When an out-of-state company leases medical equipment to Colorado doctors, dentists, and vets, is sales tax collected up front at the start of the lease or on each rental payment?

Plain-English summary

An out-of-state company leases medical equipment to Colorado veterinarians, doctors, and dentists using two kinds of contracts: one with monthly payments and a $1 purchase option at the end, and one with monthly payments and a fair-market-value purchase option. It asked a timing question: is sales tax collected at the inception of the lease or on the rental payments? The Department explained the rules, though as a GIL it made no determination.

Both kinds of leases are taxable. Colorado taxes leases of tangible personal property — and the end-of-lease purchase price is taxable too, whether nominal ($1) or full fair-market value, because that payment is consideration paid to acquire the property. What changes between lease types is when the tax is collected.

The Department drew the classic line between a "true" lease (a possessory right to use property for a limited time) and a "finance" lease (really a credit sale on installments — the lessee can't terminate early, bears ownership burdens like risk of loss, insurance, property taxes, and maintenance, claims depreciation, and "buys" the property at the end for a nominal amount, while the lessor keeps nominal title as security). The $1-buyout contract is a finance lease; the fair-market-buyout contract looks like a true lease.

• True lease, short term (3 years or less): the lessor pays sales tax when it acquires the equipment — unless it gets the Department's prior permission to collect tax on the lease payments instead. If the lessor (like this out-of-state company) didn't pay Colorado sales tax at acquisition, it owes use tax when the equipment is first used in Colorado, unless authorized to collect use tax on each payment (including the final purchase payment). A short-term lessor can credit sales tax paid to another state at acquisition — but not if it was granted leave to collect use tax on the payments.
• Long-term lease (more than 3 years) OR any finance lease (any duration): the lessor must collect sales or use tax on the lease payments, including the final "purchase" payment. It has no option to pay at acquisition, and tax paid to another state at acquisition cannot be credited against the tax due on the payments.

Finally, statutory cities and counties levy sales tax on equipment leases but do not levy use tax on them; special districts apply to the same transactions as the state.

What this means for you

Equipment leasing companies (especially out-of-state lessors)

The structure of your buyout option drives your collection duty. A nominal ($1) buyout makes it a finance lease — collect tax on every payment, no out-of-state credit. A fair-market buyout with a term of three years or less is a short true lease — you generally owe use tax when the gear first enters Colorado (since you bought it out of state), unless you get Department permission to collect on the payments. Decide that up front, because it changes whether you can credit another state's tax.

Colorado doctors, dentists, and veterinarians leasing equipment

Expect the lease itself to carry sales/use tax, and expect the final buyout payment to be taxable too, even if it's only a dollar. Whether you see the tax spread across payments or built into the lessor's pricing depends on the lease type and what arrangement the lessor has with the Department.

Accountants and tax professionals

Two axes decide timing: lease character (true vs. finance, § 39-26-111) and term length (short ≤3 yrs vs. long >3 yrs). Finance leases and long-term leases are taxed on the stream of payments with no out-of-state credit; short true leases are taxed at acquisition/first-use with a credit available unless the lessor elects payment-stream collection. The buyout — nominal or FMV — is always part of the taxable consideration (§ 39-26-102(5), (7)(a)). Statutory locals tax leases for sales tax but not use tax. See also PLR 09-004 (lease deemed a sale when first executed) and GIL-08-023 (amended).

Common questions

Q: Is a lease of medical equipment taxable in Colorado?
A: Yes. Colorado taxes leases of tangible personal property, including medical equipment, and both "true" leases and "finance" leases are taxable. The end-of-lease purchase price is also taxable, whether it's a nominal $1 or full fair market value.

Q: Is tax due at the start of the lease or on each payment?
A: It depends. Finance leases (e.g., a $1 buyout) and long-term leases (over 3 years) are taxed on the lease payments, including the final purchase payment. A short "true" lease (3 years or less) is taxed when the lessor acquires the equipment — or as use tax when first used in Colorado if bought out of state — unless the lessor gets Department permission to collect on the payments.

Q: I paid sales tax in another state when I bought the equipment — can I credit it?
A: For a short true lease, yes, you can credit the other state's sales tax paid at acquisition (unless you elected to collect Colorado use tax on the payments). For a finance lease or a long-term lease, no — the other state's acquisition tax cannot offset the Colorado tax due on the lease payments.

Q: Do city and county taxes apply?
A: Statutory cities and counties levy sales tax on leases but not use tax. Special districts apply to the same transactions as the state. Self-collected home-rule cities set their own rules and are not covered by this letter.

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:
- § 39-26-102(23), C.R.S. — "sale" includes leases of tangible personal property
- § 39-26-713(1), C.R.S. — tax on tangible personal property, including leases
- § 39-26-102(5), (7)(a), C.R.S. — purchase price / consideration paid by purchaser (the buyout is taxable)
- § 39-26-111, C.R.S. — finance leases

Department guidance referenced:
- Private Letter Ruling 09-004 (a lease is treated as a sale, deemed to occur when first executed)
- GIL-08-023 (amended)
- Department publication DRP 1002 (statutory vs. home-rule cities/counties)
- Reg. 24-35-103.5 (general information letters vs. private letter rulings)

Related Colorado rulings (leases / medical equipment):
- [[gil-17-002-equipment-leases]]
- [[gil-13-010-re-rental-equipment]]
- [[gil-15-023-sale-and-leaseback-transactions]]
- [[gil-14-021-lease-payments-on-vehicles-used-in-interstate-commerce]]
- [[plr-26-001-sales-tax-on-up-front-lease-payments]]
- [[gil-15-021-medical-equipment-and-supplies]]

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-13-023.pdf

Original ruling text

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

GIL-13-023
October 2, 2013
XXXXXXXXXXXXXXXX
ATTN: XXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
Re: Lease of Medical Equipment
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXX (“Company”) a request for guidance to
determine the applicability of Colorado sales and use tax on the lease of Company’s medical
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. 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 sales tax collected at the inception of the lease or on the rental payments?
Background
Company is an out-of-state lessor of medical equipment who leases medical equipment to
veterinarians, doctors, and dentists who are located in Colorado. Company uses two types of
contracts. One contract has monthly rental payments and a purchase option of one dollar at the
end of the lease term. The other contract also has monthly rental payments but an optional
purchase option which is priced at the fair market value of the equipment at the end of the lease
term.
Discussion

There are two common types of leases. A “true” lease is the sale of a possessory right to use
property for a limited period of time. A “finance” lease is a credit sale in which installment payments
are made. A finance lease is typically one in which the buyer/lessee cannot terminate the lease
before it expiration date, the buyer assumes all or many of the responsibilities typical of ownership
(risk of loss, insurance, property taxes, maintenance), claims a depreciation expense on its federal
income tax return, and “purchases” the property at the expiration of the lease for a nominal amount.
The seller/lessor in a finance lease creates a security interest in the property during the term of the
“lease” by retaining at least nominal title to the property.
Colorado levies sales and use tax on leases of tangible personal property.1 Both true leases and
finance leases are subject to state and state-administered sales and use taxes. Moreover, the
price at the expiration of the lease for the purchase of the property, whether at fair market value or
a nominal price, is taxable because the option payment is consideration paid in acquisition of the
property.2 Nevertheless, the distinction between the two leases is important because the tax
liability can take place at different times.
A lessor of a “true lease” must pay sales taxes when it acquires the property if the lease term is
three years or less (referred to as a short term lease), unless the lessor obtains prior permission
from the Department to collect sales or use tax on lease payments.3 If the lessor using a short term
lease did not pay Colorado sales tax when it acquired the property (such as the case may be when
the lessor is located outside Colorado when it purchased the property), then lessor must pay use
tax when the property is first used in Colorado, unless the Department authorizes the lessor to
collect use tax on each payment, including the purchase payment at the end of the lease. Lessor
using a short term lease can claim a credit for sales tax paid to another state when lessor first
acquired the property. However, if the lessor using a short term lease is granted leave to collect
use tax on the lease payments, then the tax is not offset by any tax paid in another state.4
If the lessor uses a leases that is more than three years in duration (referred to as a long term
lease) or if the lease is a finance lease5 (regardless of whether it is more or less than thirty month
duration), then lessor must collect sales or use tax on the lease payments, including the final
“purchase” payment, and lessor does not have the option to pay sales or use tax when it first
acquires the property. If lessor paid sales tax to another state when it first acquired the property,
that tax cannot be used as a credit to offset the tax due on lease payments.
The Department also collects sales taxes for statutory cities and counties, but not home rule cities
and counties.6 Statutory cities and counties levy sales tax on leases of tangible personal property,
including medical equipment, but do not levy use tax on such goods. The Department also collects
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§§39-26-102(23) and 713(1), C.R.S. You can view statutes on the Department’s web site at
www.colorado.gov/revenue/tax > tax library > statutes.
§39-26-102(5) and (7)(a), C.R.S (tax computed based on consideration paid by purchaser).
A lease is treated as a sale for sales tax purpose and the sale is deemed to have occurred when the lease is first
executed. Department Private Letter Ruling 09-004.
The credit is available only to the person who is liable for the tax. In the case of a short term lease, the lessor is
liable, as purchaser, for the sales tax when it acquired the goods and for the Colorado tax when it leases the
goods. In the case of long term leases, the lessor is liable for the other state sales tax as the purchaser of the
goods, but the incidence of taxation for Colorado taxes falls on the lessee because taxes are levied on lease
payments.
§39-26-111, C.R.S. and General Information Letter GIL-08-023 (amended). You can view statutes and rulings on
the Department’s web site at www.colorado.gov/revenue/tax > Tax Library.
See Department publication DRP 1002 for a list of statutory cities and counties, as well as home rule cities and
counties. You can view statutes on the Department’s web site at www.colorado.gov/revenue/tax > Tax Forms.

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sales and use tax for special districts, whose taxes apply on the same transactions and uses to
which state taxes apply.
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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