How do Colorado sales and use taxes apply to selling, renting, installing, and monitoring security and surveillance systems?

Plain-English summary

A company that sells, rents, installs, maintains, and monitors security and surveillance systems (video surveillance, cameras, burglar and fire alarms) asked how Colorado sales/use tax applies across all those activities, including rental contracts. The Department laid out the rules in four threads — all general guidance, no determination.

1. Equipment is taxable goods; bundled services follow the separability test. Security systems are tangible personal property, and tax is on the purchase price. Nontaxable services — including installation and monitoring — are excluded from that price only if they're both separable and separately stated. A service is separable when "the buyer has the option not to purchase the service." If the seller requires the buyer to take the service, it's part of the taxable price even if separately stated. The Department used shipping as the example (a nontaxable service under Special Regulation 18 and AD Stores v. Department of Revenue), and said "[t]his same analysis applies to charges for the services of installation and monitoring."

2. "Construction and building materials" wrinkle. If equipment is installed into real property, special contractor rules can apply: a lump-sum contractor is the consumer (pays tax to its supplier on purchase); a time-and-material contractor is a reseller (buys tax-free for resale, collects tax from its client). Construction materials are items "incorporated into a real property structure so as to lose their identity … and become an integral part of real property and cannot be removed without substantial injury." The Department couldn't decide whether the surveillance gear/cameras/alarms qualify — but noted that under GIL 15-011 and GIL 17-001, A/V equipment sold to a contractor often does not qualify as construction material. If it doesn't, the contractor is either a consumer (consumes it to perform services) or a reseller of non-construction materials.

3. Rental contracts — short-term lease rules. Colorado splits leases at three years. A short-term lease (3 years or less) makes the lessor the consumer: it pays sales/use tax when it acquires the equipment — or, if the lessor manufactures the equipment, when it acquires the parts (tax is on the parts price, not the finished sale price — IBM v. Charnes). The lessor does not collect tax on the lease payments, unless it gets the Department's permission to buy the equipment tax-free and collect tax on rental payments instead. The company's 3-to-6-month video-surveillance rentals are short-term. If it elects to collect on payments and separately states delivery, setup, rental, and monitoring, those separately stated charges' taxability turns on whether they're optional. If it doesn't elect (pays tax on the property/parts up front), then "the fees for delivery, installation, and monitoring are not subject to tax even if they are not optional or separately stated."

4. Maintenance agreements. Charges for maintenance are excluded from the taxable price if the agreement is optional and separately stated. If optional but not separately stated, the charge is included (the seller may request permission to apportion, § 39-26-105(4)). Parts used under a maintenance agreement are generally consumed by the servicer, which owes tax when it buys them — but the servicer won't pay supplier tax if the maintenance charge is itself taxable and the parts aren't separately stated (cf PLR 12-003).

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

What this means for you

Security, alarm, surveillance, and low-voltage installers

Your equipment sales are taxable; your installation and monitoring can be tax-free only if customers can decline them and you separately state them. Mandatory installation/monitoring rides into the taxable price even when itemized. If you rent equipment short-term (3 years or less), decide your model: by default you (the lessor) pay tax when you buy the gear (or just the parts, if you manufacture it) and don't tax the rental — or get Department permission to flip to collecting on payments. Notably, if you pay tax up front on the equipment, your delivery/installation/monitoring fees aren't taxed even if mandatory or bundled. For maintenance plans, keep them optional and separately stated.

General contractors and building owners buying security systems

Whether the special construction-materials contractor rules apply depends on whether the gear is built into the structure so it can't be removed without substantial injury. Much security/A/V equipment isn't — meaning it's treated as ordinary equipment, not construction material (see GIL 15-011, 17-001).

Accountants and tax professionals

This GIL is a compact tour of CO sales-tax doctrines: separability (optional + separately stated) for bundled installation/monitoring/shipping (SR 18; AD Stores, 19 P.3d 680; GIL 09-004); construction-and-building-materials / lump-sum vs. time-and-material contractor treatment; short-term lease mechanics under § 39-26-713(1)(a), with the manufacturer-lessor taxed on parts price (IBM v. Charnes, 601 P.2d 622); and maintenance-agreement apportionment (§ 39-26-105(4); PLR 12-003). Compare the lease themes in CO GIL 17-004/17-006 and the maintenance theme in GIL 17-010.

Common questions

Q: Is security/surveillance equipment taxable in Colorado?
A: Yes — it's tangible personal property, taxed on the purchase price.

Q: Are installation and monitoring taxable?
A: Only when they're not separable from the equipment sale. They're excluded from tax if the customer can decline them and the charges are separately stated; if you require them, they're taxed even if separately stated.

Q: How is a short-term equipment rental taxed?
A: For a lease of three years or less, you (the lessor) are the consumer and pay tax when you acquire the equipment — or the parts, if you manufacture it. You don't tax the rental payments unless you get Department permission to buy tax-free and collect on payments instead.

Q: If I pay tax on the equipment up front, are my delivery/installation/monitoring fees taxable?
A: No. If you don't elect to collect on the rental payments and instead pay tax on the property (or parts) at acquisition, those fees aren't taxed even if they're not optional or separately stated.

Q: Is the equipment "construction and building material"?
A: It depends on whether it's built into the structure so it can't be removed without substantial injury. Security/A/V equipment often isn't, in which case the special contractor construction-materials rules don't apply.

Q: How are maintenance agreements and their parts taxed?
A: A maintenance agreement is excluded from the taxable price if optional and separately stated. Parts used under it are generally consumed by the servicer (who owes tax on purchase) — unless the maintenance charge is taxable and the parts aren't separately stated.

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(1), C.R.S. (sales tax on tangible personal property; services generally untaxed)
- § 39-26-713(1)(a), C.R.S. (short-term lease — lessor is consumer, pays tax on acquisition, or may collect on payments by permission)
- § 39-26-105(4), C.R.S. (permission to apportion tax on a maintenance contract)
- 1 CCR 201-5, Special Regulation 18 (shipping); AD Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001); GIL 09-004
- GIL 15-011; GIL 17-001 (A/V equipment often not "construction and building material")
- International Business Machines v. Charnes, 601 P.2d 622 (Colo. 1979) (manufacturer-lessor taxed on parts price); PLR 12-003 (maintenance-agreement parts)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-17-014.pdf

Original ruling text

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

GIL-17-014
August 1, 2017
XXXXXX
Attn: XXXXXX
XXXXXX
XXXXXX
Re: Security Systems and Related Services
Dear XXXXXX,
You submitted on behalf of your client (“Company”) a request for guidance
regarding the application of Colorado state and local sales taxes to various items
arising from the sale and rental of security equipment and related services.
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.
Issues
1. With respect to Company’s rental and sales of security systems and
monitoring:
a. What items are subject to sales or use tax?
b. Does sales or use tax apply to rental contracts?
2. What are Company’s sales and use tax responsibilities with respect to
Company’s sales, installation, and monitoring of security cameras and burglar
and fire alarms systems?

Background
Company rents and/or sells security systems (video surveillance systems) and
monitoring. The rental contracts Company provides for video surveillance
systems are a 3 to 6 month contract and invoices customers for:
a. Delivery and setup fee
b. Equipment rental or sale
c. Monitoring fee performed by a third party located outside Colorado.
The video surveillance systems are manufactured by Company at its location
outside Colorado and are shipped to customers by Company using its own
transportation service.
In addition, Company sells, installs, maintains, and monitors security cameras and
burglar and fire alarms with related control systems. Company sells and installs
these security systems in new buildings or in existing properties. Customers are
either the owner or a general contractor. Company may, or may not, depending
on the requirements of the customer, be engaged subsequent to the installation of
the security systems for the maintenance of such systems. Company may, or may
not, depending on the requirements of the customer, be engaged subsequent to
the installation of the security systems for the monitoring of the security systems.
Monitoring may be done from Company's location outside of Colorado.
Discussion
1. Application of tax on charges relating to Company’s sales of security
systems (video surveillance) and monitoring.
Colorado imposes sales tax on the sale of tangible personal property but
generally not on services.1 Company’s rental and sale of security systems are
tangible personal property. Sales and use taxes are calculated on the purchase
price paid by the buyer. In general, the purchase price paid by the buyer does not
include nontaxable services that are both separable from the sale of taxable
goods and the price for such services are separately stated on an invoice.2
For example, shipping goods from the seller’s place of business to the buyer is
considered a service.3 The charge for that service is not included in the purchase
price on which sales tax is calculated for taxable goods if the service charge is
separable from the purchase of the taxable goods and the shipping charge is
separately stated on the invoice.4 The purchase of a service is considered
separable from the purchase of goods if the buyer has the option not to purchase
the service when purchasing the taxable goods. Conversely, if the seller requires
the buyer to purchase shipping services from the seller, then the sale is not
separable and the shipping charge is considered part of the purchase price paid
for the taxable goods, even if the seller separately states the charge for shipping
on the invoice.
1 § 39-26-104(1), C.R.S.

2 AD Stores v. Department of Revenue, 19 P3d 680 (Colo. 2001); GIL 09-004
3 Department Special Regulation 1 CCR 201-5, SR 18.
4 Ibid.

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This same analysis applies to charges for the services of installation and
monitoring.
We note that the equipment at issue may be installed into real property. There
are special tax rules governing the sale of construction and building materials. In
general, a contractor purchasing the equipment for installation that uses a lump
sum contract is treated as the consumer of the construction and building materials
and must pay sales tax to the supplier when the contractor purchases the
material. Contractors using a time-and-material contract will generally be treated
as a reseller of the construction and building materials and may purchase, as a
sale for resale, items from the supplier without paying tax, but the contractor must
collect tax when the contractor sells the items to their client.
Construction and building materials are those items of tangible personal property
that are incorporated into a real property structure so as to lose their identity as
personal property and become an integral part of real property and cannot be
removed without substantial injury to the structure. We cannot, in the context of
this general information letter, determine whether the surveillance system, video
cameras, burglar and fire alarms systems, and related equipment qualify as
construction and building material. In GIL 15-011 and GIL 17-001, the
Department offered guidance that audio / visual equipment sold by a retailer to a
contractor may not qualify as construction and building material. That guidance
applies here.
If the equipment Company sells does not qualify as construction and building
materials, then the contractor will either be treated as the consumer of the
materials if it consumes the material to perform construction services (e.g.,
construction tools) and, therefore, must pay sales tax when the item is purchased
from the supplier, or as a reseller of non-construction materials to the owner (e.g.,
detached furniture) and may purchase the item from the supplier as a wholesale
purchase for resale and must collect tax from the contractor’s client.
2. Application of sales or use tax to rental contracts.
Colorado distinguishes between short term rental contracts and long term rental
contracts for purposes of sales and use taxes. Short term rental contracts are
contracts that are three years or less in duration.5 A lessor using a short term
lease must pay sales or use tax when it acquires the property (or when it acquires
the parts6 for such equipment if the equipment is manufactured by Company) and
does not collect tax on lease payments from the lessee. However, the lessor may
request permission from the Department to purchase the short term leased
property exempt from sales or use tax and, instead, collect sales tax on the
lessee’s rental payments.7 Company’s rental contracts for video surveillance
5 § 39-26-713(1)(a), C.R.S.

6 Because a lessor of a short term lease is treated as the consumer of the leased goods, tax is

computed on the price lessor pays to acquire the goods. If the lessor is the manufacturer of the
leased goods, then the price on which the lessor pays tax is the price of the tangible personal
property and not on the price at which the finished goods are sold. International Business
Machine v. Charnes, 601 P.2d 622 (Colo. 1979)
7 See, footnote 5.
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appear to be three years or less in duration and, therefore, are subject to these
rules for short term leases.
If Company elects to collect tax on the lease payments and separately states the
price for delivery, setup, equipment rental, and monitoring in the lease agreement,
then whether these separately stated charges are included in the lease of the
equipment will depend on whether these charges are optional, as discussed
above. If Company does not elect to collect tax on lease payments and pays tax
on the leased property (or on the parts for such equipment if the equipment is
manufactured by Company) when it acquires it from suppliers, then the fees for
delivery, installation, and monitoring are not subject to tax even if they are not
optional or separately stated.
3. Application of sales and use tax on charges for sales, installation,
maintenance, and monitoring of security cameras and burglar and fire
alarms and related control systems.
The application of sales and use taxes for the sale, installation, maintenance, and
monitoring of video cameras, burglar and fire alarms, and related control systems
is the same as discussed in questions 1 and 2 above.
We note that this question also involves maintenance agreements. In general,
charges for maintenance are excluded from the purchase price for taxable goods
if the purchase of the maintenance agreement is optional and the charge for the
maintenance agreement is separately stated.8 If the purchase of the maintenance
agreement is optional but the charge is not separately stated, the purchase price
on which tax is calculated must include the charge for the maintenance
agreement. Seller has the option to request permission from the Department to
apportion the tax over a portion of the maintenance charge and exclude such
charge from the purchase price on which tax is calculated.9
In general, parts provided by the seller to replace or repair worn or broken parts
pursuant to a maintenance agreement are treated as items consumed by the
company providing the warranty or maintenance and the company owes sales or
use tax when it acquires the parts from suppliers. However, a company will not
pay sales tax to the suppliers if the charge for the maintenance agreement is
subject to tax and the price for the parts is not separately stated.10
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
8 See, Department FYI Sales 70 “Warranties and Maintenance Agreements”
9 § 39-26-105(4), C.R.S.

10 See, e.g., Department Private Letter Ruling PLR-12-003

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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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