When a company sells and installs a commercial sign, are its separately stated charges for surveying, engineering stamps, and permits included in the sales tax on the sign?

Plain-English summary

A company sells and installs commercial signs using a time-and-material contract, and separately bills for surveying, local government permits, engineering stamps, and administrative permits. It asked whether those charges get folded into the sales tax on the sign. The Department lays out the rules (it's a GIL, so no binding determination), and the key is what each charge is really for.

First, a threshold point about contractors. Because a sign can become a real-property fixture, a sign installer can look like a construction contractor — and contractors are taxed differently from ordinary retailers. But a contractor who uses a time-and-material contract (as here) is treated like a typical retailer. So the normal retailer rules apply.

The core rule — costs of doing business are in the tax base. A sign is taxable tangible personal property. A retailer's costs of bringing goods to market — the letter lists government permits, engineering drawings, manufacturing labor and materials, and freight-in — are included in the sales tax on the goods even if the retailer separately states them. You can't carve your overhead out of the taxable price just by itemizing it.

The exception — separable installation services. Selling the sign can also involve a service like installation. If that installation service is (1) separable from the sale of the sign and (2) separately stated, then sales tax is computed only on the price of the sign, not the installation. The Department notes a service is often treated as separable when the buyer has the option not to buy it as part of the purchase.

The twist — fees that exist only because of installation. Whether the surveying/engineering-stamp/permit fees are taxable depends on why they're incurred:

• If a fee (e.g., the engineering stamp or a permit) is required solely for the installation, and the installation is separable and separately stated, then that fee is nontaxable too — it follows the nontaxable installation.
• If those fees are not incurred solely for nontaxable installation (i.e., they're part of producing/selling the sign itself), they're back in the taxable price.

If a service isn't separable — true object. When the service can't be separated from the sale of the goods, the Department applies the true-object test: is the deal really for taxable property or for a nontaxable service? A key factor is whether the property is merely incidental to the service. If the property is not merely incidental (a sign usually isn't), the transaction is treated as a sale of taxable property and tax is computed on the entire price — even if installation is separately stated.

One more carve-out the letter flags: government fees imposed on the buyer but initially paid by the seller and reimbursed by the buyer are generally not included in the sales tax (they're the buyer's fee, just advanced by the seller).

Because this is a General Information Letter, it's general guidance only and not binding on the Department.

What this means for you

Sign makers and sellers

You can't untax your overhead by itemizing it: surveying, engineering drawings, manufacturing labor, permits to make/sell the sign, and freight-in are part of the taxable price even if separately stated (§ 39-26-102(12)). What you can keep out of tax is a genuinely optional, separately stated installation service — and any fees (engineering stamp, permits) incurred solely for that installation ride along as nontaxable. Document why each fee exists; "solely for installation" is the line. And note: a time-and-material contract keeps you on the retailer side of the contractor rules.

Contractors and installers

If you affix a sign so it becomes a real-property fixture, you can be in contractor territory — but a time-and-material contract puts you back under the ordinary retailer rules. If you use lump-sum contracts instead, analyze the construction-contractor rules separately (see the related GIL 18-003 on signage).

Accountants and tax professionals

This is a clean statement of Colorado's cost-of-doing-business principle: § 39-26-102(12) sweeps the seller's market-bringing costs into purchase price regardless of separate statement. The installation-service exception requires both separability (buyer can decline) and separate statement; ancillary fees follow the installation only if incurred solely for it. Where a service is inseparable, apply the true-object test (Noble Energy; Leanin' Tree) — property that isn't merely incidental makes the whole price taxable. Watch the buyer-fee-advanced-by-seller carve-out (reimbursed government fees imposed on the buyer generally stay out of the base).

Common questions

Q: Can a sign company separately state surveying, permits, and engineering fees to keep them out of sales tax? A: Not if they're costs of bringing the sign to market — those are taxable even when separately stated. They're only nontaxable if they're incurred solely for a separable, separately stated installation service (or are government fees imposed on the buyer that the seller merely advanced and is reimbursed for).

Q: Is installation of a sign taxable?
A: Not if the installation service is separable from the sale (the buyer could decline it) and is separately stated — then tax applies only to the sign. If installation is inseparable, the true-object test decides, and because a sign usually isn't merely incidental, the whole price is typically taxable.

Q: Does it matter that we use a time-and-material contract? A: Yes. A sign installer can be a construction contractor because signs may become real-property fixtures, but a contractor using a time-and-material contract is treated as a typical retailer — so the ordinary retailer rules in this letter apply.

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 and cases:

• § 39-26-102(12), C.R.S. (purchase price; costs of bringing goods to market included even if separately stated)
• Noble Energy, Inc. v. Colorado Department of Revenue, 232 P.3d 293 (Colo. 2010) (separability; true object)
• City of Boulder v. Leanin' Tree, Inc., 72 P.3d 361 (Colo. 2003) (true-object test for property vs. service)
• See also GIL 08-027 (permits required for installation); GIL 18-003 (signage delivery/installation; contractor lump-sum vs. time-and-material)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-18-008.pdf

Original ruling text

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

GIL18-008
June 12, 2018
XXXXXX
Attn: XXXXXX
XXXXXX
XXXXXX
Dear XXXXXX,
You submitted a request for guidance on behalf of XXXXXX (“Company”) regarding the application of sales tax to charges related to the sale and installation of commercial signs. 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 Does the calculation of sales tax for the sale of a commercial sign include Company’s charges for surveying, engineering stamps, administrative permits, and local government permits? Background Company sells and installs commercial signs. Company uses a time-and-material contract and separately charges for surveying, local government permits, engineering stamps and administrative permits. Discussion Colorado levies sales tax on the sale of tangible personal property, including signs. A retailer1 typically incurs a variety of costs when bringing goods to market. These costs can 1

Company arguably is a contractor because the signs may become real property fixtures. The rules for contractors are somewhat different than for the typical retailer. However, a contractor who uses a time-and-material contract, as is the case here, is treated as a typical retailer.

include such things as government permits, engineering drawings, manufacturing labor and materials, and freight-in transportation costs. These costs are included in the calculation of sales tax even if the retailer separately states a price for these costs.2 In some cases, the sale of goods also involves the sale of related services, such as the service of installation of property. If the sale of the service is both separable from the sale of the taxable goods and the price for the service is separately stated, then sales tax is calculated only on the price of the taxable goods. Although there are a variety of factors that are considered in determining whether the sale of service is separable, the sale of a service is often treated as separable if the buyer has the option not to purchase the service as part of its purchase of the property.3 If the sale of the installation service is separable from the sale of the sign, then charges for services associated with installation are also likely nontaxable. It is not clear in this request for guidance whether the engineering stamp is required only for installation. If it is, then the engineering stamp fee is a nontaxable item if the installation is separable and the prices for installation and the engineering stamp are separately stated. Similarly, if the various permits are required only for installation and the installation is separable from the sale of the signs, then separately stated charges for these permits are also not taxable.4 On the other hand, if the engineering stamp and permits are not incurred solely for nontaxable installation services, then these fees are generally included in the calculation of sales tax.5 If a service is not separable from the sale of the taxable goods, then a determination must be made as to whether the true object of the transaction is the sale of taxable goods or the sale of a nontaxable service.6 One factor that will be considered is whether the tangible personal property is merely incidental to the service. If the property is not merely incidental, the transaction is more likely to be viewed as a sale of taxable property and tax is calculated on the entire price, even if the price for the installation service is separately stated. 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.

§39-26-102(12), C.R.S.
Noble Energy, Inc. v. Colorado Dept. of Revenue, 232 P.3d 293, 296-97 (Colo. 2010); City of Boulder v. Leanin’ Tree, Inc., 72 P.3d 361, 366 (Colo. 2003) 4 GIL 08-027 5 Government fees imposed on the buyer but initially paid by the seller and reimbursed by the buyer are generally not included in the calculation of sales tax. 6 See, footnote 3. 2 3

2

DR 4010A (06/11/14)

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)