If an event company rents equipment from a lessor and hires its own contractors to operate it, can it buy the rental tax-free for resale — or does it owe tax as the user?

Plain-English summary

A production-event company rents out its own stage, sound, and lighting equipment to clients for events, and sometimes rents additional equipment from a rental company ("Lessor"). On some jobs the company hires third-party contractors to operate that rented equipment; on others, the client's own employees operate it. It asked whether it owes sales/use tax on the equipment it rents from the Lessor when it hires third-party operators.

The Department's general guidance: it depends on who is actually using the equipment.

• Colorado taxes leases of tangible personal property (§ 39-26-102(23)). For leases of three years or less, the lessor either pays tax when it acquires the property or (with the Department's permission) treats its purchase as an exempt sale for resale and collects tax from lessees on each payment — one method, chosen per item.
• Two principles: (1) Colorado doesn't tax wholesale transactions, including a lessee who subleases to a sublessee; (2) a lessee who uses the property cannot claim a wholesale exemption and then collect tax from "sublessees."
• The pivot is whether the company is "using" the equipment when it hires third-party operators. The answer turns on the totality of the circumstances, and who controls the property is key. If the company rents a forklift and its own employees operate it, the company is the consumer and can't claim resale (PLR-11-007) — and the same is true when it hires third parties: through its subcontracted labor, the company is the consumer of the rented equipment.
• Where it's unclear who the user is, the Department leans toward treating the lessor-to-lessee deal as a wholesale lease if the lessee separately states the labor charge from the equipment-use charge on its invoice to the sublessee.

Bottom line: It "appears" the company is the user when its subcontractors operate the equipment, so it must pay sales tax to the Lessor. But it can claim the resale exemption when the client's employees operate the equipment — and then it must charge the client sales tax on the lease payments.

What this means for you

Event-production, staging, and equipment companies that re-rent

The dividing line is control/operation. If you (or your subcontractors) operate rented gear, you're the end user — pay the lessor's tax and don't try to re-rent it exempt. If your client's people operate it, you're genuinely subleasing — you can take the resale exemption from the lessor but must charge your client tax on the lease payments. Don't mix these up: claiming resale while you're really the user is what the Department is policing.

Lessors renting to re-renters

You must exercise due diligence on a lessee's resale claim. Unless the exemption is clearly appropriate, collect the tax and tell the lessee to file a refund claim. You can generally honor a resale claim when the lessee presents a sales tax license — unless you have reasonable grounds to believe it isn't actually subleasing. A lessee who knowingly claims resale wrongly risks revocation of its license or collection permission.

Accountants and tax professionals

Lease taxation runs through § 39-26-102(23) and the FYI Sales 56 lessor election (acquisition tax vs. collect-on-payments) for ≤3-year leases. The use-vs-sublease question is a control/totality test (PLR-11-007): operating the equipment yourself — directly or via subcontractors — makes you the consumer. The separately-stated-labor factor can tip an ambiguous case toward a wholesale lease. For the rental-vs-service and operator-control cousins, see [[gil-13-003-rental-and-labor-charges]] and [[gil-16-011-vehicle-rentals]]. Watch the home-rule-city caveat below.

Common questions

Q: I rent equipment and hire contractors to operate it for my clients — do I owe tax to the lessor?
A: Yes. If you (or your subcontractors) operate the equipment, you're the user/consumer, so you pay sales tax to the lessor and can't buy it exempt for resale.

Q: When can I re-rent the equipment tax-free?
A: When your client's own employees operate it. Then you're genuinely subleasing, so you can claim the resale exemption from the lessor and instead charge your client sales tax on the lease payments.

Q: What decides whether I'm the "user"?
A: The totality of the circumstances, with control the key factor — who actually operates and controls the equipment. Operating it yourself (or via hired contractors) makes you the user.

Q: Does separately stating labor and equipment on my invoice matter?
A: It can. Where it's unclear who the user is, separately stating the labor charge from the equipment-use charge on the invoice to your client points toward a wholesale (re-rental) lease.

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 and guidance:
- § 39-26-102(23), C.R.S. (sales tax on the lease of tangible personal property)
- Department Publication FYI Sales 56 (leases of motor vehicles and other TPP; lessor's election for leases of three years or less)
- Department Private Letter Ruling PLR-11-007 (a lessee whose own employees operate the equipment is the consumer)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-13-010.pdf

Original ruling text

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

GIL-13-010
April 18, 2013
XXXXXXXXXXXXXXXXX
ATTN: XXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
Re: Re-rental Equipment
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXX (“Company”) a request for guidance to
determine whether Company is liable for sales and use tax for equipment Company rents from
a lessor when Company hires third-party contractors to operate the equipment at events.
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 Company liable for sales and use tax for equipment Company rents from a lessor when Company
hires third-party contractors to operate the equipment at events?
Background
Company is a production event company that primarily rents its stage, sound and lighting
equipment to clients for their use at an event. Company states that it rents equipment it owns to
clients. Company occasionally rents equipment from equipment rental companies (herein referred

to as “Lessor”). In some instances, Company hires third-parties to operate the equipment and, in
other instances, Company’s client will use its own employees to operate the equipment.
Discussion
Colorado levies sales tax on the lease of tangible personal property.1 For leases of three years or
less in duration, the lessor must collect sales tax on the acquisition of the property unless it receives
permission from the Department to treat its purchase of the equipment as an exempt sale for resale
(lease and sublease) and collect tax from lessees.2 However, one method must be chosen and the
lessor must use that method for each vehicle or property leased regardless of the duration of the
lease contract. If the lessor obtains permission to collect tax from lessees, tax is collected on the
amount actually paid on each lease payment.
There are two general principles that apply to your question. First, and as you point out, Colorado
does not impose sales tax on wholesale sales, including on lessees who sublease the property to
sublessees. Second, a lessee who uses the property cannot claim a wholesale exemption lease
from the lessor and collect sales tax from “sublessees.”
The question raised in your letter is whether Company is “using” the equipment when it hires thirdparty contractors to operate the equipment. Whether a party is “using” property or subleasing the
property is resolved by looking at the totality of the circumstances. Who has control of the property
is an important consideration. For example, if Company leases a forklift from Lessor and Company’s
employees operate the equipment, then the Company is considered the consumer of the leased
equipment and cannot claim a resale exemption from the lessor.3 This is also true if Company hires
third-parties to perform the work. In such cases, Company, through its subcontracted labor, is the
consumer of the rented equipment.
In instances where it is unclear whether the lessee or sublessee is the user of the property, the
Department is inclined to view the transaction between the lessor and lessee as a wholesale lease if
the lessee separately states on its invoice to sublessee the price for lessee’s labor from the price for
the use of the equipment. Although we do not determine the issue here, it appears that Company is
the user of the equipment when its subcontractors operate the equipment and, therefore, Company
must pay sales tax to the Lessor. However, Company can claim the resale exemption if the
equipment it rents from Lessor is operated by the client’s employees. In this case, Company must
charge clients sales tax on the lease payments.
The lessor is required to exercise due diligence in determining whether to grant a lessee’s request
for an exemption. Unless the exemption is clearly appropriate, the lessor should collect the tax and
direct the lessee to file a claim for refund with the Department. In general, a lessor can grant a
lessee a resale exemption if the lessee presents a sales tax license and claims the exemption,
unless the lessor has reasonable grounds to believe that the lessee is not subleasing the equipment.
A lessee that knowingly and incorrectly claims a resale exemption for leased equipment is subject to
revocation of the Department’s permission to collect sales tax from sublessees and/or revocation of
its sales tax license.
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§39-26-102(23)
Department Publication FYI Sales 56, “Sales Tax on Leases of Motor Vehicles and Other Tangible Personal
Property.” You can find this publication on our Web site at www.colorado.gov/revenue/tax and click on Tax
Library > FYI Publications > Sales > Sales 56.
See, Department Private Letter Ruling PLR-11-007. You can find this publication on our Web site at
www.colorado.gov/revenue/tax and click on Tax Library > Rulings > Rulings by Number.

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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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