How are service agreements, shipping, restocking fees, and resale certificates taxed on sales of medical imaging equipment in Colorado?

Plain-English summary

A company that sells and services medical imaging equipment asked four sales-tax questions: how service agreements are taxed, whether shipping is taxed, whether sales tax is refunded when it charges a restocking fee, and what resale documentation it needs. The Department answered each as general guidance (medical imaging equipment itself is not an exempt medical product under § 39-26-717).

Service agreements. Colorado taxes goods, not services. A service agreement not entered into with the original equipment purchase is generally not taxable if the servicer doesn't charge the customer for repair/replacement parts — instead the servicer pays tax on the parts when it buys them or pulls them from inventory. But if the agreement charges the customer for parts, the servicer must collect tax from the customer on the parts. If the service agreement is inseparable from the original equipment sale, its price is taxed along with the equipment; it's separable only when optional and separately stated. And critically: if the equipment sale itself is non-taxable (e.g., a sale to an exempt entity like a county hospital under § 39-26-704), then the service agreement is non-taxable too — even if inseparable or not separately stated.

Shipping. Shipping is a nontaxable service, presumptively excluded from the tax base — unless (1) the retailer requires the buyer to use the retailer's shipping as part of buying the goods, or (2) the retailer doesn't separately state the shipping charge. In either case tax is calculated on the whole price.

Restocking fees and refunds. A sales-tax refund is allowed only if the retailer refunds the "full purchase price." Deducting a restocking fee means the full price wasn't refunded, so no sales tax is refunded (§ 39-26-102(5); GIL 08-020).

Resale documentation. The company "may exempt a sale … as a wholesale purchase for resale if the purchaser presents … a Colorado sales tax license" (see FYI Sales 1).

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

What this means for you

Sellers of equipment that also offer service/maintenance plans

Structure service agreements as optional and separately stated to keep them out of the taxable equipment price. Decide deliberately who bears the parts tax: if you don't bill the customer for parts, you pay tax on parts you consume; if you do bill the customer for parts, collect tax on them. And remember the flow-through rule: if the underlying equipment sale is exempt (e.g., to a hospital that's an exempt entity), the attached service agreement rides along as exempt too.

Anyone charging restocking fees

If you keep a restocking fee on a return, you haven't refunded the full purchase price — so you don't refund the sales tax either. Build that into your return policy and customer communications.

Shipping and resale practices

Separately state shipping and don't force customers to use your shipping if you want it untaxed. Collect a Colorado sales tax license from buyers claiming resale.

Accountants and tax professionals

Core authorities: § 39-26-104 (goods taxed, services not); separability = optional + separately stated; servicer-as-consumer-of-parts rule (Reg 1 CCR 201-4, 39-26-105.2); shipping under SR 18 and AD Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001); refund-only-on-full-price (§ 39-26-102(5), GIL 08-020); exempt-entity flow-through (§ 39-26-704); § 39-26-105(4) permission to apportion. Medical imaging equipment is not within the § 39-26-717 medical exemptions.

Common questions

Q: Is a service or warranty agreement on equipment taxable in Colorado?
A: A separate, optional service agreement is generally not taxable. The servicer pays tax on parts it consumes; if it instead charges the customer for parts, it must collect tax on those parts. An inseparable agreement is taxed with the equipment.

Q: What if the equipment was sold tax-free?
A: Then the service agreement is also non-taxable — even if it's inseparable or not separately stated. The exemption on the equipment carries to the agreement.

Q: Is shipping taxable?
A: Generally no — it's a nontaxable service. But it becomes taxable if you require the buyer to use your shipping, or if you don't separately state the shipping charge.

Q: Do I refund sales tax if I keep a restocking fee?
A: No. A refund of tax is allowed only when you refund the full purchase price. A restocking fee means you didn't, so no sales tax is refunded.

Q: What do I need to document a resale (wholesale) sale?
A: A valid Colorado sales tax license from the purchaser.

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, rules, and cases:
- § 39-26-104, C.R.S. (sales tax on goods; services generally untaxed)
- § 39-26-105(4), C.R.S. (permission to collect tax on rental but not on a separately documented maintenance contract)
- § 39-26-102(5), C.R.S. (refund credit only when the full sale price is refunded)
- § 39-26-704, C.R.S. (sales to exempt entities — e.g., county hospital — are exempt; service agreement follows)
- § 39-26-717, C.R.S. (medical exemptions; do not appear to cover medical imaging equipment)
- 1 CCR 201-4, Reg 39-26-105.2 (servicer pays tax on parts it consumes)
- 1 CCR 201-5, Special Regulation 18 (shipping)
- AD Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001); GIL 08-020 (no tax refund when a restocking fee is charged)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-17-010.pdf

Original ruling text

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

GIL-17-010

April 25, 2017
XXXXXXXXXXXXXXX
Attn:XXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Medical Imaging Equipment
Dear XXXXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXX (“Company”) a request for guidance
regarding the application of sales and use taxes to service agreements, shipping,
restocking fees, services, and resale certificates related to the sale of medical equipment.
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
1. Is revenue received from service agreements subject to sales tax?
2. Is a charge for shipping subject to sales tax?
3. What, if any, sales tax refund is due if Company charges a restocking fee?
4. What resale certificate is Company required to receive?
Background
Company sells medical imaging equipment and provides services for several types of
medical imaging equipment pursuant to service agreements or on a non-contract basis.
The service agreement is entered into either at the time of purchase from Company or
when the equipment is already installed. The agreement can include only labor or both
labor and parts.

Structure of Analysis
To determine whether Company’s transactions are subject to sales and use tax, the
Department will examine the following questions:
1. Is the sale of services inseparable from the sale of the equipment?
2. Is a refund due if Company charges a restocking fee?
3. How does Company document a wholesale sale for resale?
Discussion
Service Agreement
Colorado levies sales or use tax on the sale or use of tangible personal property but
generally does not impose tax on services.1 Services provided pursuant to service
agreements that are not entered into in connection with the original purchase of the
equipment are generally not subject to tax if the company providing the warranty or service
does not charge the customer for repair and replacement parts. The company providing
such service must pay tax on the price of tangible personal property used to provide this
service when the property is bought or removed from inventory.2 However, if the
company, as part of the service agreement, charges the customer for repair or
replacement parts, then the company must collect sales tax from the customer on the
price it charges for such parts.
If the services Company provides pursuant to a service agreement are inseparable from
the sale of the original equipment, then the price for the service is included in the
calculation of sales tax for the taxable goods.3 Services are separable from the sale of
taxable goods if the service agreement is optional and the price for the service agreement
is separately stated. A retailer may request permission from the Department to collect
sales tax only on the rental of tangible personal property and not on the maintenance
contract if the relative prices can be adequately documented.4
If the sale of the equipment is non-taxable5, then the sale of a service agreement is also
non-taxable, even if the service agreement is inseparable from the sale of the goods or if
the price for the services is not separately stated.6
Shipping
Shipping is a non-taxable service and charges for such are presumptively not included in
the calculation of tax when selling taxable goods.7 However, there are two common
situations where the shipping charge is included in the purchase price of taxable goods.
First, if the retailer requires the buyer to use the retailer’s shipping service as part of the
purchase of taxable goods, then the charge for shipping is included in the calculation of
sales tax on the purchase of the goods. Second, if the retailer does not separately state
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5
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2

§ 39-26-104, C.R.S.
Department Regulation 1 CCR 201-4, 39-26-105.2
AD Stores v. Department of Revenue, 19 P.3rd 680 (Colo 2001)
§ 39-26-105(4), C.R.S.
Although Colorado exempts a variety of medical equipment, it does not appear that the sale of
medical imaging equipment is exempt. § 39-26-717, C.R.S.
The sale of the equipment to an exempt entity, such as a charitable organization or a
government entity (e.g., a county hospital), is exempt from tax. § 39-26-704, C.R.S.
Department Special Regulation 18 (SR 18). 1 C.C.R. 201-5
DR 4010A (06/11/14)

the charge for shipping from the charge for taxable goods, then sales tax is calculated on
the entire price.
Refunds
Pursuant to statute8, a tax refund is allowed only if the retailer refunds the “full purchase
price.” A retailer has not refunded the full purchase price when it deducts a restocking fee.
Therefore, no refund of tax is permitted in such case.
Company may exempt a sale to the purchaser as a wholesale purchase for resale if the
purchaser presents Company with a Colorado sales tax license. For more information
about how to document exempt sales, see Department FYI Sales 1.9
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

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§ 39-26-102(5), C.R.S. (defining gross taxable sales - “The taxpayer may take credit in this
report of gross sales for an amount equal to the sale price of property returned by the
purchaser when the full sale price thereof is refunded whether in cash or by credit.”). See, also
GIL 08-020 (no tax refund if retailer charges a restocking fee).
9
This FYI as well as other Department publications is available on the Department’s website at
www.colorado.gov/tax > Education and Legal Research > FYI Publications > Sales.
3

DR 4010A (06/11/14)