If a Colorado contractor pays sales tax on construction materials and only later gets an exemption certificate, must the supplier go back and refund or credit that tax?

Plain-English summary

Colorado exempts sales of construction and building materials to contractors and subcontractors when those materials go into public works owned and used by government entities, qualifying charities, or schools (not schools run for profit). To use the exemption, the contractor must get a certificate of exemption from the Department and present it at the time of purchase.

The supplier here asked: when a contractor buys materials without an exemption certificate, the supplier correctly charges sales tax — and if the contractor later obtains a certificate, does the supplier have to go back and fix the earlier invoices?

The Department's answer is no. A contractor generally knows well in advance whether a project qualifies and has ample time to apply for and receive a certificate before buying materials. If the contractor doesn't hand over a certificate at purchase, the retailer must charge sales tax — and a retailer who fails to do so is on the hook for the tax plus penalties and interest. So once tax has been properly charged, the supplier is not required to refund or credit it just because a certificate shows up afterward.

Instead, the contractor has the remedy: it can apply to the Department for a refund by filing Form DR 0137. Separately, the supplier may, at its own discretion, refund the tax to the contractor after being presented the certificate and then claim a credit on its own sales tax return (§ 39-26-703(2.5)(b)(I)) — but that is optional, not mandatory.

What this means for you

Building-material suppliers and retailers

If a contractor can't produce an exemption certificate at the register, charge the tax — protecting yourself, since you'd otherwise be liable for the uncollected tax plus penalties and interest. If a certificate arrives later, you have a choice: you can refund the tax and take a credit, or you can simply tell the contractor to seek a refund from the state with Form DR 0137. You are not obligated to reopen the invoice.

Contractors and subcontractors on exempt projects

Apply for your exemption certificate before you start buying materials — you generally know early whether a job is for a government, charity, or school owner. If you do get charged tax because your certificate wasn't ready, your path to recovery is Form DR 0137 to the Department, not a demand on the supplier.

Accountants and tax professionals

The exemption flows from § 39-26-708, and the supplier's optional refund-and-credit mechanism is § 39-26-703(2.5)(b)(I). The practical point is timing: the certificate must be presented at purchase, and a late certificate shifts the refund burden to the buyer rather than forcing the seller to amend.

Common questions

Q: Does a supplier have to refund tax once the contractor finally produces a certificate?
A: No. If the tax was properly charged at the time of sale, the supplier is not required to refund or credit it. The supplier may choose to do so and take a credit, but it's optional.

Q: How does the contractor get its money back?
A: By applying to the Department for a refund using Form DR 0137.

Q: What happens if the supplier doesn't charge tax and the project isn't actually exempt?
A: The retailer becomes liable for the sales tax that was due, plus penalties and interest. That's why suppliers should charge tax whenever a valid certificate isn't presented at purchase.

Q: Which projects qualify for the contractor exemption?
A: Construction and building materials used to build, alter, or repair public works owned and used by the U.S. or Colorado government and their subdivisions, qualifying charitable organizations in their charitable functions, and schools not run for private or corporate profit.

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

Citations and references

Statutes and rules:
- § 39-26-708(1), (2), C.R.S. (exemption for construction/building materials on public works of government, charities, and non-profit schools)
- § 39-26-708(3), C.R.S. (Department-issued contractor certificate of exemption)
- § 39-26-703(2.5)(b)(I), C.R.S. (retailer may refund tax to purchaser and claim a credit)
- Department Rule 24-35-103.5 (GIL / PLR procedure)

Forms:
- DR 0172 — Contractor Application for Exemption Certificate (per exempt project)
- DR 0137 — Claim for Refund (filed by the contractor)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-15-002.pdf

Original ruling text

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

GIL-15-002 — January 27, 2015

Re: Contractor Exemption Certificates

You submitted on behalf of the Company a request for guidance to clarify the application of sales tax to construction and building materials purchased by a contractor or subcontractor.

The 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. […] The Department initially treats your request as one of a general information letter.

Issue

Is the retailer required to refund or credit sales taxes that were paid before an exemption certificate is issued?

Background

Company is a supplier to contractors who provide construction services for tax exempt entities. In some instances, the contractors make purchases from Company when they do not have a tax exemption certificate. Company charges the appropriate taxes until the customer presents Company with an exemption certificate. Company believes that it should not go back and adjust the taxes on invoices that were billed prior to receipt of the tax exemption documents and that the customer must request a credit and/or refund from the Department.

Discussion

Colorado exempts from taxation all sales of construction and building materials to contractors and subcontractors for use in the building, erection, alteration, or repair of structures, highways, roads, streets, and other public works owned and used by (1) the United States government, the State of Colorado, its departments and institutions, and the political subdivisions thereof in their governmental capacities only, (2) charitable organizations in the conduct of their regular charitable functions and activities, and (3) schools, other than schools held or conducted for private or corporate profit. [§§ 39-26-708(1), (2), C.R.S.]

To facilitate this exemption, the Department issues a contractor (or subcontractor) a certificate of exemption indicating that the contractor's purchase of construction or building materials is for a purpose stated above and is, therefore, exempt from sales or use tax. [§ 39-26-708(3), C.R.S.] The Department provides forms to apply for an exemption certificate (DR 0172) and has the authority to verify that the contractor is entitled to the issuance of the certificate.

The contractor must present an exemption certificate at the time of purchase. A contractor will generally know well in advance of construction whether the project is entitled to an exemption certificate and will have more than sufficient time to apply for and receive an exemption certificate before purchasing building materials and supplies. If the contractor does not provide a certificate of exemption to the retailer, then the retailer must charge sales tax on the transaction. A retailer who fails to charge sales tax in such instances will be liable for any sales tax that was due as well as penalties and interest. Company should advise the contractor that, if it later obtains an exemption certificate, it may apply to the Department for a tax refund by submitting Department Form 0137.

The retailer may, in its discretion, and after being presented an exemption certificate by the contractor, refund the sales tax to the contractor and claim a credit on its sales tax return. [§ 39-26-703(2.5)(b)(I), C.R.S.] However, the retailer is not required to refund or credit taxes appropriately charged if the contractor subsequently obtains a certificate.

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.

(Condensed from the official PDF; see the linked source for the complete text and footnotes.)