When a construction subcontractor fabricates and installs a staircase into a building, is its labor taxed, or only the materials it buys?

Plain-English summary

A construction subcontractor that fabricates and installs staircase systems into buildings asked the Colorado Department of Revenue a practical question: when figuring sales and use tax, does its labor get taxed, or just the materials it buys? The Department's answer: the materials are taxed; the fabrication labor is not.

Here's the framework. Colorado taxes the sale and use of "construction and building materials" — tangible items that lose their identity and become a permanent part of the realty during construction. The Department's Special Rule 10 decides who pays that tax based on the type of contract:

• Lump-sum contract (materials and labor not separately stated): the contractor is the consumer of the materials and pays sales/use tax on the materials when it buys them.
• Time-and-materials contract (materials and labor separately stated): the contractor is treated as a retailer, doesn't pay tax when buying the materials, but collects sales tax from the customer on the marked-up materials price — and does not collect tax on the separately stated labor.

For subcontractors specifically, Special Rule 10 is direct: a subcontractor who buys construction and building materials for its job is the consumer of those materials and owes state sales/use tax on that purchase. And critically — when the subcontractor uses those materials to fabricate an item (like a staircase) before building it into the structure so it becomes an integral, permanent, and inseparable part of the real property, the subcontractor's fabrication labor is not subject to sales and use tax.

So the staircase subcontractor pays tax on the steel, wood, fasteners, and other materials it purchases — but the labor of fabricating and installing the staircase into the building is not taxed.

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

What this means for you

Construction subcontractors

If you buy materials to fabricate something (a staircase, railing, custom assembly) and install it so it becomes a permanent part of the building, treat yourself as the consumer of those materials: pay sales or use tax on what you buy. Your fabrication labor is not taxed, so don't add sales tax on top of your labor charges for that work. Keep your material purchases and tax payments documented.

General contractors and accountants

The tax outcome turns on contract type under Special Rule 10. Under a lump-sum contract the contractor pays tax on materials as the consumer; under a time-and-materials contract the contractor is a retailer that collects tax on marked-up materials but not on separately stated labor (and must hold a sales tax license). For a fabricating subcontractor, materials are taxable inputs and the fabrication labor that becomes part of realty is not taxed.

Property owners

The tax in a fabricate-and-install job like a staircase generally rides on the materials, not the contractor's labor. That's why a quote may show tax on materials but not on the labor to build and install the finished piece into your property.

Common questions

Q: Does a subcontractor charge sales tax on its fabrication labor? A: No. When a subcontractor fabricates an item from materials it purchased and builds it into a structure so it becomes a permanent, inseparable part of the real property, that fabrication labor is not subject to sales or use tax.

Q: So what is taxed?
A: The materials. A subcontractor who buys construction and building materials for its job is the consumer of those materials and owes state sales/use tax on that purchase.

Q: Does it matter what kind of contract I have?
A: Yes, for contractors generally. Under a lump-sum contract the contractor pays tax on the materials as the consumer; under a time-and-materials contract the contractor collects tax from the customer on the marked-up materials price (not on separately stated labor) and must hold a sales tax license.

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, rules, and authority:

• § 39-26-104(1)(a), C.R.S. (sales tax on retail sales of tangible personal property)
• § 39-26-202(1), C.R.S. (use tax on tangible personal property)
• § 39-26-102(15)(a)(I), C.R.S. (definition of "tangible personal property")
• 1 CCR 201-5, Special Rule 10 (construction contractors; lump-sum vs. time-and-materials treatment; subcontractors as consumers; fabrication labor)
• 1 CCR 201-1, Rule 24-35-103.5 (general information letter and private letter ruling procedure)
• Bd. of Cnty. Comm'rs v. ExxonMobil Oil Corp., 192 P.3d 582 (Colo. App. 2008) (materials become a permanent part of realty)
• Int'l Bus. Machs. Corp. v. Charnes, 601 P.2d 622 (Colo. 1979) (fabrication labor)
• Department publication: Construction Contractors, FYI Sales 6

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-25-004.pdf

Original ruling text

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

GIL 25-004
March 24, 2025
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Via Electronic Mail: XXXXXXXXX
Re: Sales and use tax due on the fabrication and installation of a staircase system into real property by a construction subcontractor Dear XXXXXXXXX: You submitted a request for a general information letter regarding the sales and use tax due on the fabrication and installation of a staircase system into real property by a construction subcontractor. 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 labor costs are included in the calculation of sales and use tax on the purchase of materials for and the fabrication of a staircase system into real property by a construction subcontractor. Discussion Colorado generally imposes sales and use tax on the retail sale of tangible personal property.1 The term “tangible personal property” means “corporeal personal property” and generally “embraces all goods, wares, merchandise, products and commodities, and all tangible or corporeal things and substances that are dealt in and capable of being possessed and exchanged.”2 This includes tangible personal property purchased, delivered, stored, used, or consumed by construction contractors in the state for the purpose of being built into a building or structure.3 This specific category of taxable tangible personal property is often referred to as “construction and building materials.” The phrase “construction and building materials” is not defined in statute or rule, though the Court of Appeals has explained that, in the context of imposing tax on such tangible personal property, the plain meaning of the phrase “construction and building materials” suggests that such

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Sections 39-26-104(1)(a) and 39-26-202(1), C.R.S.
Section 39-26-102(15)(a)(I), C.R.S.
1 CCR 201-5, Special Rule 10, paragraph (2).

GIL 25-004
March 24, 2025
Page 2
materials must necessarily lose their identity and become a permanent part of the realty during construction.4 Because sales and use tax is imposed on the purchase or use of construction and building materials that lose their identity and become a permanent part of the realty during construction, the Department must determine when the sales or use tax applies. Through the application of 1 CCR 201-5, Special Rule 10, this determination is based on the type of contract entered into by a contractor for a construction project. Construction contractors that operate under a lump-sum contract, where the price of materials and labor are not separately stated, are treated as the consumer of all construction and building materials they purchase for a project and are therefore required to pay state sales and use tax on such materials.5 Construction contractors that operate under a time-and-materials contract, where materials and labor are separately stated, are treated as retailers, not consumers, of all construction and building materials. As such, these contractors do not pay sales tax on materials at the time of purchase, but instead must collect the tax from their customers on the marked-up price of the materials and remit the tax to the Department.6 Under a time-and-materials contract, the construction contractor does not collect sales tax on the separately stated price of labor.7 Special Rule 10 also specifically addresses subcontractors. A subcontractor who purchases construction and building materials for use in their job is the consumer of those materials and is liable for the payment of state sales and use tax on the purchase of those materials by the subcontractor.8 In cases where a subcontractor uses the construction and building materials they purchased for a construction project to fabricate an item before building that item into a building or structure such that it becomes an integral, permanent, and inseparable part of the real property, the subcontractor’s fabrication labor is not subject to sales and use tax.9 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 4

Bd. of Cnty. Comm'rs v. ExxonMobil Oil Corp., 192 P.3d 582, 587 (Colo. App. 2008). 1 CCR 201-5, Special Rule 10, paragraphs (2) and (5). 6 Id. at (3); see also 1 CCR 201-5, Special Rule 10, paragraph (5) (requiring that a contractor who enters into a time-and-materials contract must have a sales tax license). 7 1 CCR 201-5, Special Rule 10, paragraph (3); see also Department publication: Construction Contractors, FYI Sales 6. 8 1 CCR 201-5, Special Rule 10, paragraphs (1) and (6). 9 Cf. Int’l Bus. Machs. Corp. v. Charnes, 601 P.2d 622, 625–26 (Colo. 1979). 5