Is a fleet repairer's 'management fee' — charged for online access to its maintenance database/reports — subject to Colorado sales tax, and does it matter that the fee is separately stated from parts and labor?

Plain-English summary

A company repairs and maintains large vehicle fleets — scheduled work like oil changes and unscheduled work like accident damage. As part of the service it keeps a database of every maintenance event (vehicle, type, date, work performed) and charges clients a "management fee" to log into its website and run reports on that data. Invoices separately state parts, labor, and the management fee. Is the management fee taxable?

The Department's answer is it depends on whether the management service is optional. Two principles combine:

1. The fee itself is for ASP software, which isn't taxable. The management fee buys access to the company's database — computer software the company hosts for clients to use. A company that keeps custody of software for third parties to access is an application service provider (ASP), and ASP-provided software is not tangible personal property and isn't subject to sales tax (§ 39-26-102(15)).

2. But a required service rides along with the taxable goods. Auto parts are taxable tangible personal property. Under Colorado's inseparability doctrine (A.D. Store Co. v. Department of Revenue, 19 P.3d 680 (Colo. 2001)), charges for nontaxable services that are not separable from the sale of taxable goods are included in the sales tax calculation — while genuinely optional services stay separable and nontaxable (the court approvingly cited a Massachusetts case, Info. Servs., Inc., reaching that result for optional services). So if a client must purchase the management service in order to use the repair/maintenance service, the management fee is part of the taxable sale — even though it's separately stated from the parts.

The pivot is optionality, not invoice formatting. Required = taxable (bundled with the parts); optional = nontaxable (separable ASP service). The Department pointed to PLR 09-004 (fleet coordination and convenience services) and its non-optional-services rule (SR-18 transportation, SR-22 hotels, § 39-26-102(1.3) auctioneers) as the same principle in other settings.

What this means for you

Fleet maintenance and auto-service providers

If your data/management service is a genuine add-on customers can decline while still getting their vehicles repaired, the fee is a nontaxable ASP service. But if buying the repairs requires also paying the management fee, expect that fee to be taxed as part of the parts sale — separately stating it on the invoice won't make it nontaxable. Structure the offering (and document the optionality) accordingly.

Accountants advising service-plus-goods businesses

Separate statement is not the test; separability is. The questions: are the parts taxable (yes, auto parts are), and must the customer buy the service to get the goods? If the service is non-optional, it's inseparable and pulled into the tax base under A.D. Store. ASP software being non-taxable doesn't rescue a fee that's bundled as a required condition of the taxable sale.

Common questions

Q: Is a fleet 'management fee' for database access taxable in Colorado?
A: Not by itself — it's access to ASP-hosted software, which isn't taxable. But it becomes taxable if clients are required to buy the management service as part of purchasing the taxable repair parts.

Q: We separately state the management fee from parts and labor. Doesn't that make it nontaxable?
A: No. The Department was explicit that a required service is included in the tax calculation "even if the price for the management fee is separately stated." Separability, not separate statement, controls.

Q: When is the management fee NOT taxable?
A: When the service is genuinely optional and separable — the client can buy the repairs without buying the management service. Then it's a nontaxable ASP service.

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, C.R.S. (tax on tangible personal property and certain services)
- § 39-26-104(1)(a), C.R.S. (nontaxable service inseparable from a taxable TPP sale is taxed)
- § 39-26-102(15), C.R.S. (ASP-provided software is not tangible personal property)

Case law and related guidance (cited by the Department):
- A.D. Store Co. v. Department of Revenue, 19 P.3d 680 (Colo. 2001) (inseparable nontaxable services included in tax base; optional services separable)
- Info. Servs., Inc. v. Comm'r of Revenue, 718 N.E.2d 1256 (Mass. App. Ct. 1999) (optional services not taxable)
- PLR 09-004 (fleet coordination and convenience care services); SR-18 (transportation), SR-22 (hotels), § 39-26-102(1.3) (auctioneers)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-16-018.pdf

Original ruling text

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

GIL-16-018
August 19, 2016
XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Management Fee
Dear XXXXXXXXXXXX,
You submitted on behalf of a client {"Company") a request for guidance regarding the taxability
of a management fee.
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 Rule 1 CCR 201-1, 24-35-103. 5.
The Department treats this request as 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 1 CCR 201-1, 24-35-103.5.
Issue
Is Company's management fee subject to sales tax?
Background
Company provides repair and maintenance services for large fleets of motor vehicles.
Company performs all scheduled (oil changes) and non-scheduled maintenance (damage due
to accidents). As part of these services, Company maintains data on all maintenance performed,
which includes the vehicle, vehicle type, date of maintenance, and repair work, as well as other
information. Company charges clients a fee, referred to as a management fee, to access this

data. Customers access this data by logging onto Company's website and they can run reports.
Company separately states on client invoices charges for parts, labor, and the management fee.
Structure of Analysis
To determine whether the fee is subject to tax, the Department will examine the following
questions:
1. Is the fee the sale of taxable property or service under §39-26-104, C.R.S.?
1. Is the fee inseparable from the sale of taxable tangible personal property under §
39-26-104(1)(a), C.R.S.?
Discussion
Colorado imposes sales tax on the sale of tangible personal property and a limited number of
services.1 The retail sale of auto parts is a taxable sale of tangible personal property. The
management fee provides access to Company's database, which is computer software that
clients access to obtain information. A company that retains custody of computer software for
use by third parties is commonly known as an application service provider (ASP). Computer
software made available to consumers by an ASP is not tangible personal property and,
therefore, charges for access to such software is not subject to sales tax.2
However, charges for nontaxable services are included in the tax calculation for taxable goods if
the buyer is required to purchase the nontaxable service as part of its purchase of taxable
goods. In A.O. Stores v. Department of Revenue, 19 P.3rd 680 (Colo. 2001), the Court held that
charges for non-taxable services that are not separable from the sale of taxable goods are
included in the calculation of sales tax, citing with approval Info. Servs., Inc. v. Comm'n of
Revenue, 718 N.E.2d 1256, 1258 (Mass. App. Ct. 1999) in which the court concluded that
optional services were not taxable because they were separable from the ultimate sale of the
taxable goods.3 Therefore, if Company's client must purchase the management service when
using Company's repair and maintenance service, then the management fee is included in the
calculation of sales tax, even if the price for the management fee is separately stated from the
taxable sale of auto parts.
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.
1

§ 39-26-104(1), C.R.S.
§ 39-26-102(15), C.R.S.
3
This rule regarding non-optional services is applied in a host of situations, from non-optional services in hotels,
transportation, and auctioneers (see department Special Rule Sales 18 (Transportation), SR Sales 22 (Hotels), 3926-102(1.3) (auctioneers) to the closely related issue of optional motor vehicle fleet coordination and convenience
services (see private letter ruling PLR 09-004 (fleet coordination and convenience care services)

2

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