If my utility passes through a municipal franchise fee on my gas or electric bill, is that fee subject to Colorado sales tax?

Plain-English summary

Someone asked the Colorado Department of Revenue whether municipal franchise fees are subject to sales tax. The Department's answer: yes — a franchise fee passed through on a utility bill is part of the taxable purchase price, so sales tax applies to it.

A franchise fee is what a city charges a utility company for the right to run its lines and equipment through the city's alleys, streets, and rights-of-way. It's usually set as a percentage of the utility's gross revenues, and the utility typically passes it on to customers inside that city.

Colorado charges sales tax on the purchase price of commercial gas and electric service, calculated on the full purchase price. The law excludes only a few specific things from "purchase price": direct federal taxes, Colorado's own sales taxes (those imposed under article 26 of title 39), and the state retail delivery fee. A franchise fee is none of those — so it stays in the purchase price, and sales tax applies on top of it.

This is a General Information Letter — general guidance the Department is not bound by, not a binding ruling.

What this means for you

Utility companies

When you pass a municipal franchise fee through to customers on a commercial gas or electric bill, include it in the sales tax base — sales tax is calculated on the full purchase price, and franchise fees aren't among the charges the law carves out. Don't treat the franchise fee as a non-taxable government pass-through; the Department's view is that it's part of the taxable price.

Business customers and accountants

If you see a franchise fee line on a commercial utility bill, expect sales tax to be calculated on a base that includes that fee. It's worth checking your bills to confirm the tax is being applied consistently with this guidance.

Common questions

Q: Are municipal franchise fees subject to Colorado sales tax? A: Yes. A franchise fee is part of the purchase price of gas and electric service and isn't one of the items the law excludes from purchase price, so it is subject to state sales tax.

Q: What is a franchise fee, exactly?
A: It's a fee a municipality charges a utility for using the city's alleys, streets, and rights-of-way — usually a percentage of the utility's gross revenues that the utility may pass on to customers in that city.

Q: Why isn't the franchise fee excluded like other government charges? A: Only specific charges are excluded from the purchase price — direct federal taxes, Colorado sales taxes, and the retail delivery fee. A franchise fee isn't on that list, so it remains taxable as part of the price.

Q: Can I rely on this letter?
A: Treat it as guidance, not a guarantee. A General Information Letter is not binding on the Department and makes no determination for any specific taxpayer.

Q: Does this cover home-rule city taxes?
A: No. The Department administers state and state-administered local sales and use taxes only. Self-collected home-rule cities set their own rules — check with each city.

Citations and references

Statutes and rules:

• § 39-26-104(1)(d.1), C.R.S. (sales tax on the purchase price of commercial gas and electric services)
• § 39-26-715, C.R.S. (sales tax on gas and electric service)
• § 39-26-104(1)(a), C.R.S. (sales tax calculated on the full purchase price)
• § 39-26-102(7)(a), C.R.S. (definition of "purchase price"; excludes direct federal tax, Colorado article-26 sales taxes, and retail delivery fees)
• § 43-4-218, C.R.S. (retail delivery fee and enterprise retail delivery fees)
• 1 CCR 201-1, Rule 24-35-103.5 (general information letter and private letter ruling procedure)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-24-005.pdf

Original ruling text

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

GIL 24-005
December 18, 2024
XXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
Via Electronic Mail: XXXXXXXXXXXX
Re: Taxability of Franchise Fees
Dear XXXXXXXXXXXX:
You submitted a request for a general information letter regarding the taxability of franchise fees charged by municipalities. 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, and requires payment of a fee. For more information about general information letters and private letter rulings, please see 1 CCR 201-1, Rule 24-35-103.5. Issue Whether franchise fees charged by municipalities are subject to sales tax. Discussion Colorado charges sales tax on the purchase price of commercial gas and electric services.1 Sales tax is calculated on the full purchase price.2 The purchase price is the price paid or charged to the consumer.3 The following specific taxes and fees are not included in the purchase price: any direct tax imposed by the federal government, any direct tax imposed by article 26 of title 39, C.R.S., or any retail delivery fee and enterprise retail delivery fee imposed or collected as specified in section 43-4-218, C.R.S.4 Any fees not specifically excluded from the purchase price are generally subject to tax. Franchise fees are imposed by municipalities on utility companies for the utility company’s use of alleys, streets, and rights-of-way. The municipality determines the amount of the fee, usually a percent of the utility’s gross revenues. The utility company may pass that fee on to customers

1

Section 39-26-104(1)(d.1); section 39-26-715, C.R.S.
Section 39-26-104(1)(a), C.R.S.
3
Section 39-26-102(7)(a), C.R.S.
4
Id.
2

GIL 24-005
December 18, 2024
Page 2
located within the service boundaries of that municipality. As franchise fees are not among the list of fees excluded from the purchase price, franchise fees are subject to state sales tax as part of the purchase price. 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 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 self-collected home-rule cities. You may wish to consult with those local governments that administer their own sales or use taxes about the applicability of those taxes. Visit our website at Tax.Colorado.gov for more information about state and local sales taxes. Thank you for your request. Sincerely, Office of Tax Policy Colorado Department of Revenue