Does Colorado sales tax apply to a separately stated prepaid-fuel charge or to freight/transportation charges on a vehicle?
Plain-English summary
A company leases vehicles to individuals and businesses and also runs a referral car-sales business. It asked about two add-on charges:
- A prepaid-gasoline option: a customer can prepay for a full tank (priced at the area's average pump price) at the start of the rental, and then return the car empty with no extra charge.
- A freight/transportation charge in the referral-sales business: when a customer wants a vehicle that's at a different location, the company arranges delivery to the customer's location and passes on the delivery cost.
Colorado taxes the rental of motor vehicles (§§ 39-26-102(23), 713(1)(a)) on the purchase price — the total amount paid by the consumer (§§ 39-26-104(1)(a), 102(7)(a)) — but some charges stay out of that base.
1. Prepaid gasoline — likely not taxable if optional and separately stated. Gasoline is generally exempt from state sales and use tax (§ 39-26-715(1)(a)(I)). Because the company says the prepaid-gas charge is separately stated and optional — the customer can instead buy gas from any other retailer — the Department said the prepaid-gasoline charge may not be taxable so long as it is separately stated and optional. But the Department flagged the flip side: if the customer is required to buy the prepaid gas at the time of the transaction, the charge may be taxable.
2. Freight/transportation — depends on whether the sale comes before or after delivery. Transportation of property between a retailer and a purchaser is generally a non-taxable service (SR 18). But a transportation charge becomes part of the taxable price when it's inseparable from the sale, not separately stated, or is a "freight-in" charge. Freight-in means transportation incurred to bring property from the place of production or the manufacturer to the seller (or the seller's agent), through any chain of middlemen — i.e., the cost of bringing a product to market — and it is taxable. By contrast, transportation to ship a product after a sale is not taxable if separately stated.
Applying that: the Department understood that, generally, the purchase takes place after the vehicle is moved to the new location — so the vehicle isn't "brought to market" until it arrives, and the delivery charge looks like taxable freight-in. However, if for some reason the customer buys the vehicle before it's transferred, the charge may not be freight-in and not taxable.
What this means for you
Vehicle rental businesses
A prepaid-fuel add-on can stay out of the taxable rental price if you make it genuinely optional (the customer is free to refuel elsewhere) and you state it separately on the contract or invoice — because gasoline itself is exempt. Bundle it in or make it mandatory and it can become taxable as part of the rental.
Car dealers and retailers
For delivery charges, timing is everything. If the sale closes after you move the vehicle to the buyer, the freight is freight-in (bringing the car to market) and is taxable. If the sale closes before the move, a separately stated shipping charge is not taxable. Separately stating the charge is necessary but not sufficient — the point of sale vs. point of delivery drives the result.
Accountants and tax professionals
Two distinct principles. Exempt items (gasoline) can be kept out of the base when optional and separately stated (§ 39-26-715(1)(a)(I)); mandatory or bundled, they fold into the taxable purchase price (§§ 39-26-104(1)(a), 102(7)(a)). Freight-in vs. post-sale shipping (SR 18) turns on whether the transfer of ownership precedes or follows transportation — pre-market transport is taxable freight-in, post-sale transport is exempt if separately stated. Watch the home-rule-city caveat below.
Common questions
Q: Is a prepaid-fuel charge on a car rental taxable in Colorado?
A: Likely not, if it's optional (the customer could buy gas elsewhere) and separately stated, because gasoline is exempt from state sales tax. If buying the prepaid fuel is required, it can be taxable as part of the rental price.
Q: Are delivery/freight charges on a vehicle taxable?
A: It depends on timing. If the customer buys the vehicle after it's delivered to their location, the delivery is taxable freight-in (bringing the product to market). If the customer buys it before delivery, a separately stated shipping charge isn't taxable.
Q: Does separately stating a charge automatically make it non-taxable?
A: No. Separate statement is necessary but not enough — an optional exempt item (gas) stays out, but freight-in to bring goods to market is taxable even if separately stated.
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:
- §§ 39-26-102(23), 713(1)(a), C.R.S. (sales/use tax on motor-vehicle rentals)
- § 39-26-104(1)(a), C.R.S. (tax on the purchase price)
- §§ 39-26-102(7)(a), 102(5), C.R.S.; Rule 39-26-102.7(a) (purchase price = price paid by consumer)
- § 39-26-715(1)(a)(I), C.R.S. (gasoline generally exempt)
- 1 CCR 201-5, SR 18 (transportation and freight-in charges)
Related rulings: [[gil-15-012-delivery-charge]], [[plr-23-007-taxability-of-delivery-fee]], [[plr-24-008-sourcing-sales-when-customer-arranges-for-third-party-shipping]].
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-14-016.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-14-016
September 9, 2014
XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Prepaid Fuel and Transportation Charges
Dear XXXXXXXXX,
You submitted on behalf of your client (“Company”) a request for guidance to determine
whether prepaid gasoline or transportation 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
1) Is Company required to collect sales tax on a prepaid fuel charge, assuming that such
charge is separately stated in the rental contract or customer invoice?
2) Is Company required to collect sales tax on the freight and transportation charges billed
to the customer, assuming such charges are separately stated on the sales contract or
customer invoice?
Background
Company leases vehicles to both individuals and business and operates a referral car sales
business. As a part of its leasing services, Company provides an option to its customers to
prepay for gasoline at the beginning of the rental contract. The amount of the prepaid
gasoline charge is equal to the average pump price in the area for the full tank of gasoline in
the leased vehicle. If the customer elects this option, then the customer may return the
vehicle with an empty tank of gasoline without an additional charge.
Company also operates a referral car sales business. At times, a customer will request to
purchase a specific vehicle that is not located at the location closest to the customer. In this
event, Company will arrange for the delivery of the vehicle from its current location to the
location where the customer will purchase the vehicle. Company then charges a fee for this
service and passes on to the customer the costs associated with the delivery of the vehicle.
Discussion
1. Prepaid Gasoline
Colorado levies sales and use tax on the rental of motor vehicles.1 Tax is calculated on the
purchase price.2 The purchase price means the price paid by the consumer and includes the
total amount received in money.3 However, in some instances, charges paid by a purchaser
are not included in the calculation of sales tax.
Generally, gasoline is exempt from state sales and use tax.4 Company asserts that a
customer has the option to purchase Company’s prepaid gasoline and that the charge is
separately stated, or customer may purchase gasoline from another gasoline retailer.
Therefore, the prepaid gasoline charges may not be taxable so long as the charges are
separately stated and optional. If the customer is required to purchase the prepaid gasoline
at the time of purchase, the prepaid gasoline charge may be considered taxable.
2. Freight and Transportation Charges
Transportation of tangible personal property between a retailer and a purchaser is generally
considered a non-taxable service.5 However, transportation charges may be considered part
of the taxable purchase price for the sale of the good when the transportation service is
inseparable from the sale of the good, is not separately stated on the invoice for taxable
goods, or is a freight-in charge.6
Freight-in charges are transportation charges incurred in connection with transporting
tangible personal property from the place of production or from the manufacturer to the seller
or to the seller’s agent or representative, or to anyone else acting on the seller’s behalf,
either directly or through a chain of wholesalers or jobbers or other middlemen and are not a
transportation charge exempt from tax.7 Generally, transportation charges to bring a product
to market are freight-in charges and are taxable. In contrast, transportation charges to ship a
product after a sale are not taxable if separately stated.
Company represents that it “will arrange for delivery of the vehicle from its current location to
the location where the customer will purchase the vehicle.” It is the Department’s
understanding that, generally, the purchase takes place after the vehicle is transferred to the
new location. Therefore, it appears that the vehicle is not brought to market until it is present
at the new location. Under these circumstances, it appears that these transportation charges
are freight-in charges and, thus, subject to sales or use tax. However, if for some reason the
§§39-26-102(23) and 713(1)(a), C.R.S
§39-26-104(1)(a), C.R.S
3 §39-26-102(7)(a) and 102(5), C.R.S. See, also, Department rule 39-26-102.7(a)
4 §39-26-715(1)(a)(I), C.R.S
5 Department Rule 1 CCR 201-5: SR 18.
6 Ibid.
7 Ibid.
1
2
2
DR 4010A (06/11/14)
consumer purchases the vehicle before the vehicle is transferred to the new location, the
transportation charge may not be a freight-in charge and not taxable.
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
3
DR 4010A (06/11/14)