Is water and ice dispensed from a vending machine — into containers the customer brings — subject to Colorado sales tax, and does it matter that the machine sits just outside a bar?
Plain-English summary
A rural Colorado liquor store and bar owner has a vending machine — sitting just outside, not inside, the store or bar — that dispenses filtered water and ice to local residents, who fill their own containers. Is that water and ice subject to sales tax? The Department walks through two statutes and concludes: no, it's exempt (with one important caveat about the nearby bar).
Step 1 — Is the water property or a service? Colorado splits water two ways. Water delivered in "bottles, wagons, tanks, or other containers" is tangible personal property (potentially taxable); water from "pipes, conduits, ditches, or reservoirs" — like a municipal utility's supply — is a service (generally not taxed). The reasoning: a water utility is predominantly a capital-intensive enterprise, which is different from a retail sale of discrete quantities of drinking water. Vending-machine water is sold in discrete quantities, so it's tangible personal property. And it doesn't matter that the customer brings the container — the regulation's reference to retailer-provided containers is just descriptive of the type of transaction, not a hard requirement.
Step 2 — Even as property, is it exempt as "food"? Yes. Colorado exempts the sale of "food," defined by reference to the federal SNAP program, and SNAP includes bottled water for human consumption. Food sold from vending machines is exempt (§ 39-26-714). The Department again treats SNAP's "bottled" reference as descriptive, not limiting — so water dispensed into the customer's own container is still exempt food. One exclusion: carbonated water sold in a container is expressly excluded from "food" and is taxable; the Department assumes the machine's water is not carbonated.
Ice gets the same result. Ice is clearly tangible personal property (not a service), and the only question is the food exemption. SNAP treats crushed or block ice as food, and Special Regulation 23 says ice sold for human, domestic home consumption is exempt. Since the ice goes to local residents (presumably for human consumption), it's exempt.
The caveat — the bar next door. There's a big exception to the food exemption: food (including water) sold by restaurants, bars, and similar establishments is taxable (§ 39-26-104(1)(e)). Because the vending machine sits just outside the bar, there's a factual question whether these are really sales "by the bar." The Department reads the facts the other way: the water and ice are sold in bulk, for offsite use, and paid through the machine rather than in the bar — all of which suggests the sales are separate from the bar business and therefore not taxable.
Because this is a General Information Letter, it's general guidance only and not binding on the Department.
What this means for you
Vending operators, convenience stores, and water/ice sellers
Non-carbonated water and ice sold from a vending machine for human consumption are exempt as food — and customers filling their own bottles or jugs doesn't break the exemption. Watch the two lines that flip the result: carbonated water in a container is taxable, and food/water sold by a restaurant or bar is taxable. If your machine is tied to a bar or restaurant, keep the operation factually separate (bulk, offsite use, paid at the machine, not run through the bar) to stay on the exempt side.
Bar and restaurant owners with adjacent vending
Don't assume everything near your bar is taxed like bar sales. A water/ice vending operation can be a separate, exempt business if the sales are bulk, offsite, and paid through the machine. But if water or ice is sold through the bar (e.g., a bottle handed over the bar), that's taxable restaurant/bar food.
Accountants and tax professionals
Two-step analysis: (1) property vs. service under Reg 39-26-102.15 — discrete-quantity water is TPP, utility-system water is a service; the container's source is descriptive, not dispositive; (2) food exemption under § 39-26-102(4.5)/§ 39-26-714 — SNAP-eligible water and ice are exempt, including from vending machines, with carbonated water expressly carved back in as taxable. Then apply the § 39-26-104(1)(e) restaurant/bar exception, which is a facts-and-circumstances question of whether the sale is "by" the bar.
Common questions
Q: Is water from a vending machine taxable in Colorado?
A: Non-carbonated water sold from a vending machine is exempt as food, even when the customer fills their own container. Carbonated water sold in a container is taxable.
Q: What about ice?
A: Ice is tangible personal property but exempt as food when sold for human consumption — SNAP treats crushed/block ice as food, and Special Regulation 23 exempts ice for human, domestic home consumption.
Q: Does it matter that the machine is right next to a bar?
A: It can. Food and water sold by a bar or restaurant are taxable. But where the vending sales are bulk, for offsite use, and paid through the machine rather than in the bar, the Department treats them as separate from the bar business and not taxable.
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 rules:
- § 39-26-102(4.5), C.R.S. (definition of "food," tied to SNAP; carbonated water in a container excluded)
- § 39-26-714, C.R.S. (food sold from vending machines is exempt)
- § 39-26-104(1)(e), C.R.S. (food sold by restaurants, bars, and similar establishments is taxable)
- Department Regulation 39-26-102.15 (water in containers is tangible personal property; water from pipes/ditches/reservoirs is a service)
- 1 CCR 201-5, Special Regulation SR 23 (ice for human, domestic home consumption is exempt)
- Federal SNAP guidance (bottled water and crushed/block ice eligible as food)
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-18-011.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL 18-011
July 18, 2018
XXXXXX
Attn: XXXXXX
XXXXXX
XXXXXX
Re: Sales Tax / Water / Vending Machines
Dear XXXXXX,
You submitted a request for guidance regarding the applicability of sales tax to
water dispensed from a vending machine.
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 water and ice dispensed from a vending machine subject to sales
or use tax?
Background
You state that you own a liquor store and bar that are located on the same
property in a rural part of Colorado. You have a vending machine that dispenses
water and ice. The vending machine is not located inside either the store or bar
but is located in the immediately adjacent area. You state the vending machine
provides filtered water and ice to local residents.
Discussion
There are two general tax statutes related to the sale of water. The first makes a
general distinction between the sale of water as tangible personal property,
which is subject to sales and use tax, and the sale of water as a services, which
is generally not subject to sales tax.1 Department regulation 39-26-102.15 states
that water delivered in “bottles, wagons, tanks or other containers” is considered
the sale of tangible personal property. On the other hand, water sold from
“pipes, conduits, ditches or reservoirs” is classified as the sale of a service.2 For
example, the sale of water by a public utility delivered through its water supply
system to residential and commercial customers is considered the sale of
service.
The distinction is that owning and operating a complex municipal and privately
owned water systems, although providing tangible personal property to
consumers, consists predominantly of the use and maintenance of a complex
capital intensive enterprise. The substantial capital investment involved in
creating and maintaining a municipal water system or ditch system distinguishes
it from retail sales of smaller amounts of drinking water, whether pre-bottled or
bottled by the customer.
In this case, the filtered water is offered for sale in discrete quantities that are
more accurately classified under regulation 39-26-102.15 as the sale of tangible
personal property.
We note that this regulation references water delivered in containers provided by
the retailer and the water you provide is dispensed into containers provided by
the customer. This distinction does not alter the result because the reference to
containers in the regulation is more of a descriptive element intended to
characterize a type of transaction in which water is more of a discrete unit as
opposed to water provided as a public utility service.3
The second tax statute relevant to this issue is that which exempts the sale of
“food”. Food sold from vending machines is exempt from tax. “Food” is defined
as food and food products that qualify as food under the federal Supplemental
1
§§ 39-26-104 and 204 C.R.S.
Regulation 39-26-102.15.
3
For example, water sold from wagons is also treated as a sale of tangible personal property rather than the
sale of a service. The Department acknowledges water sold from a reservoir, ditch, or in pipes is sold in
units, such as acre feet or gallons. As in other areas of sales tax law, it is difficult to draw clear lines
between transactions that are the sale of services and those transactions that are the sale of property.
2
2
DR 4010A (06/11/14)
Nutrition Assistance Program (SNAP).4 This program defines “food” to include
bottled water sold for human consumption.5 As in the case of the Department’s
regulation, the Department views this federal requirement of water in a bottle
more as a descriptive element and not as a limitation that excludes water
dispensed into containers that the customer provides. Thus, the sale of water
dispensed from vending machines into containers provided by customers is
properly classified as the sale of food and, therefore, exempt from tax.6
The application of tax to the sale of ice is the same as water. The sale of ice is
clearly the sale of tangible personal property and not the sale of a service. The
only question then is whether the sale of ice is exempt as the sale of food. The
federal SNAP program treats the sale of crushed or block ice as food.7
Moreover, Special Regulation 23 states, "[i]ce sold for human, domestic home
consumption is exempt from sales tax under 39-26-102(4.5), C.R.S." You stated
that the ice is sold to local residents. Ice from a vending machine is presumably
for human consumption and, therefore, exempt from tax.
An important exception to the food exemption is the sale of food by restaurants,
bars, and other similar establishments.8 Food, including water, sold by bars and
restaurants is subject to tax. For example, water sold in a plastic bottle by a bar
to customers is subject to tax. This exception is relevant because you indicated
that the vending machine is located just outside the bar. There may be a factual
issue of whether the ice and water are sold by the bar as opposed to a sale
distinct from the bar business. This said, the fact that the water and ice are sold
in bulk, are intended for offsite use, and the transaction is paid for through the
vending machine and not in the bar all together suggests that these sales are
separate from the bar business and, thus, not taxable.
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.
4
§ 39-26-102(4.5), C.R.S.
“Is bottled water eligible for SNAP benefits?” FDA publication dated 7/8/2011, updated 3/15/2018 at
https://asktheexpert.custhelp.com/app/answers/detail/a_id/5264. However, § 39-26-102(4.5), C.R.S.
expressly excludes carbonated water sold in a container from the definition of food and, therefore, the
sale is subject to tax. The Department assumes for purposes of this letter that the water at issue is not
carbonated.
6
Food sold from vending machines is not subject to tax. § 39-26-714, C.R.S.
7
“Is crushed or block ice eligible for purchase with SNAP benefits?” FDA publication dated 7/8/2011,
updated 3/15/2018 at https://asktheexpert.custhelp.com/app/answers/detail/a_id/5263.
8
§ 39-26-104(1)(e), C.R.S.
5
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 homerule 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)