Are a supplier's implementation, web-hosting, management, and payment-processing fees for on-site vending machines taxable as part of the product sales?
Plain-English summary
A company that sells fasteners and industrial, construction, and safety supplies is launching a program that puts its own vending machines at customers' worksites so customers can buy its products on site instead of picking them up at a branch. Customers (the end-users) sign three-year-plus contracts and are billed/taxed weekly on the products they buy. On top of the taxable product sales, the company charges four fixed "service" fees — owed regardless of sales volume — and asked whether each is subject to Colorado sales/use tax:
- Implementation fee — one-time, to deliver and connect the vending machine.
- Web-hosting fee — annual, an internet service giving usage reports and helping the company determine stocking needs.
- Management fee — annual, for the labor of employees traveling to the worksite to stock the machine.
- Process fee — annual, if the customer uses ACH Credit, Net-15 invoicing, or credit cards instead of fee-free ACH Debit.
The Department's general view: these fees are largely inseparable from the taxable product sales, so they're likely taxable. The reasoning:
- Colorado taxes tangible personal property, not services — but a service that is inseparable from a taxable sale is included in the sales price even if separately stated (A.D. Stores). The principal test is whether the buyer can obtain the goods without buying the service. Nearly every sale carries labor/overhead (sales staff, shelving, parking) that's an inseparable part of the price and can't be carved out by billing it separately.
- Implementation & web-hosting fees are "similar to charges for costs associated with bringing the Company's products to market" — the company is "essentially creating a smaller version of their branch store" at the worksite — so they're commonly an inseparable part of the sales price and most likely can't be excluded from tax.
- Management fee (labor to travel and restock the machine) is "similar to a transportation charge." Because the products are being moved to the vending machine — which the Department views as the "seller" — the fee looks like a "freight-in" charge, which is not exempt (SR-18).
- Process fee is judged against the definition of "purchase price" (money and credits received or due, Reg 39-26-102.7): an otherwise non-taxable fee tied to a sale of taxable goods is included in the tax base if it's inseparable from the product sale.
What this means for you
Suppliers running on-site vending / VMI programs
Labeling a charge a "service fee" and stating it separately doesn't keep it out of the tax base if the customer can't get your products without it. Fees that amount to bringing goods to market (delivering/connecting equipment, monitoring stock) or moving product to the point of sale (restocking labor = freight-in) tend to be inseparable and taxable. To have a shot at non-taxable treatment, a fee must be genuinely optional and separable — something the buyer can decline while still buying the goods.
Customers buying through worksite vending
Expect these program fees to be taxed along with the products. The one most likely to be separable is a truly optional add-on (the process fee only applies if you choose certain payment methods) — but even that is taxed if the Department finds it inseparable from the purchase.
Accountants and tax professionals
The controlling test is A.D. Stores separability — "can the buyer obtain the goods without the service?" Costs of bringing goods to market and freight-in (SR-18) are inseparable and taxable; the purchase price definition (Reg 39-26-102.7) sweeps in inseparable fees. Note the Department's characterization of the vending machine as the "seller," which makes restocking a freight-in charge. Freight-in vs. exempt post-sale shipping recurs in [[gil-14-022-consolidated-freight-charges]] and [[gil-14-016-prepaid-fuel-and-transportation-charges]]; separability in [[plr-13-002-private-letter-ruling]]. Watch the home-rule-city caveat below.
Common questions
Q: Are separately stated service fees on a product sale taxable in Colorado?
A: They can be. If the service is inseparable from the sale of taxable goods, it's included in the sales price even when stated separately. The test is whether the buyer could obtain the goods without buying the service.
Q: Why is the restocking "management fee" taxable?
A: The Department treats moving products to the vending machine (the "seller") as a freight-in transportation charge, which is not exempt under SR-18.
Q: Is anything here clearly non-taxable?
A: Nothing was ruled non-taxable. A fee is non-taxable only if it's genuinely separable — the buyer can get the goods without it. The Department viewed the implementation, web-hosting, and management fees as inseparable, and the process fee as included in the purchase price if inseparable.
Q: Does stating the fee separately on the invoice help?
A: No. Inseparable services are taxed even if separately stated. Separate billing alone doesn't make a charge non-taxable.
Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, not binding on the Department, and makes no determination on specific facts. It also doesn't cover self-collected home-rule city taxes.
Citations and references
Statutes, rules, and cases:
- § 39-26-104(1)(a), C.R.S. (sales tax on the purchase price of tangible personal property)
- Department Regulation 39-26-102.7(a)(1), (3) (definition of purchase price)
- Department Special Regulation SR-18 (Transportation Charges; freight-in not exempt)
- A.D. Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001) (separable vs. inseparable services)
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-13-008.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-13-008
April 18, 2013
XXXXXXXXXXXXX
ATTN: XXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
Re: Fees Associated with Company-Owned Vending Machines
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXX (“Company”) a request for guidance to determine
the applicability of Colorado sales and use tax on service fees in connection to a new program
Company is developing.
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 the enumerated fees subject to Colorado sales and use tax?
Background
Company sells fasteners (screws, nuts, etc.), along with industrial, construction and safety supplies.
Company is developing a new program (“Program”) intended to improve convenience for
Company’s end-user customers. Program places Company-owned vending machines at a
customer’s worksite. This allows customers to purchase Company’s products at their worksites,
which would otherwise have been picked-up at or shipped by Company’s local branches.
Customers, who are the end-users of all products purchased through the vending machines, enter
into Program by signing a contract to participate in Program for three years or more. Potential
customers will include: manufacturing sites, rail yards, maintenance areas, and refineries.
Customers will be billed and taxed according to the products purchased through the vending
machines on a weekly basis.
Company represents that the service fees in question are not related to the sale of products from
the vending machines, but are incurred by customers in exchange for access to the worksite
vending option. These fees do not represent any transfer of ownership or transfer of tangible
personal property. Program service fees are billed separately on an initial invoice, followed by an
annual invoice. The service fees are fixed, as negotiated in the contract, and will be due regardless
of the volume of sales generated through Program.
The service fees in question are:
1. Implementation Fee: A one-time fee assessed to customers for Program’s vending machine
to be delivered and connected to the customer’s worksite.
2. Web-Hosting Fee: An annual fee assessed to customers in exchange for a service via the
Internet that allows customers to review usage reports, and allows Company’s employees to
determine stocking needs for customers.
3. Management Fee: An annual fee assessed to customers for the labor associated with
Company’s employees traveling to a customer’s worksite and stocking the vending machine.
4. Process Fee (if applicable): An annual fee assessed to customers due to increased
overhead costs required to process payments in an alternate option of ACH Credit, Net 15
Invoicing, or Credit Cards, as opposed to ACH Debit option of payment, which incurs no
Process Fee.
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. If you would like a
specific ruling on the issues you raise, you can request a private letter ruling by submitting a
request and fee in compliance with Department Regulation 24-35-103.5.
Colorado levies sales tax on the sale, use or rental of tangible personal property, but not on the
sale of services.1 There are, however, important exceptions to the non-taxability of services.
For example, in AD Stores v Department of Revenue, 19 P.3d 680 (Colo. 2001), the Colorado
Supreme Court held that charges for dress alteration are “separable” from the sale of a finished
dress and, therefore, are excluded in the sales tax calculation. Conversely, services that are
inseparable from the sale of taxable tangible personal property are included in the sales tax
calculation, even if the service charge is separately stated on the customer’s invoice. One of
the principal factors the Department considers when evaluating whether a service is
“separable” is whether the buyer has the option to obtain the goods without also purchasing the
service.
Nearly all sales of taxable tangible personal property have labor and overhead cost
components. For example, a retailer typically employs sales staff to assist customers with their
purchases. Retailers may also provide customer parking, an in-store Internet kiosk from which
to place orders, shelves on which to place products and other services and amenities that
customers may find useful. Retailers recover these labor and overhead costs in the price of
1
§39-26-104(1)(a), C.R.S. You can view statutes on the Department’s web site at www.colorado.gov/revenue/tax
tax library > statutes.
2
the goods sold. Moreover, a brick and mortar store cannot disaggregate costs such as
shelving, transportation, building site, parking lot, etc. from the cost of their products. These
costs, which are included in the sales price of products, are generally an inseparable part of the
sales price, and the retailer cannot exclude them from the sales tax calculation by separately
charging for them on an invoice.
Implementation and Web-Hosting Fees
The implementation and web-hosting fees appear to be similar to charges for costs associated
with bringing Company’s products to market. Program’s vending machines will be delivered
and connected to a customer’s worksite and the web-hosting fee will monitor sales so
Company’s employees are aware when to restock the vending machine. Company is
essentially creating a smaller version of their branch store at the customer’s worksite. These
costs are commonly an inseparable part of the sales price, and Company most likely cannot
exclude them from the sales tax calculation by separately charging for them.
Management Fee
The management fee is assessed to compensate Company for the labor of an employee
traveling to the customer’s site and stocking the vending machine. In short, this fee is similar to
a transportation charge.
Transportation charges incurred in connection with transporting tangible personal property to
the seller or seller's agent, representative, or anyone else acting in the seller's behalf, either
directly or through a chain of wholesalers or jobbers or other middlemen, are deemed “freight in” charges and are not a transportation charge exempt from tax.2 The Department would likely
view the management fee as a “freight-in” charge because Company’s products are being
transferred to the vending machine, which appears to be the “seller.”
Process Fee
Sales tax is calculated using the “purchase price paid or charged.”3 “Purchase price is “the
amount of money received or due in cash and credits [and] ... [a]ny consideration valued in
money...”4 Fees, which are otherwise non-taxable (e.g., charges for services) but are also
related to the sale of taxable goods, are included in the sales tax calculation if the fees are
inseparable from the sale of the product.5
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
2
3
4
5
Department Special Regulation, SR-18, “Transportation Charges.” You can view this Regulation on the
Department’s web site at www.colorado.gov/revenue/tax > Tax Library > Rules and Regulations > Final Tax
Regulations > Sales and Use Tax > SR-18.
§39-26-104(1)(a), C.R.S.
Department Regulation 39-26-102.7(a)(1) and (3).
AD Stores v Department of Revenue, 19 P.3d 680 (Colo. 2001).
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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
4