Is an optional maintenance agreement bought with a vehicle lease subject to Colorado sales tax?

Plain-English summary

A vehicle-leasing company asked whether the optional maintenance agreement its customers can buy when leasing a vehicle is subject to Colorado sales or use tax. The agreement comes from a third party, is a separate contract the customer separately signs, and can be financed within the lease (shown as a separate line item in the lease contract). The Department's answer: such a maintenance agreement is not part of the taxable lease as long as it is separable and separately stated.

The general rule: maintenance agreements sold in connection with the sale or lease of taxable equipment "are generally subject to Colorado sales or use tax unless the maintenance contract is separable and separately stated." So there are two tests:

1. Separable (optional). "A maintenance agreement is considered separable from tangible personal property when the agreement is optional." If the customer had to buy it in order to lease the vehicle, it would not be separable. Here the company represented the agreement is optional, so this test is met.

2. Separately stated. The cost must be separately stated on an invoice. Here the agreement is a separate contract the customer separately signs, and when financed within the lease there is "a separate line item detailing the cost of the maintenance agreement in the lease contract." That satisfies the separately-stated requirement.

Importantly, the Department added that the monthly invoice not breaking out the maintenance portion "does not alter our conclusion," because "[t]he customer knowingly entered into the agreement and can see the amount on their maintenance agreement contract." So both tests being met, the optional maintenance agreement is excluded from the sales tax on the lease.

This is a General Information Letter — general guidance, not a binding determination.

What this means for you

Vehicle and equipment lessors

If you offer a maintenance or service agreement alongside a lease, you can keep it out of the taxable lease amount only when it is genuinely optional (the customer can lease without it) and its price is separately stated — a separate contract and/or a separate line item works. If you ever require the maintenance plan as a condition of leasing, it folds into the taxable lease. Note that even when the recurring monthly bill doesn't itemize the maintenance piece, a separate signed contract showing the amount is enough.

Customers leasing vehicles

An optional maintenance plan you choose to buy, priced separately, generally shouldn't be taxed as part of your lease. If a dealer requires it to lease, the analysis changes.

Accountants and tax professionals

This is the standard bundling / separately-stated analysis: optional = separable; required = inseparable and taxable with the lease. Underlying lease mechanics: long-term lease (>3 yr) taxed on each payment as an installment sale (§ 39-26-102(23)); short-term lessor pays on acquisition or collects on payments by permission (§ 39-26-713(1)(a)). The "knowingly entered into / can see the amount on the contract" point is a useful documentation standard. Compare the separately-stated/optional theme in CO GIL 18-014 (facility rental vs. catering) and GIL 17-008 (marketing services vs. printed goods).

Common questions

Q: Is a maintenance agreement sold with a lease taxable in Colorado?
A: Generally yes — unless it is both separable from the lease and separately stated. Meet both and it's excluded from the sales tax on the lease.

Q: What makes a maintenance agreement "separable"?
A: It must be optional. If the customer is required to buy it in order to lease the vehicle, it is not separable and is taxed with the lease.

Q: Does the monthly bill have to itemize the maintenance charge?
A: No. The Department said a separate signed maintenance contract (or a separate line item in the lease contract) showing the amount is enough; the monthly payment invoice not breaking it out doesn't change the result.

Q: What if the maintenance plan is required to lease?
A: Then it isn't separable and its cost is included in the taxable lease.

Q: Is this letter binding?
A: No. A General Information Letter is general guidance and is not binding on the Department; it makes no specific determination. For a binding answer, request a private letter ruling.

Q: Does this cover city sales tax?
A: No. The Department administers state and state-collected local taxes only; self-collected home-rule cities and counties set their own rules.

Citations and references

Statutes:
- § 39-26-102(23), C.R.S. (long-term lease of tangible personal property taxed on each lease payment as an installment sale)
- § 39-26-713(1)(a), C.R.S. (short-term lessor is the consumer and pays tax on acquisition, or may obtain permission to collect tax on the lease payments)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-17-006.pdf

Original ruling text

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

GIL-17-006

March 16, 2017
XXXXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
Re: Optional Maintenance Agreement
Dear XXXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXXX (“Company”) a request for
guidance on whether sales or use tax applies to Company’s optional maintenance
agreement.
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
pay the fee in compliance with Department Rule 1 CCR 201-1, 24-35-103.5.
Issue
Is the sale of an optional maintenance agreement entered into when a customer leases a
vehicle subject to Colorado sales or use tax?
Background
Company is engaged in the business of leasing vehicles for periods between 24-48
months with some very limited 12 month leases. When leasing a vehicle, customers may
purchase an optional maintenance agreement from a third party. The maintenance
agreement is a separate contract from the lease contract and customers must separately
sign each contract if they chose to purchase the maintenance agreement.
The cost of the optional maintenance agreement can be financed within the lease and a
separate line in the lease contract will identify the amount financed for the maintenance

agreement. Company charges Colorado sales tax on each monthly lease payment;
however, the invoice for the monthly lease payment does not include a breakdown of the
portion of the payment that relates to the optional maintenance agreement.
Structure of Analysis
To determine whether Company’s transaction is subject to sales tax, the Department will
examine the following question:
1. Is the maintenance agreement separable from the lease of taxable tangible personal
property?
Discussion
Colorado imposes sales tax on each payment a lessee makes on a long-term lease of
tangible personal property, including long-term leases of motor vehicles.1 Long-term
leases are leases whose initial lease term is longer than three years. For short term
leases, Colorado requires the lessor to pay tax when acquiring the leased property, or the
Department may grant the lessor permission to acquire the leased property exempt from
tax and collect sales tax on the lease payments throughout the lease.2
Maintenance agreements when sold in connection with the sale or lease of taxable
tangible personal property are generally subject to Colorado sales or use tax unless the
maintenance contract is separable and separately stated from the sale or lease of the
taxable tangible personal property.
Maintenance agreements must be separable from the sale or lease of tangible personal
property to be excluded from the calculation of sales tax. A maintenance agreement is
considered separable from tangible personal property when the agreement is optional. If
the customer is required to purchase a maintenance agreement in order to lease the
tangible personal property, such maintenance agreement is not separable from the
tangible personal property. Company represents that the maintenance agreement is
optional and the customer does not have to purchase such agreement in order to lease a
vehicle. As such, the maintenance agreement is separable from the sale or lease of
tangible personal property.
In addition, maintenance agreements must be separately stated from the lease of the
tangible personal property on an invoice. Company represents that the maintenance
agreement is a separate contract from the lease contract and customers must separately
sign each contract if they chose to purchase the maintenance agreement. Additionally,
Company represents that if the cost of the maintenance agreement is included in the
lease, there is a separate line item detailing the cost of the maintenance agreement in the
lease contract. The separate line item in the lease contract detailing the cost of the
maintenance agreement fulfills the requirement that the maintenance agreement be
separately stated from the sale or lease of the tangible personal property. The fact that the
monthly lease payment does not include a breakdown of the portion of the payment that
relates to the optional maintenance agreement does not alter our conclusion. The
customer knowingly entered into the agreement and can see the amount on their
maintenance agreement contract.
1
2
2

§ 39-26-102(23), C.R.S.
§ 39-26-713(1)(a), C.R.S.
DR 4010A (06/11/14)

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 homerule 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)