Does Colorado charge excise tax (or sales tax) on propane and other liquefied petroleum gas sold for home heating and other non-vehicle uses?

Plain-English summary

A vendor asked the Colorado Department of Revenue whether it could sell liquefied petroleum gas (LPG) — propane — to an end user for home heating or other non-vehicle uses without first paying the state fuel excise tax. The Department said yes.

Colorado's excise tax falls on "special fuel" — diesel, kerosene, LPG, and natural gas — but only when it is used to propel a motor vehicle on Colorado highways. Propane burned in a home furnace or a barbeque grill simply isn't "special fuel" under that definition, so the excise tax never attaches. (Even if the tax had been paid up front, home heating is a federally recognized nontaxable use under IRS Publication 510, so the buyer could claim a refund.)

The practical catch is timing. Because the tax can come due before anyone knows how the fuel will ultimately be used, a distributor may sell propane tax-free only when it is certain the fuel won't go into a vehicle. The Department's safe harbor: propane delivered to a stationary tank with no vehicle-fueling attachments, used solely for home heating or other non-vehicle purposes, may be sold tax-free.

The letter also confirms the sales-tax side: residential heating fuel (gas, fuel oil, coal, wood, coke, electricity) sold to occupants of a residence to run a home heating system is exempt from state sales and use tax under § 39-26-715(1)(a)(II). But self-collected home-rule cities and counties may still tax it unless they have adopted the same exemption (see Form DR 1002).

This letter was issued just after HB 13-1110, which repealed the old annual decal-and-license-fee system for LPG- and natural-gas-powered vehicles and set special-fuel rates based on each fuel's energy content. It is the foundation for the Department's later propane guidance in [[gil-14-023-fuel-taxation-and-reporting-of-propane]] and [[gil-15-020-propane-reporting]].

What this means for you

Propane dealers and LPG distributors

You can sell propane excise-tax-free when you are certain it will not fuel a motor vehicle. The clean case is delivery to a fixed home-heating tank with no vehicle-fueling hookup. If you can't be certain of the end use, the safer course is to collect the tax and let the buyer claim a refund for any non-vehicle use. The companion ruling [[gil-14-023-fuel-taxation-and-reporting-of-propane]] explains the licensing, inventory, and reporting mechanics in more detail.

Homeowners and other residential heating customers

Propane and other fuels you buy to heat your home are exempt from Colorado state sales/use tax and carry no fuel excise tax. Watch your local bill, though — a home-rule city or county that hasn't adopted the residential-heating exemption can still charge its own sales tax.

Accountants and tax professionals

The dividing line is use to propel a highway vehicle, not the fuel type. The same propane is "special fuel" (taxable) at the pump and ordinary exempt heating fuel in a furnace. Combine this with the gross-vs-net-gallon reporting change that arrived later via HB 15-1228, covered in [[gil-15-020-propane-reporting]].

Common questions

Q: Is propane for my home furnace or grill taxed in Colorado?
A: No state fuel excise tax — it isn't "special fuel" unless used to propel a highway vehicle — and residential heating fuel is also exempt from state sales/use tax. A home-rule city or county may still impose local sales tax.

Q: When can a propane dealer sell tax-free?
A: Only when certain the fuel won't power a vehicle. The Department's example is propane delivered to a stationary tank with no vehicle-fueling attachment, used solely for home heating or other non-vehicle purposes.

Q: What if the excise tax was already paid but the propane was used for heating?
A: Home heating is a nontaxable use under IRS Publication 510, and § 39-27-103(3)(a)(I)(I) allows a refund where federal law would. The ultimate purchaser can file a refund claim.

Q: Can I rely on this letter for my own business?
A: No. A General Information Letter is general guidance only and is not binding on the Department. For a binding answer on your facts, request a private letter ruling (which requires a fee).

Citations and references

Statutes, rules, and sources:
- § 39-27-102(1)(a), C.R.S. (excise tax on special fuel to propel a motor vehicle)
- § 39-27-101(29), C.R.S. (definition of "special fuel")
- § 39-27-103(3)(a)(I)(I), C.R.S. (refund where federal law allows one)
- § 39-26-715(1)(a)(II), C.R.S. (sales/use exemption for residential heating fuel)
- HB 13-1110 (repealed the LPG/CNG decal-and-license-fee system; energy-content rates)
- IRS Publication 510 (home heating as a nontaxable use)
- Form DR 1002 (local governments exempting residential heating fuel)

Related rulings:
- [[gil-14-023-fuel-taxation-and-reporting-of-propane]] — propane licensing, inventory, and gross-gallon reporting
- [[gil-15-020-propane-reporting]] — HB 15-1228 shift to net-gallon reporting (effective 1/1/2016)

Source

• Landing page: Colorado All Letter Rulings
• Original PDF: GIL-13-025.pdf

Original ruling text

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

GIL-13-025 (amended)
March 3, 2014
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Liquefied Petroleum Gas and Excise Taxes
Dear XXXXXXXXX,
You submitted a request for guidance to determine the applicability the applicability of
Colorado excise tax on liquefied petroleum gas (“LPG”) used for home heating.
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
Can a vendor sell liquefied petroleum gas to an end user for use in a home heating system or
other non-vehicle uses without having paid the excise tax?
Background
HB13-1110 repealed a special fuel excise tax exemption and decal system under which owners of
vehicles powered by liquefied petroleum gas and natural gas paid an annual license tax fee in lieu
of the special fuels excise tax. In an effort to create tax parity among special fuels, this bill also
provides for reduced special fuels excise tax rates based on the differences in each fuel’s energy
content. Finally, the bill created a new exemption for compressed natural gas used to propel a

vehicle on the state highways if it is supplied to the user at a residential home.
Following the passage of HB13-1110, the Department has received inquiries regarding whether
liquefied petroleum gas used for home heating and other non-vehicle uses such as propane grills is
subject to the excise taxable.
Discussion
Colorado levies an excise tax on the sale of special fuel acquired, sold, offered for sale, or
used in Colorado, to propel an on-highway motor vehicle.1 "Special fuel" is defined as diesel
engine fuel, kerosene, liquefied petroleum gas, and natural gas used for the generation of
power to propel a motor vehicle on Colorado highways.2
Liquefied petroleum gas used in a home heating system and other non-vehicle uses do not fall
within the definition of special fuels and, thus, would not be subject to the excise tax.
Moreover, Section 39-27-103(3)(a)(l)(l), C.R.S. allows for a refund of the excise tax for any
use that entitles a person to a refund under the provisions of federal law. The Department has
historically interpreted IRS Publication 510 Excise Taxes to allow for such a refund. Publication
510 states that home heating is a non-taxable use which may entitle the ultimate purchaser to
a credit or refund. Consequently, even if fuels sold for home heating purposes had been
subject to the tax on special fuels, the use of such fuels in home heating, and other non-taxable
use, would qualify for a refund of the tax.
Because the tax must sometimes be paid before the ultimate use is established, only fuel that
the distributor is certain will be used for non-vehicle purposes, including home heating and other
non-vehicle use, may be sold without the tax.3 The Department will accept that propane
delivered to a stationary tank that does not have any vehicle fueling attachments used to
extract the propane and used solely for home heating or other non-vehicle uses may be sold
tax free.
Because liquefied petroleum gas is not subject to Colorado excise tax when used in a home
heating system, and other non-vehicle uses, we then look to whether these two products are
subject to Colorado sales or use taxes. Section 39-26-715(1)(a)(ll) provides an exemption
from sales and use taxes for all sales and purchases of electricity, coal, wood, gas, fuel oil,
or coke sold, to occupants of residences for the purpose of operating a home heating
system. However, local government sales taxes may be due if such local government has
not expressly adopted an exemption for all sales and purchases of electricity, coal, wood,
gas, fuel oil, or coke sold to occupants of residences for the purpose of operating a home
heating system.4 Therefore, the liquefied petroleum gas is exempt from both the state excise
and sales and use tax, but may be subject to the city or county sales and use taxes when
used to operate a home heating system
1
2
3

§39-27-102(1)(a), C.R.S. You can view statutes on the Department’s website at
www.colorado.gov/revenue/tax > Tax Library > Statutes
§39-27-101(29), C.R.S.
However, if a distributor is not certain that the special fuel will be used for a non-vehicle purpose and sells the
special fuel with the tax included, the purchaser who uses the special fuel for a non-taxable purpose may file a
claim for refund with the Department to recoup the taxes paid.

2

4

See Department Form DR 1002 for a list of cities and counties that exempt fuel used for residential heating
purposes.

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.
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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