Is a digital copier's 'per-click' maintenance charge — which bundles labor with toner and staples and is priced by pages printed — subject to Colorado sales tax when the customer uses the copier to make printed items it then resells?
Plain-English summary
A company leases and sells digital copiers to print shops, and bundles a maintenance contract priced by pages printed — a "per-click" charge that covers maintenance labor plus consumables like toner and staples. The company argued the whole per-click fee was a nontaxable service. The Department didn't fully buy that framing but still reached the same result: on these facts, the per-click fee is not taxable.
The Department's reasoning is the interesting part. It rejected the idea that the per-click charge is "strictly a service contract," because toner and staples aren't used to repair worn or broken parts — they're consumed making copies. So the fee really represents both a sale of tangible personal property (toner, staples) and a service (maintenance). Normally that would trigger a true-object / separately-stated analysis. But here the Department said it didn't need to go there, because the toner and staples are exempt anyway, on two independent grounds:
- Sale for resale (§ 39-26-102(19)) — the print-shop customers resell the copies, posters, and other items they produce, so the toner and staples flow into goods that get taxed downstream; selling those consumables to the print shop is a wholesale (resale) sale, not a taxable retail sale.
- Ingredient or component part (§ 39-26-102(20)) — the toner and staples become components of the printed products the shop sells.
With the property side exempt and the labor a nontaxable service (the Department assumed the fee is optional and separately stated), the whole per-click fee escapes tax.
Two important caveats the Department flagged: the copier company itself still owes use tax on things it consumes in doing maintenance (lubricants, replacement parts — these aren't resold), and the answer flips if the per-click fee is charged to a customer who doesn't resell what it prints (e.g., a business printing for its own internal use). In that case the consumables are taxable.
What this means for you
Copier dealers and managed-print providers
If your per-click customers are print shops reselling their output, the consumables baked into the click charge ride along under the resale and component exemptions, and the labor is a nontaxable service — so the click fee isn't taxable to them. But segment your customer base: a click contract sold to a law firm or office that prints only for its own use doesn't get those exemptions, and the toner/staples portion becomes taxable. Keep the maintenance charge optional and separately stated to protect the service treatment.
Print shops buying copier maintenance
Because you resell what you print, the toner and staples in your per-click fee qualify for the resale and ingredient/component exemptions — so the click charge generally isn't taxed to you. You'll typically provide a resale/exemption certificate. Note this rests on your reselling the printed goods (and collecting tax on those sales).
Accountants and tax professionals
The Department deliberately sidestepped the true-object test by finding the TPP component independently exempt — a clean reminder that you don't reach bundling analysis if the goods side is exempt regardless. The exemptions are § 39-26-102(19) (resale) and (20) (ingredient/component, with 1 CCR 201-5, SR-14). Two contingencies control the outcome: the maintenance fee being optional and separately stated, and the customer actually reselling its output.
Common questions
Q: Is a copier "per-click" or "cost-per-page" maintenance charge taxable in Colorado?
A: On these facts, no — where the customer resells what it prints. The toner and staples in the click fee are exempt as a sale for resale and as ingredients/components of the printed goods, and the maintenance labor is a nontaxable service.
Q: What changes if I print only for my own business and don't resell?
A: The Department said it would "likely reach a different conclusion." Without a resale, the toner and staples lose both exemptions and become taxable tangible personal property.
Q: Does the copier company owe any tax?
A: Yes — use tax on the tangible items it consumes performing maintenance, such as lubricants and replacement parts, since those aren't resold.
Q: Does the maintenance fee need to be separately stated?
A: The Department assumed the per-click fee is optional and separately stated when treating the service portion as nontaxable. Bundling a required, non-separated charge can change the analysis.
Q: Can I rely on this letter?
A: Only as general guidance. A General Information Letter is not binding on the Department and makes no specific determination. For a binding answer on your facts, request a private letter ruling.
Citations and references
Statutes and rules:
- § 39-26-104(1), C.R.S. (imposition of sales/use tax)
- § 39-26-202, C.R.S. (use tax)
- § 39-26-102(19), C.R.S. (sale for resale / wholesale exemption)
- § 39-26-102(20), C.R.S. (ingredient or component part exemption)
- 1 CCR 201-5, SR-14 (Fabricating, Producing, and Processing)
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-16-003.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-16-003
April 18, 2016
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Maintenance Agreement
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXX (“Company”) a request for guidance to determine
whether Company’s maintenance agreements are subject to 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 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.
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 Rule 24-35-103.5.
Is Company’s “per click” charge subject to tax?
Issue
Background
Company leases or sells digital copiers to customers who use these machines to produce and sell
items, such as business cards, posters, flyers, and books. When a customer purchases a copier, it
also purchases a maintenance contract. The maintenance contract includes the labor to maintain
printers in working order, replacement parts, and consumables, such as toner and staples. The
sale of these consumables is considered wholesale sale transactions because these consumables
are resold and the subsequent sale is subject to tax. The price for the maintenance agreement is
based on the number of pages printed (a “per click charge”).
Structure of Analysis
To determine whether Company’s maintenance contract is subject to tax, the Department will
examine the following questions:
1. Is the item a nontaxable service?
2. Is the item taxable under § 39-26-104(1), C.R.S.?
a. Is the item tangible personal property sold or purchased at retail?
b. If the item is not purely tangible personal property, does the item contain both
potentially taxable and nontaxable elements?
i. If it contains both potentially taxable and nontaxable elements, are the
nontaxable service components and taxable tangible personal property
separable and separated?
ii. What is the true object of the customer in the transaction?
3. Is the tangible personal property eligible for any exemptions?
a. Is the item exempt as a sale for resale under § 39-26-102(19), C.R.S.?
b. Is the item exempt as a sale for resale or as an ingredient or component part of a
product that is compounded under § 39-26-102(20), C.R.S.?
Discussion
Colorado levies sales and use tax on the sale, storage, use or consumption of tangible personal
property in Colorado.1 The sale of services are generally not subject to tax.
Company characterizes its “per click” fee as a charge for service (maintenance). We do not agree
that the “per click” charge is strictly a service contract. Had the printing company purchased toner
and staples separate from the maintenance contract, these items would clearly be subject to tax
(unless, as described below, an exemption applies). Toner and staples, together with the paper on
which copies are made, are not used for maintaining or servicing worn or broken parts of the
printer. The “per click” fee represents both the sale of tangible personal property (toner and
staples) and the provisioning of services (maintenance).
When a transaction involves both the sale of tangible personal property and the sale of a
nontaxable service, we typically inquire as to whether these two items are separable, separately
stated, and, if necessary, determine the true object of the transaction. However, we find that such
an analysis is not required here because the sale of the toner and staples are exempt from tax
under the facts described by Company. There are two exemptions that apply to the sale of toner
and staples. The first exemption is the sale for resale (i.e., wholesale sale) exemption. Sales tax
applies to retail sales, not wholesale sales.2 Company represents that its customers are in the
business of producing copies, posters and other items for sale and such items are subject to sales
tax. Thus, the sale of toner and staples to these customers is exempt because the customers will
resell these items.
The second exemption applicable here is the exemption for components or ingredients used to
produce tangible personal property that is sold.3 The sale of toner and staples by Company falls
within this exemption because the staples and toner are components or ingredients used in the
production of tangible personal property (e.g., copies, posters) that is resold by the printing
company to the end user.
For these reasons, we believe the “per click” fee is not subject to tax. The sale of toner and
staples is exempt pursuant to two exemptions. The sale of the maintenance service is also not
subject to tax because services are nontaxable and we assume the “per click” fee is optional and
separately stated. Company is liable for use tax for any tangible personal property it uses in
connection with the maintenance (e.g., lubricants, replacement parts). If Company assesses the
1
2
3
2
§ 39-26-104(1) and 202, C.R.S.
§ 39-26-104(1) and § 39-26-102(19), C.R.S.
§ 39-26-102(20), C.R.S. Code of Colorado Regulations 1 CCR 201-5, SR-14 - Fabricating, Producing, and
Processing. If the printer is owned by a company that uses it for its own internal needs, then the printing company’s
purchase of the ink and staples are taxable because the printing company is the end user of those items.
DR 4010A (06/11/14)
“per click” fee to businesses that do not resell tangible personal property (i.e., copies, etc.), we will
likely reach a different conclusion.
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
3
DR 4010A (06/11/14)