chemicals, which aid in the use of equipment. In addition, Company employees travel to
drilling locations and stay on-site to supervise and assist with the functioning of the rental
equipment. Customers are charged for these labor costs. One of Company’s customers has stated
that Company should not be charging tax on their invoices because the “materials were used within
the service and [are] not a specific material purchase.” Therefore, Company is requesting a
determination of the tax required to be collected and remitted on their rentals and services.
Discussion
The Department does not have a regulation or publication that specifically addresses your inquiry.
The following is a general discussion of the tax issues surrounding your request.
Colorado imposes sales and use tax on the sale and rental of tangible personal property.1 In
general, Colorado does not levy sales tax on services, except in certain circumstances.
If a retailer provides both taxable tangible personal property and non-taxable services, the question
arises whether some, all, or none of the price is taxable. This will generally be determined on
whether the “true object” of the transaction is the sale of a service or rental of tangible personal
property. This determination can be complicated and is often reached by looking at a variety of
factors. For example, the Department has determined that when a retailer provides a truck and an
operator, the transaction is not generally considered a taxable rental of property.2 In such cases, the
Department tends to view the true object of the transaction as a non-taxable service if the operator
controls the truck. Any determination must closely examine the facts and the contractual terms
between the parties. On the other hand, if the retailer separately states the charge for the truck and
operator, then the transaction is generally treated as a taxable rental of property and a non-taxable
provision of a service. As I mentioned earlier, we cannot make a determination here in a general
information letter and with the few facts provided.
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.

1

§39-26-104 and 202, C.R.S.
2 See, Department Regulation 39-26-102.23, which can be viewed at www.colorado.gov/revenue/tax > Tax Library

Regulations > Final Regulations > Sales Tax

2

Sincerely,

Office of Tax Policy Analysis
Colorado Department of Revenue

3