Is acquiring tangible personal property by foreclosing on a security interest a taxable sale, and is manufacturing machinery used in an enterprise zone exempt?
Plain-English summary
A company asked two unrelated questions: (1) is buying/acquiring tangible personal property at a foreclosure subject to tax, and (2) is manufacturing machinery used exclusively in an enterprise zone exempt?
Foreclosure acquisition — not a taxable sale. Colorado taxes retail sales of tangible personal property unless exempt. But when an owner's property passes to a lender — who holds a security interest, and obtains possession and title by foreclosing on that interest — that transfer is not a sale subject to tax. The statute's definition of "sale" expressly excludes the "repossession of personal property by a chattel mortgage holder or foreclosure by a lienholder" (§ 39-26-102(10)(j)). However, if the secured party later sells the foreclosed property to a third party (for example, by auction), that sale is subject to sales tax. So the foreclosure itself is tax-free; the lender's downstream sale is taxable.
Enterprise-zone manufacturing machinery — exemption available. Colorado exempts sales of manufacturing machinery and machine tools over $500 used directly and predominantly in Colorado to manufacture tangible personal property (§ 39-26-709). For machinery used solely and exclusively in an enterprise zone, the exemption is expanded to also cover self-constructed equipment and mining and related activities (§ 39-30-106). The Department flagged that there are a number of qualifications to meet under both §§ 39-30-106 and 39-26-709 — it didn't make a binding determination here, just pointed to the statutory framework.
What this means for you
Lenders and secured creditors
Taking back collateral by foreclosure or repossession doesn't trigger sales tax on you — it's excluded from the definition of a sale. But remember the flip side: when you dispose of that property (an auction or sale to a buyer), you're making a taxable retail sale and need to handle the tax accordingly.
Manufacturers, including in enterprise zones
Qualifying manufacturing machinery and machine tools (over $500, used directly and predominantly in Colorado manufacturing) can be bought exempt. If your operation sits wholly within an enterprise zone, the exemption reaches more — self-constructed equipment and mining-related machinery — but only if you meet the detailed qualifications in §§ 39-30-106 and 39-26-709.
Accountants and tax professionals
The foreclosure result rests on the "sale" exclusion in § 39-26-102(10)(j) (foreclosure/repossession), with the secured party's later third-party sale taxable under § 39-26-104(1). The enterprise-zone piece layers § 39-30-106's expansion (self-constructed equipment, mining) on top of the base § 39-26-709 machinery exemption — both with qualification checklists. This GIL is a framing/pointer, not a fact-specific determination. Compare the base machinery exemption analysis in [[gil-15-004-contract-manufacturing]].
Common questions
Q: Do I owe sales tax when I take property through foreclosure or repossession?
A: No. Colorado's definition of "sale" excludes repossession by a chattel-mortgage holder and foreclosure by a lienholder, so that acquisition isn't a taxable sale.
Q: What about when I later sell the foreclosed property?
A: That sale to a third party (such as at auction) is subject to sales tax.
Q: Is manufacturing machinery exempt in Colorado?
A: Machinery and machine tools over $500 used directly and predominantly in Colorado manufacturing are exempt under § 39-26-709, subject to qualifications.
Q: Does an enterprise zone change the machinery exemption?
A: Yes. For machinery used solely and exclusively in an enterprise zone, § 39-30-106 expands the exemption to include self-constructed equipment and mining and related activities, subject to the statutory qualifications.
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:
- § 39-26-104(1), C.R.S. (sales tax on retail sales of TPP)
- § 39-26-102(10)(j), C.R.S. ("sale" excludes repossession by a chattel-mortgage holder or foreclosure by a lienholder)
- § 39-26-709, C.R.S. (manufacturing machinery and machine-tools exemption)
- § 39-30-106, C.R.S. (enterprise-zone expansion; self-constructed equipment, mining)
- Department Rule 24-35-103.5 (GIL / PLR procedure)
Related rulings in this library:
- [[gil-15-004-contract-manufacturing]] (manufacturing machinery exemption; predominant use)
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-15-013.pdf
Original ruling text
Office of Tax Policy, P.O. Box 17087, Denver, CO 80217-0087
GIL-15-013 — May 28, 2015
Re: Asset Acquisition through Foreclosure and Manufacturing Machinery in an Enterprise Zone
You submitted on behalf of the Company a question regarding Colorado sales or use tax on assets acquired by foreclosure and whether the purchase of manufacturing machinery is exempt from sales and use taxes. […] The Department treats this request as one for a general information letter.
Issue
- Is the purchase of tangible personal property at a foreclosure sale subject to tax?
- Is the purchase of manufacturing machinery and machine tools used exclusively in an enterprise zone subject to sales tax?
Discussion
Sales tax applies to the retail sale of tangible personal property, unless it is otherwise exempt. [§ 39-26-104(1), C.R.S.] The transfer of possession and title from an owner of tangible personal property to a lender, whose loan is secured by a security interest on such property and who obtains possession and title of the property by foreclosing on the secured interest, is not a transaction subject to sales tax. [§ 39-26-102(10)(j), C.R.S. (a taxable sale does not include the "repossession of personal property by a chattel mortgage holder or foreclosure by a lienholder").] However, if the secured party thereafter sells the property to a third party, such as by auction sale, then that sale is subject to sales tax.
Colorado exempts from sales tax sales of manufacturing machinery and machine tools in excess of $500 used directly and predominantly in Colorado in manufacturing tangible personal property. [§ 39-26-709, C.R.S.] In addition, the manufacturing machinery and machine tools exemption is expanded to include self-constructed equipment, mining and related activities if used solely and exclusively in an enterprise zone. [§ 39-30-106, C.R.S.] There are a number of qualifications for the exemption. Machinery and machine tools must meet the qualifications set forth in §§ 39-30-106 and 39-26-709, C.R.S.
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.)