Is a company's monthly 'subscription' charge for energy-saving technology it owns and installs at the customer's site a nontaxable service, or a taxable rental of tangible personal property?

Plain-English summary

A company buys energy-efficiency technology (think lighting systems), pays sales tax on it, and has it installed at customers' sites by licensed third-party contractors. Customers then pay a monthly charge the company calls a "subscription" for a fixed period, during which the technology is guaranteed to perform within set parameters (e.g., a lighting system delivering a specified lumen output and wattage). The company keeps title, ownership, and control the whole time, the customer can't alter or maintain the equipment, and the gear isn't permanently attached and can be removed. The question: is that monthly charge a nontaxable service, or a taxable rental of tangible personal property?

Colorado taxes the sale or rental of tangible personal property but generally not services — so the line matters. The catch: this is a General Information Letter, and the Department deliberately did not decide. Instead it walks through the factors it weighs when a charge could be either, and explains why some intuitive answers don't control:

• Control of the property is "one of the most common factors," but it is not determinative. A truck you drive is a taxable rental; a truck that comes with a driver is more like a nontaxable shipping service. Yet a rental company can forbid the customer from altering, repairing, or maintaining equipment without making the deal a service — so the contract's no-tampering limits here don't automatically make it a service.
• Autonomy matters. When property runs by itself (the Department's example: a rented electrical generator that just needs fuel and occasional maintenance), control becomes much less relevant and the deal looks more like a taxable rental. Energy-saving technology that operates autonomously can fall in this bucket.
• Special expertise. Needing a trained technician to install or service equipment is not the same as the expertise to control or modify it — install/repair expertise alone doesn't convert a rental into a service.
• Location and integration. Property at the customer's site leans toward customer control (more rental-like); property at the provider's site leans the other way. How integrated the equipment is into the customer's operations also bears on who controls it.
• Separability, then true object. The "true object" test is not the starting point. It applies only if the service and the property are so intertwined they're "essentially unusable" without each other. If they're separable, then tax simply applies to the whole price if the service portion isn't separately stated. Notably, the customer's option to buy the equipment at the end of the contract suggests the property and service are separable. Only for a genuinely inseparable bundle does the Department ask whether the service predominates and the property is merely incidental.

So the honest answer is a framework, not a verdict. The facts here — company-owned gear, installed at and operating autonomously at the customer's premises, with a purchase option — point toward several rental-leaning factors, but the Department expressly declined to rule. (It had earlier suggested the company seek a binding private letter ruling for that reason.)

A practical wrinkle the letter flags: how long the contract runs changes the mechanics. If the term is three years or less (short-term lease), the company generally pays tax when it buys the equipment. If it's longer than three years (long-term lease), tax is generally imposed on the lease payments instead. The Department assumed a term over three years just to frame the discussion.

What this means for you

Energy-service companies and equipment providers

If you install and keep ownership of equipment and bill a recurring "subscription," the label doesn't settle the tax. Colorado looks past the word to who really controls the gear, whether it runs autonomously, where it sits, and whether the service and equipment are separable. Several of those factors (customer-site, autonomous operation, an end-of-term purchase option) lean rental — which is taxable. Because the answer is fact-sensitive and this GIL didn't decide, get a binding private letter ruling before treating the charge as a nontaxable service.

Businesses paying a monthly "subscription" for installed equipment

Don't assume "subscription" means no sales tax. If the substance is renting equipment that sits at and runs at your site, Colorado may treat the monthly charge as a taxable rental.

Accountants and tax professionals

This GIL is most useful as a clean statement of Colorado's service-vs-rental analysis: control is a common but non-determinative factor; autonomy of operation cuts toward rental; install/maintain expertise ≠ control/modify expertise; location and integration matter; and the true-object test applies only after finding the property and service inseparable (a purchase option suggests separability). Watch the lease-term mechanics: tax on the lessor's purchase for ≤3-year leases (§ 39-26-713(a)) versus tax on lease payments for >3-year leases (§ 39-26-102(23)). Because it's a non-binding GIL with no holding, push fact-specific deals to a PLR.

Common questions

Q: Is a monthly "subscription" for installed energy-saving equipment taxable in Colorado?
A: The Department didn't say — this GIL reaches no holding. It depends on factors like who controls the equipment, whether it runs autonomously, where it's located, and whether the property and service are separable. Several facts here lean toward a taxable rental, but only a private letter ruling would decide.

Q: The company keeps title and ownership — doesn't that make it a service?
A: No. The Department said retention of title/ownership helps distinguish a sale of goods from a service, but it's not relevant to the different question of service-versus-rental.

Q: When does the "true object" test apply?
A: Only when the service and property are so intertwined they're essentially unusable without each other. If they're separable — and an end-of-term purchase option suggests they are — you don't reach true object; tax applies to the whole price if the service isn't separately stated.

Q: Does the length of the contract change anything?
A: Yes. For a lease of three years or less, the provider generally pays tax when it buys the equipment; for a lease longer than three years, tax is generally imposed on the lease payments.

Q: Does this cover city sales tax?
A: No. The Department administers state and state-administered local taxes only. Colorado's self-collected home-rule cities set their own rules. Check with each home-rule city.

Citations and references

Statutes, rules, and cases:
- § 39-26-104, C.R.S. (sales and use tax on property; generally not services)
- § 39-26-713(a), C.R.S. (lessor taxed on its purchase for short-term leases of three years or less)
- § 39-26-102(23), C.R.S. (tax on lease payments for leases longer than three years)
- 1 CCR 201-5, Special Regulation SR 40 (Service Enterprises; true-object test)
- AD Stores v. Colorado Department of Revenue, 19 P.3d 680 (Colo. 2001) (separability; separately stated charges)
- Cf. GIL 14-018, GIL 09-029 (customer control as a factor); GIL 07-013 (rented electrical generator as taxable rental property)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-18-002.pdf

Original ruling text

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

GIL-18-002
January 30, 2018
XXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXX
Sent via email: XXXXXX

Re: Sales Tax on Monthly Charges for Energy Savings Technology
Dear XXXXXXXXXXXX,
You submitted on behalf of XXXXXXX (“Company”) a request for a general information
letter regarding the applicability of sales tax to Company’s charges for energy saving
technology. In prior communications on this issue, the Department recommended
Company request a private letter ruling because of the specificity requested in the request
for guidance. Company indicated that it may pursue such a ruling but would make that
determination after it reviews guidance pursuant to a general information letter. This is a
general information letter in response to Company’s request.
Background
Company purchases energy efficiency technology from a vendor, to whom Company pays
applicable state and local sales taxes. The technology is installed at the customer’s
location by third-party contractors who are licensed by Company. Customers pay
Company a charge, which is described by Company as a “subscription.” The contract is
effective for a predetermined period of time during which the technology is guaranteed to
operate within specified parameters. Customers may have the option to purchase the
technology at the end of that period. Company states that it does not guarantee
customers will have energy savings but only that the technology will “function or perform”
within specified parameters. For example, in the case of lighting technology, Company
does not guarantee that the customer will have reduced energy costs but only that the
lighting will have a specified “lumen output and wattage delivery for each area of the
building.”
Company represents that it “retains title, ownership and control of the technology at all
times.” Company represents that customers do not gain possession or control of the
technology because the contract provides strict guidelines about how the equipment can
and cannot be used and, more specifically, that customers cannot alter or maintain the
technology. The technology is not permanently attached to the customer’s premises and
can be removed.

Issue
Is Company’s subscription charge subject to sales and use tax?
Discussion
Colorado levies sales and use taxes on either the purchase or rental of tangible personal
property, but generally not on services.1 A lessor pays tax on purchases of property if the
lessor subsequently rents the property to lessees for three years or less (short term lease),
unless the lessor obtains permission from the Department to collect sales tax on lease
payments rather than on its purchase of the property.2 Sales tax is always imposed on lease
payments, rather than on lessor’s purchase of the property, if the lease term is more than three
years (long term lease).3 If a company is providing a service, it must pay sales or use tax
when it acquires property used to provide the service.
The question raised in this request for guidance is whether Company is providing a nontaxable
service to customers or engaging in the taxable rental of tangible personal property.4
Differentiating between these types of transactions can be difficult in some circumstances. The
Department will typically examine a number of factors in making its determination. The
Department notes at the outset that Company represents that it retains title and ownership of
the technology. Although retention of title and ownership may distinguish a sale of goods from
a sale of services, retention of title and ownership is not relevant when, as here, the issue is
whether the Company is providing a service or renting property.
One of the most common factors the Department considers is whether the customer has
control over the property.5 For example, a charge for the use of a truck is subject to tax
because the customer controls the truck.6 On the other hand, the transaction is more likely
viewed as a nontaxable service of shipping if the company also provides a driver because the
company is in control of the truck.
Although control of the property is a factor considered by the Department, it is not
determinative. For instance, a rental company may rent property only on the condition that the
customer not alter, repair, or perform maintenance on the rented property, or permit such work
only by persons trained to perform such work. These limitations on the right to control the
equipment do not necessarily mean that the contract is one for a non-taxable service.

1 Charges for service can be included in the calculation of tax on a taxable transaction if the service

is inseparable from the sale or rental of taxable property and the true object of the transaction is
the sale of taxable goods or, if the service is separable from the sale of goods, the charge for the
service is not separately stated.
2 §39-26-713(a), C.R.S.
3 §39-26-102(23), C.R.S.
4 The Department assumes for purposes of discussion that the contract period for the subscription
is greater than three years because, if the contract period is three years or less, then tax is
imposed on the Company when it acquires the property, regardless of whether the subscription is
treated as the sale of a service or as a short term rental of property.
5 See, e.g., GIL 14-018, GIL 09-029
6 This assumes that the lessor has, as is typically the case, permission to collect tax on lease
payments.
2

DR 4010A (06/11/14)

Moreover, control becomes significantly less relevant when the property operates
autonomously. For example, a rental company may rent an electrical generator, which runs
autonomously and requires only fuel and periodic maintenance. The lease of the generator
may be a taxable rental of property and not a service.7 Similarly, energy saving technologies
may operate autonomously and require little or no maintenance.
Related to the issue of autonomy and control is whether the operation of the property requires
special expertise. In such cases, control of the property may rest with the party who has such
expertise. It should be noted that the expertise to install or maintain the property is not the
same as the expertise to control or modify the property, which may be relevant. For example,
a business may rent a large printer and agree that only a certified technician with proper
training and expertise can install, service, and repair the printer, but this expertise does not
make the entire transaction one for services.
The location of the property can also be relevant in determining who has control of the
property. Property located at the lessor’s premises is more likely viewed as controlled by the
lessor and, conversely, property located at the customer’s location is more likely viewed as
controlled by the customer. In addition, the degree of integration may be indicative of who has
control of the property.
The question of whether there is a service or rental of property is often framed in terms of the
customer’s true object: is the customer’s true object of the transaction to acquire a service or to
acquire property?8 This test, however, is applied only in those cases where the sale of the
service is so intertwined with the property that the two are inseparable. Inseparable in this
context means that the property and services are so intertwined that they are essentially
unusable in the absence of the other. The fact that a customer can purchase the property at
the end of a contract may suggest the property and services are separable.
If the service and property are inseparable, then the true object test is used to determine if the
transaction is primarily for a service or for the rental of property. This true object test considers
whether the service component of the transaction predominates and the property merely is
incidental to that service.9 Ultimately, the true object test is based on what is commonly
understood to be a service or a rental of property.
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.

7 See, e.g., GIL 07-013 (electrical generator as taxable rental property).

8 See, e.g., Special Regulation 1 C.C.R. 201-5: SR 40 (Service Enterprises).

However, the true
object test applies only after it is first determined that the sale of the goods is inseparable from
the sale of services. If they are not inseparable, then tax applies to the entire purchase price if
the price for the service is not separately stated. See, also, AD Stores v. Colorado Department
of Revenue, 19 P.3rd 680 (Colo. 2001)
9 See, footnote 6.
3

DR 4010A (06/11/14)

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

4

DR 4010A (06/11/14)