Does a city's 10-cent disposable bag fee get added into the sales tax base when a customer buys taxable goods?

Plain-English summary

A municipality imposes a 10-cent fee on each disposable bag a retail customer uses. The fee is levied on the customer and collected by the retailer, and the money is meant to cover the city's costs of bag disposal, public education, and producing reusable bags. The question: when a customer buys taxable goods and pays the bag fee, does that 10-cent fee get folded into the state sales tax calculation on the purchase?

The Department's answer: no.

A taxable sale requires a transfer of tangible personal property for consideration. There is a transfer of property (the bags) and a payment of money (the fee). But the Department's key point is that the retailer offers the bag free of charge — the taxable event for the bag is when the retailer buys it from its supplier, not when the customer pays the fee. The disposable bag fee is not paid in consideration for the bag, much the way sales tax itself is paid in connection with a purchase but isn't consideration for the item. With no consideration paid for the bag (other than the fee, which isn't consideration for it), the bag-fee transaction isn't a taxable sale, so the fee is not subject to state sales tax and isn't added to the tax base on the customer's purchase.

The Department also flagged a limit: it does not administer the town's own sales taxes, so this letter does not decide whether the bag fee is included in the town's tax calculation.

What this means for you

Retailers and grocers

A government-imposed disposable bag fee that you collect from customers is not part of the state sales tax base — don't compute state sales tax on the 10-cent fee. The reasoning is that you give the bag away for free and the fee isn't the price of the bag. (You separately owe tax when you buy the bags from your supplier — that's the taxable event for the bags themselves.)

Municipalities

This letter addresses only state and state-administered sales tax. Whether the bag fee belongs in a home-rule city's own tax base is up to that city; the Department didn't decide it.

Accountants and tax professionals

The analysis turns on the definition of "sale" (§ 39-26-102(10)) requiring a transfer for consideration. The Department analogizes the bag fee to sales tax: paid in connection with, but not as consideration for, the property. The taxable event for the bag is the retailer's purchase. Watch the home-rule caveat — self-collected cities may treat the fee differently in their own bases.

Common questions

Q: Is a city disposable bag fee subject to Colorado state sales tax?
A: No. The Department concluded the fee isn't consideration for the bag — the bag is given away free — so there's no taxable sale and the fee stays out of the state sales tax base.

Q: Why isn't the fee taxed if the customer is paying money and getting a bag?
A: A taxable sale requires a transfer for consideration. The Department treats the bag as free and the fee as not being the bag's price — analogous to how sales tax is paid with a purchase but isn't the price of the item.

Q: Who pays tax on the bags, then?
A: The retailer. The taxable event for the bags is when the retailer buys them from its supplier, not when the customer pays the fee.

Q: Does this cover my home-rule city's tax?
A: No. The Department administers only state and state-administered local taxes, and it expressly didn't decide whether the fee is in the town's own tax base. Check with the city.

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:
- § 39-26-104(1), C.R.S. (sales tax imposed on tangible personal property)
- § 39-26-102(10), C.R.S. (definition of "sale" — transfer of property for consideration)

Rules:
- Department Rule 24-35-103.5 (GIL / PLR procedure)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-15-022.pdf

Original ruling text

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

GIL-15-022
October 15, 2015
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Disposable Bag Fee
Dear XXXXXXXXXXXXXX
You submitted on behalf of the XXXXXXXXXXXXXXX a request for guidance on whether a municipal
fee related to disposable bags is included in the sales and use tax calculation for the consumer’s
purchase of taxable tangible personal property.
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 but
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 treats this request as one for a general information letter. It is important to
remember that general information letters, such as this one, are general discussions of tax law and
are not binding on the Department. If Company would like the Department to issue a private letter
ruling on the issue raised here, Company can submit a request and fee in compliance with
Department Regulation 24-35-103.5.
Issue
Is a municipal disposable bag fee included in the sales and use tax calculation for the sale tax of
taxable goods purchased by the customer?
Background
XXXXXXXXXXXXXXXXX, which is a XXXXXXXXXX, imposes a $.10 fee on each disposable bag
used by a retail customer. The fee is levied on the customer and collected by the retailer. The
purpose of the fee is to recover a variety of municipal costs associated with the use of such bags,
including disposal, public education and production of reusable bags. The Department does not
administer the collection of this fee but does administer the collection of sales tax for the state,
XXXXXXXXXXXX and certain special districts located in XXXXXXXXXXXXX.

Discussion
To determine the taxability of the disposable bag fee, we need to determine whether the transfer of
the disposable bag from the retailer to the customer who pays the $.10 fee constitutes a taxable sale
of tangible personal property.1 A taxable sale occurs when there is the transfer of tangible personal
property for consideration.2 There is certainly a transfer of tangible personal property (bags) from the
retailer to the customer as well as a payment of money from the customer to the retailer (i.e., the fee).
However, the retailer offers the bag free of charge to the customer. Moreover, the taxable event
relating to the bags is when the retailer purchases the bags from the supplier, not when the customer
pays for the items that go into the bag. The disposable bag fee is not paid in consideration for the
bag, just as the payment of sales tax is not a payment made in consideration for the purchase of a
taxable item, although the tax is certainly paid in connection with such purchase. Thus, it appears that
the disposable bag fee is not subject to tax because there is no consideration paid, with the exception
of the fee, for the disposable bag from the customer to the retailer.
The Department does not administer the sales taxes for XXXXXXXXXXXXXXX (town) and, therefore,
this letter does not address whether the disposable bag fee is included in the calculation of the town’s
sales taxes.
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/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

1
2

2

Colorado levies sales tax on the sale of tangible personal property. § 39-26-104(1), C.R.S.
§ 39-26-102(10), C.R.S.
DR 4010A (06/11/14)