Is a 'demand charge' on a commercial electricity bill subject to Colorado sales or use tax?

Plain-English summary

A commercial electricity customer (it runs a 100-horsepower electric motor) was billed a demand charge — a charge for the ability to pull about 74,600 watts of electricity at one time — and was charged sales tax on it. The customer thought the demand charge shouldn't be taxed and asked the Department.

The Department's view: a demand charge is just part of the price of electricity, so it's taxed exactly the way the electricity itself is taxed.

• Colorado generally taxes tangible personal property, not services — but electricity is a service that Colorado specifically subjects to sales tax (§ 39-26-104(1)(d.1)).
• A demand charge is simply a pricing structure: a utility may offer a lower base rate for normal use but a higher rate when a customer's draw spikes during peak-demand periods. That's no different from a retailer charging more when demand is high. Either way, sales tax is imposed on the purchase price the consumer pays (§§ 39-26-104(1)(a), 102(7)(a)). The demand charge gets the same treatment regardless of how the energy price is structured.
• So the real question is how the electricity is used. There are two exemptions: electricity used for residential purposes (§ 39-26-715(1)(a)(II)) and electricity used for "processing, manufacturing… construction… and industrial purposes" (§ 39-26-102(21)(a) — industrial-use electricity is deemed a wholesale sale even when sold to the final consumer). State-administered local jurisdictions also don't tax industrial-use electricity (§ 29-2-105).
• Non-industrial commercial uses are NOT exempt. Electricity for indoor/outdoor lighting of office buildings, heating and cooling of commercial buildings, and similar commercial uses not directly tied to an industrial process is taxable (Special Rule SR 19) — and so is the demand charge that rides along with it.

What this means for you

Business owners and utility customers

A demand charge is not a separate, non-taxable fee — it's part of the price of the electricity. If your electricity use is taxable (ordinary commercial use like lighting and HVAC), the demand charge is taxable too. If your use qualifies as residential or industrial, the underlying electricity — and the demand charge with it — is exempt.

Manufacturers and industrial users

Electricity used for processing, manufacturing, construction, or industrial purposes is exempt and is treated as a wholesale sale even when sold straight to you as the end user (§ 39-26-102(21)(a)), and state-administered local taxes don't apply to it either (§ 29-2-105). The demand-charge portion of an industrial-use bill rides on that same exemption.

Accountants and tax professionals

The takeaway is that rate structure doesn't change taxability — base rate, peak rate, and demand charge are all just components of the taxable "purchase price" under §§ 39-26-104(1)(a) and 102(7)(a). Taxability turns entirely on use category (residential/industrial exempt; non-industrial commercial taxable) under SR 19. Watch the home-rule-city caveat below; self-collected cities set their own electricity rules.

Common questions

Q: Is a demand charge for electricity taxable in Colorado?
A: It's taxed the same as the electricity it's part of. The demand charge is treated as part of the purchase price, so it's taxable for non-industrial commercial use and exempt for residential or industrial use.

Q: Why is electricity taxed at all if Colorado doesn't tax services?
A: Electricity is a service, but Colorado specifically subjects it to sales tax by statute (§ 39-26-104(1)(d.1)), unlike most services.

Q: Which electricity uses are exempt?
A: Electricity used for residential purposes (§ 39-26-715(1)(a)(II)) and for processing, manufacturing, construction, or industrial purposes (§ 39-26-102(21)(a)). Ordinary commercial uses such as office lighting and HVAC are taxable.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, is not binding on the Department, and makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes and rules:
- § 39-26-104(1)(a), C.R.S. (sales tax on the purchase price)
- § 39-26-104(1)(d.1), C.R.S. (electricity is a taxable service)
- § 39-26-102(7)(a), C.R.S. (purchase price = price paid by the consumer)
- § 39-26-715(1)(a)(II), C.R.S. (residential-use exemption)
- § 39-26-102(21)(a), C.R.S. (industrial-use electricity deemed a wholesale sale)
- § 29-2-105, C.R.S. (state-administered local jurisdictions don't tax industrial-use electricity)
- Department Special Rule SR 19 (Gas and Electric Services)

Related rulings: [[gil-14-006-alternating-current-electricity]] (natural-gas generation; renewable-energy and manufacturing-machinery exemptions), [[gil-17-011-electricity-to-produce-software]], [[plr-16-001-electric-use]].

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-14-009.pdf

Original ruling text

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

GIL-14-009
April 28, 2014
XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Demand Charge
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXX (“Company”) a request for guidance to
determine whether demand charges are subject to Colorado sales or use tax.
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 Rule 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 Department Rule 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 demand charges for the use of electricity subject to Colorado sales or use tax?

Background

Company was charged a demand charge for the ability to pull about 74,600 watts1 of electricity at
one time. Company was charged sales tax on the demand charge and believes sales tax should
not apply.
Discussion
Colorado levies sales tax on the sale or use of tangible personal property, but not generally on the
sale of services.2 Although Colorado does not generally impose sales and use tax on services,
electricity is a service that is subject to Colorado sales tax.3 A demand charge is a charge for using
electricity in certain circumstances. For example, a utility may offer consumers a lower base rate
for energy consumption but a higher rate if the consumer’s energy consumption exceeds certain
levels during specified periods (typically periods of peak demand). This is similar to a retailer who
offers its goods or services at a lower price when demand for the goods or services is low and a
higher price when there is higher demand for the goods and services. In either case, sales tax is
imposed on the purchase price paid by the consumer.4 The same result applies to the demand
change. Regardless of the energy price structure, sales tax is imposed on the purchase price paid
by the consumer.
There are two exemptions for electricity. There is an exemption for electricity used for residential
purposes5 and an exemption for electricity used for “processing, manufacturing…construction…and
industrial purposes”.6 State administered local tax jurisdictions do not levy sales tax on sales of
electricity for industrial use.7
However, non-industrial commercial uses are not exempt. For example, electricity used for indoor
and outdoor lighting of office buildings, heating and cooling of commercial buildings, and other
commercial uses that are not directly related to industrial use are subject to sales tax.8

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
Company states that it operates a 100 horsepower electric motor. Department understands that one horsepower
equals 746 watts.
2
§§39-26-104(1)(a), and 202 C.R.S. You can view statutes on the Department’s website at
www.colorado.gov/revenue/tax >Tax Library > Statutes.
3
§39-26-104(1)(d.1), C.R.S.
4
Sales tax is calculated on the purchase price. 39-26-104(1)(a), C.R.S. The purchase price is the price paid by
the consumer. 39-26-102(7)(a), C.R.S.
5
§39-26-715(1)(a)(II), C.R.S.
6
§39-26-102(21)(a), C.R.S. (Sales of electricity used for industrial purposes is deemed a wholesale sale, even
when sold to the ultimate consumer.)
7
§29-2-105, C.R.S.
8 Department Special Rule SR 19 Gas and Electric Services.
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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

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