Does Colorado sales or use tax apply to an advertising agency's separately stated charges for direct-mail materials and mailing fulfillment when the materials are printed in Colorado but mailed to recipients outside the state?

Plain-English summary

An advertising agency in Colorado asked the Department for a binding ruling on two charges it bills to a multistate retailer client: (1) a separately stated charge for direct-mail advertising materials, which the agency hires a Colorado printer to print and mail directly to the client's potential customers located outside Colorado; and (2) a separately stated charge for mailing fulfillment services (sorting and bundling the mailers, plus the USPS postage). The Department ruled that neither charge is subject to Colorado sales or use tax.

How the chain works: the retailer hires the agency; the agency hires the printer; the printer prints the mailers in Colorado and mails them from its Colorado facility straight to the retailer's prospective customers in other states. The agency gives the printer its Colorado sales tax license to buy the materials tax-free for resale.

On the materials, the Department first decided they are tangible personal property (Colorado amended the definition of TPP effective March 1, 2011 to include direct-mail advertising material, and the older carve-out for "cooperative direct mail advertising distributed in Colorado" didn't apply here). But two exemptions then knock out the tax:
- Wholesale/resale exemption. Wholesale sales are exempt, and Special Regulation 1(2) says an advertising agency gets the wholesale exemption when it buys materials from a third party and resells them to its client. So the printer-to-agency sale is an exempt wholesale sale.
- Out-of-state delivery exemption. Reg. 39-26-704.2(4) makes sales of property that's in Colorado at the time of sale but delivered (by the vendor or common carrier) to a destination outside Colorado for use outside Colorado non-taxable. Because the printer mails the materials from Colorado to recipients outside the state, the agency-to-retailer resale is exempt too.

On the fulfillment services, Colorado generally doesn't tax services. Normally a mixed goods-and-services deal would force a "true object"/separability analysis (the Department cited A.D. Stores), but here the Department didn't need to: since the underlying materials were already non-taxable, the printer's and agency's separately stated fulfillment charges aren't taxable either.

Because this is a private letter ruling, it is binding on the Department for this taxpayer and these facts only, premised on full and accurate disclosure, and cannot be relied on by anyone else.

What this means for you

Advertising agencies and print/mail shops

When you buy printed materials to resell to a client, use your sales tax license to buy them tax-free for resale (Special Regulation 1(2)). And where the finished mailers are shipped/mailed out of state for use outside Colorado, the sale to your client is non-taxable under the out-of-state delivery rule — even though the printing happened in Colorado. Separately stating the materials from the fulfillment/postage charges keeps the analysis clean.

Multistate retailers running direct-mail campaigns

A Colorado-printed mailing campaign aimed at out-of-state prospects can come to you free of Colorado sales/use tax on both the materials and the fulfillment, when the pieces are mailed directly to recipients outside Colorado. Where the mailers land matters: pieces delivered to Colorado recipients would be analyzed differently.

Accountants and tax professionals

Two independent exemptions carried the materials — the agency's wholesale resale (SR 1(2)) and out-of-state delivery (Reg. 39-26-704.2(4)) — and the services rode along once the goods were non-taxable, so the Department never had to resolve the true-object/separability question. Note the timing point: direct-mail advertising material became TPP effective 3/1/2011, so the older "cooperative direct mail" exclusion is no longer the analysis.

Common questions

Q: Is direct-mail advertising material taxable in Colorado?
A: It's tangible personal property (since March 1, 2011), so it's potentially taxable — but in this ruling it was exempt because the agency resold it at wholesale and the finished mailers were delivered to recipients outside Colorado for use outside the state.

Q: Are the mailing/fulfillment (sorting, bundling, postage) charges taxable?
A: Not here. Colorado generally doesn't tax services, and because the underlying materials were non-taxable the Department didn't even need to run a true-object analysis — the separately stated fulfillment charges aren't taxable.

Q: What if the mailers go to Colorado addresses?
A: That changes the picture. The out-of-state delivery exemption depends on the materials being delivered for use outside Colorado. Pieces delivered to Colorado recipients wouldn't fit that exemption and would have to be analyzed on their own facts.

Q: Can my agency rely on this ruling?
A: No. A private letter ruling binds the Department only for the taxpayer and facts it was issued to and cannot be relied on by anyone else. It shows the Department's reasoning, but your facts may differ.

Citations and references

Statutes, rules, and cases:
- § 39-26-104(1), C.R.S. (sales/use tax on TPP)
- § 39-26-102(15)(a)(I), C.R.S. (TPP definition; direct-mail material added 3/1/2011)
- § 39-26-102(9), (19), C.R.S. (retail vs. wholesale sale)
- Special Regulation 1(2) (advertising agencies; resale exemption)
- Reg. 39-26-704.2(4) (TPP delivered out of state for use outside Colorado not taxable)
- A.D. Stores v. Dep't of Revenue, 19 P.3d 680 (Colo. 2001) (separability of services)
- 1 CCR 201-1, Reg. 24-35-103.5 (private letter ruling procedure)

Related rulings

• [[gil-12-007-transportation-charges]] — separable/separately stated delivery charges
• [[gil-12-010-tangible-personal-property-assembled-in-colorado]] — out-of-state delivery; goods made in CO sold elsewhere
• [[gil-12-011-reimbursable-expenses]] — true object / separability for bundled charges

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-11-004.pdf

Original ruling text

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

PLR-11-004
June 15, 2011
XXXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
Re: Private letter ruling re: direct mail advertising
Dear XXXXXXXXX,
Your firm submitted on behalf of XXXXXXXXXXXXXXXXXXXXXX (“Company”) a request for
a private letter ruling to the Colorado Department of Revenue (“Department”) pursuant to
Regulation 24-35-103.5. This letter is the Department’s private letter ruling.
Issue
1. Is an advertising agency’s separately stated charge for “direct mail advertising
materials” that the advertising agency instructed a printer to print and mail to potential
customers located outside Colorado subject to Colorado sales and use tax?
2. Is an advertising agency’s separately stated charge for mailing fulfillment services
subject to Colorado sales or use tax?
Conclusion
1. An advertising agency’s separately stated charge for the sale of direct mail
advertising materials to the agency’s client who directs the advertising agency to
instruct the printer to print and mail the material to potential customers located outside
Colorado is not subject to Colorado sales and use tax.
2. An advertising agency’s separately stated charge to its client for mailing fulfillment
services is not subject to Colorado sales or use tax.
Background
Company asks us to consider four related transactions regarding the sale of direct mail
advertising materials (“materials”) and services (“services”).

Retailer, a multistate company with offices in Colorado as well as in other states, enters into a
contract1 for the purchase and sale of advertising materials and services with Advertising
Agency, which is located in Colorado. Agency then enters into a contract with Printer, which
is also located in Colorado, to print and mail the materials from its Colorado facilities to
Retailer’s potential customers who are located outside Colorado. Printer’s invoice to Agency
separately states a charge for printing and a charge for fulfillment services. Fulfillment
services are described as the services of sorting and bundling the direct mail advertising
materials for mailing purposes. Charges for fulfillment services include the charge by the
United States Postal Service to mail the materials. Charges for mailing the advertising
materials using the USPS are separately stated from the charges for the fulfillment services.
Agency presents its Colorado sales tax license to the Printer for purposes of claiming a sale
for resale exemption from sales and use taxes. Finally, Agency submits an invoice to Retailer
in which the price of the materials is separately stated from the charge for fulfillment services.
Retailer describes the charges Retailer pays for the fulfillment services as a “resale” (by the
Agency) of the fulfillment services performed by the Printer.
Discussion
Colorado levies sales and use tax on the sale, use, storage, or consumption of tangible
personal property.2 Prior to March 1, 2010, Colorado law expressly excluded direct mail
advertising materials distributed in Colorado by a person engaged solely and exclusively in
cooperative direct mail advertising from the definition of tangible personal property and,
therefore, exempted those materials from sales and use tax.3 We conclude that the
materials4 at issue here do not fall within the definition of direct mail advertising material
because there is no basis presented in the ruling request to conclude that these materials are
distributed by a person engaged solely and exclusively in cooperative direct mail advertising
or that the materials are distributed in Colorado. Effective March 1, 2011, the definition of
tangible personal property was amended to include direct mail advertising material..5
Therefore, the materials at issue in this ruling request are categorized as tangible personal
property both before and after March 1, 2011.
Colorado tax exemptions for certain transactions. As the Company correctly noted in its
ruling request, there are at least two exemptions that apply here.
First, wholesale sales are exempt from Colorado sales and use taxes.6 The department
specifically addressed this wholesale exemption in the context of advertising agencies.
Department’s Special Regulation (“SR”)1(2) provides, in pertinent part,
(2) If an [advertising] agency acquires articles for resale to its clients, the
agency must have a sales tax license to purchase such property tax free for
resale....
1 This ruling assumes without determining that the contracts between Printer and Agency and between

Agency and Retailer contain agreements to buy and sell the materials.

2 §39-26-104(1), C.R.S.

3 §39-26-102(15)(a)(I), C.R.S.

4 Company characterizes the advertising material at issue as “direct mail advertising material.”

Direct mail
advertising material is specifically defined in Colorado as discount coupons, advertising leaflets, or other
printed advertising. We assume without deciding that Company’s characterization of the material is correct.
5 §39-26-102(15)(a)(I), C.R.S.
6 Colorado sales tax applies only when there is a “retail” sale, which are all sales except a wholesale sale.
§39-26-104(1) and 102(9) and (19), C.R.S.

2

The assumption underlying this regulation is that an advertising agency is entitled to a
wholesale sales tax exemption when it purchases materials from a third party and resells the
materials to its client. Therefore, the sale of materials from Printer to Agency is exempt as a
wholesale sale because Agency7 resells the materials to Retailer.
The subsequent resale of materials by Agency to Retailer is also exempt from sales and use
tax.8 Specifically, department regulation 39-26-704.2(4) states, in pertinent part, that,
(4) Sales of tangible personal property located within this state at the time of sale and
delivered to the purchaser by the vendor or by common carrier to a destination outside
this state for use outside this state are not taxable....
The sale of materials from Agency to Retailer falls squarely within this exemption. Printer
mails Retailer’s materials from the Printer’s premises in Colorado to Retailer’s potential
customers who are located outside Colorado. Therefore, the resale of material by Agency to
Retailer is exempt from sales and tax.
Finally, we conclude that the Printer’s and Agency’s charges for fulfillment services are not
subject to sales or use tax. With some exceptions and under some circumstances not
applicable here, Colorado does not levy tax on services. When as here a transaction
involves both the provision of services and tangible personal property, we are typically
required then to determine whether charges for services are inseparable9 from the sale of
goods and whether the true object of such a bundled10 transaction is one primarily for the
sale of goods or services. We do not reach those issues here because we previously
concluded that the sale of materials is non-taxable. Therefore, charges by Printer to Agency
and charges by Agency to Retailer for fulfillment services are not taxable.
Miscellaneous
This ruling is premised on the assumption that the Company has completely and accurately
disclosed all material facts. The department reserves the right, among others, to
independently evaluate the Company’s representations. This ruling is null and void if any
such representation is incorrect and has a material bearing on the conclusions reached in
this ruling. This ruling is subject to modification or revocation in accordance to Department
Regulation 24-35-103.5
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this
redacted version of the ruling will be made public within 60 days of the date of this letter.

7 We accept without ruling that Agency holds a retail sales tax license issued by the Department.

8 Special Regulation 1(2) states that the resale from the agency to the client is taxable (“The sales tax

charged by the agency [to its clients] would apply to the total amount of the retail sale of property prepared
by its employees or acquired from outside sources...”), but, as we discuss above, this resale is exempt
under another exemption.
9 A.D. Stores v. Department of Revenue, 19 P.3rd 680 (Colo. 2001) (charges for dress alteration services are
separable from the sale of the dress and, therefore, separately stated charges for alteration services are not
subject to sales tax).
10 Company presents the transaction between Agency and Retailer (as well as the transaction between Printer
and Agency) as two distinct transactions: one for the sale of goods and one for the sale of fulfillment services.
Although we do not necessarily agree that these are two distinct transactions, we need not resolve that issue
here because we conclude that the sale of the materials is not taxable.

3

Please let me know in writing within that 60 day period whether you have any suggestions or
concerns about this redacted version of the ruling.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

4