Can a manufacturer claim a Colorado sales/use tax exemption on coal and shredded tires that serve as both kiln fuel and as a chemical ingredient in the finished product?

Plain-English summary

A manufacturer that heats raw materials in kilns to make a chemical product (the process described — raw materials, kilns, a meal-to-clinker ratio — reads like cement/clinker production) burns coal and shredded tires that play two roles at once: they fuel the kilns, and part of each ends up chemically incorporated into the finished product. It asked how Colorado sales/use tax applies. The Department issued a mostly favorable, partial-exemption ruling.

1. Ingredient/component exemption (§ 39-26-102(20)) — a portion is exempt. Colorado exempts property a manufacturer buys that "becomes an ingredient or component part" of the product it makes. Burning coal leaves coal ash containing silica and alumina, which are necessary, desirable components of the product; burning shredded tires contributes iron (from the steel mesh) to the product. So the portion of the coal and tires that becomes a component is exempt.

The interesting move is apportionment. The Department distinguished C.F. & I. Steel v. Charnes (where carbon rods contributing only 1–3% carbon to steel got no exemption) on the ground that this taxpayer didn't claim a full exemption — it asked only for the portion attributable to the component, which the Department found reasonable and consistent with its regulation (Reg. 39-26-102.20, Example 3, on apportioning dual-use flux). The taxpayer may use one of two formulas — (a) the cost of the additional raw materials it would otherwise need to supply those components, or (b) the coal price minus the market price of comparable coal ash — and must use whichever reflects the least-cost source, which can change as commodity prices move.

2. Industrial-fuel exemption (§ 39-26-102(21)(a)) — coal yes, tires no. This exemption covers "electricity, coal, gas, fuel oil, steam, coke or nuclear fuel" used in manufacturing. It had been suspended from March 1, 2010 to July 1, 2012, so the Department ruled that the company's coal purchases on or after July 1, 2012 are again exempt as industrial fuel. But it rejected the argument that shredded tires are "fuel oil": fuel oil means a liquid petroleum product (kerosene, heating oil), and exemptions are construed narrowly with the burden on the taxpayer (RTD v. Charnes; GM v. Denver). Shredded tires aren't a listed exempt fuel, so they get no § 102(21)(a) exemption — only the § 102(20) component portion.

3. How to claim it. For past overpayments, the company can file a refund claim (Form DR 0137) with documentation, or have its suppliers refund the tax (or take a credit on their returns). Refund/credit claims are limited to a three-year window (§ 39-26-703), and a vendor fee may be deducted depending on the route. Going forward, the company can claim the exempt portion at the time of purchase, or pay the full tax and periodically file for refund.

Because this is a private letter ruling, it is binding on the Department only for this taxpayer and these facts, premised on full and accurate disclosure (the Department expressly reserved the right to re-examine the factual percentages), and cannot be relied on by anyone else.

What this means for you

Manufacturers using dual-purpose inputs (fuel that also becomes product)

Colorado will let you exempt the component-becoming portion of an input that serves double duty as both fuel and ingredient — you don't lose the whole exemption just because most of the material is burned for heat (the lesson of distinguishing C.F. & I. Steel). But you must apportion with a defensible, least-cost-source formula and keep documentation; the Department reserves the right to test your percentages.

Cement, lime, kiln, and process industries

Coal used in manufacturing is an exempt industrial fuel again from July 1, 2012 forward (after the 2010–2012 suspension). Alternative fuels like shredded tires are not exempt fuels, so for those, your only exemption is the ingredient/component portion (e.g., the iron). Don't stretch "fuel oil" to cover solid or non-listed fuels — it's read narrowly as liquid petroleum products.

Accountants and tax professionals

Two independent exemptions, different scopes: § 102(20) (component portion, apportioned, least-cost source) and § 102(21)(a) (whole input, but only listed fuels and only post-7/1/2012 for coal). Refunds run through DR 0137 (or supplier refund/credit), capped at three years (§ 39-26-703), with vendor-fee mechanics (§ 39-26-105(1)) depending on the route.

Common questions

Q: If I burn a material for heat but some of it becomes part of my product, can I get any exemption?
A: Yes — the portion that becomes a necessary, desirable component of your product is exempt under § 39-26-102(20). You apportion the price using a least-cost-source formula; you don't get a full exemption just because some of the material ends up in the product, but you're not denied the component portion either.

Q: Why is coal exempt as fuel but shredded tires aren't?
A: The industrial-fuel exemption lists specific fuels (electricity, coal, gas, fuel oil, steam, coke, nuclear fuel). Coal is on the list (exempt for manufacturing use from July 1, 2012). Shredded tires aren't a listed fuel, and "fuel oil" means a liquid petroleum product, so tires don't qualify — though their iron content can still be exempt as a component.

Q: How do I recover tax I already paid on these inputs?
A: File Form DR 0137 with supporting documentation, or have your suppliers refund the tax or take a credit on their returns. Claims are limited to three years from overpayment, and a vendor fee may apply depending on the route.

Q: Can another manufacturer 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.

Citations and references

Statutes, rules, and cases:
- § 39-26-102(20), C.R.S. (ingredient/component-part exemption)
- § 39-26-102(21)(a), C.R.S. (industrial-fuel exemption; coal in manufacturing; suspended 3/1/2010–7/1/2012)
- Reg. 39-26-102.20, Example 3 (apportioning dual-use property)
- Reg. 39-26-709.1 (definition of manufacturing)
- C.F. & I. Steel v. Charnes, 637 P.2d 324 (Colo. 1981) (insignificant component denied full exemption)
- Regional Transp. Dist. v. Charnes, 660 P.2d 24 (Colo. App. 1982); General Motors v. Denver, 990 P.2d 59 (Colo. 1999)
- § 39-26-703, C.R.S. (three-year refund limit); § 39-26-105(1), C.R.S. (vendor fee); Form DR 0137

Related rulings

• [[plr-12-005-private-letter-ruling]] — industrial-fuel/gas exemption (welding gases); machinery exemption
• [[gil-12-010-tangible-personal-property-assembled-in-colorado]] — component/ingredient exemption (§ 102(20))
• [[plr-11-009-private-letter-ruling]] — narrow construction; directly-used-in-production thread

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-11-010.pdf

Original ruling text

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

PLR-11-010

December 21, 2011
XXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
Re: Private Letter Ruling
Dear XXXXXXXXXXX,
Your firm submitted on behalf of XXXXXXXXXXXX (“Company”), XXXXXXXXXX, and
XXXXXXXXXXXXXXXXXX (the latter two entities collectively referred to in this ruling as
“Suppliers”) 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.
Issues
1. Is XXX% of Company’s purchase price of coal exempt from sales and use taxes
pursuant to §39-26-102(20), C.R.S. because XXX% of the coal is an ingredient or
component part of a manufactured or compounded product?
2. Is XXX% of Company’s purchase price of shredded tires exempt from sales and use
taxes pursuant to §39-26-102(20), C.R.S. because XXX% of the shredded tires is an
ingredient or component part of a manufactured or compounded product?
3. Are Company’s purchases of coal made on or after July 1, 2012 exempt from sales and
use taxes pursuant to §39-26-102(21)(a), C.R.S. because the coal is used in the
manufacturing?
4. Are Company’s purchases of shredded tires made on or after July 1, 2012 exempt from
sales and use taxes pursuant to §39-26-102(21)(a), C.R.S. because the shredded tires
are used in the manufacturing?
5. How does Company claim this exemption for prior periods and on future purchases?
Conclusions
1. A portion of Company’s purchase price of coal is exempt from sales and use taxes
pursuant to §39-26-102(20), C.R.S. because a portion of the coal is a necessary and
desirable component of the Product. Company must use an apportionment formula that
reflects the lowest economic cost of alternative sources of components.
2. A portion of the Company’s purchase price of shredded tires is exempt from sales and
use taxes pursuant to §39-26-102(20), C.R.S. because the iron contained within

shredded tires is a necessary and desirable component of the Product. Company must
use an apportionment formula that reflects the lowest economic cost of alternative
sources of components.
3. Company’s purchases of coal made on or after July 1, 2012 are exempt from sales and
use taxes because §39-26-102(21)(a), C.R.S. exempts purchases of coal used in
manufacturing.
4. Company’s purchases of shredded tires made on or after July 1, 2012 are not exempt
from sales and use taxes pursuant to §39-26-102(21)(a), C.R.S. because shredded
tires are not listed as an exempt fuel.
5. To claim the tax refund and exemption for coal ash and shredded tires, Company must
either file a claim for refund (DR 0137), together with accompanying supporting
documentation, or request that Suppliers issue it a refund and Suppliers either submit
refund claims or take a credit on their sales tax returns.
Background
Company manufactures1 XXXXXXXXXXX (“Product”) at facilities located in Colorado. Product
is a chemical mixture of raw ingredients that are combined in accordance with a precise
chemical formula. Raw materials are mixed and heated in kilns to create a chemical reaction,
the result of which, after further processing, is the Product. Coal is a fuel used to heat the raw
materials to a temperature necessary for these chemical reactions. Coal is directly fed into the
kilns together with the raw materials. Burning coal produces coal ash, which contains silica
and alumina. These two components are necessary and desirable components of the Product.
In the absence of these components of coal ash, Company would have to use other sources of
these components and incorporate them into the Product. Company estimates that reduction
in other raw materials that contain such components resulting from the components in coal ash
is XXX%, which is based on the raw material dollar savings compared to the total value of the
raw material usage with coal ash.
Company also uses shredded tires as fuel and to contribute ingredients to produce the
Product. Tires are burned as a fuel to create heat that chemically transforms raw materials into
the Product. Shredded tires are partially made of steel mesh which contains iron and the
Company represents that iron is a necessary and desirable component of the Product. And, as
in coal ash, Company calculates the percentage of the price of shredded tires by determining
the amount of other raw materials needed to replace the iron had shredded tires not been
used.
Company purchases all of the coal from XXXXXXXXX and shredded tires from
XXXXXXXXXXXXXXXXXXX, both of which are corporate affiliates of Company, and both of
which hold a sales tax license issued by the Department and report and remit sales taxes paid
by Company to Suppliers for purchases of, among other items, coal and shredded tires.
Discussion

1 The manufacturing process is more complex than described here, but we find it unnecessary to fully explain the
process in order to issue this ruling. We also reviewed the factual representations of these processes and are
satisfied that there is a sufficient factual basis to issue this ruling. However, given the complexity of this process, we
do not make an independent determination that the factual representations are correct or complete. The department
reserves the right to independently review these representations.

2

1. A portion of Company’s purchase price for coal is exempt from sales and use tax pursuant
to §39-26-102(20), C.R.S.
Colorado exempts from sales and use taxes purchases of:
tangible personal property by a person engaged in the business of manufacturing,
compounding for sale, profit, or use, any article, substance or commodity, which
tangible personal property enters into the processing of or becomes a ingredient or
component part of the product or service which is manufactured, compounded, or
furnished, ...2
Coal serves two functions in the manufacturing3 process. It provides the necessary heat to
physically and chemically alter the raw ingredients that are necessary and desirable
components of the Product. Second, the resulting coal ash contains a percentage of
compounds that are necessary and desirable components of the Product. Thus, that portion of
coal ash that becomes a necessary and desirable component of the Product would appear to
be exempt. However, the relatively small amounts of these components contained in coal ash
raises the question of whether Company is entitled to an exemption in light of C.F.&I Steel v.
Charnes, 637 P.2d 324 (Colo. 1981).
In C.F. & I. Steel v. Charnes, the taxpayer used carbon rods to melt iron in the production of
steel. The carbon rods also contributed a very small amount of carbon (1% to 3% of the
electrode) to the manufacturing process. Taxpayer argued that the entire purchase price of the
rods was exempt from sales and use tax under the components exemption at issue here. The
court disagreed because the amount of carbon contributed to the steel manufacturing was
insignificant. Importantly, there is no indication that the taxpayer requested that the exemption
apply only to a portion of the price of the rods - certainly, a proportional approach was not
discussed by the court.4
We believe C.F. & I Steel is not controlling in this case. Company does not argue for a full
exemption of the price of coal. Rather, Company argues that the exemption applies only to a
portion of the price of coal. We think a proportional method is a reasonable application of this
exemption and have so stated in regulation.5
There are at least two methods for apportioning this exemption. Company proposes estimating
the cost of additional raw materials that would be required to provide those components
contributed by coal ash had coal ash not been present. This calculation indicates that XXX%
of other additional raw materials would be required.6
2 §39-26-102(20), C.R.S.

3 Manufacturing means the operation of producing, in an industrial use, an item of tangible personal property

different from and having a distinctive name, character, or use from raw or prepared materials. See, Department
Regulation 39-26-709.1. Production of the Product is clearly “manufacturing” because the raw ingredients undergo
both a chemical and physical process that create a product distinctly different in character, name and use from the
raw products.
4 The taxpayer in C.F. & I Steel argued that the carbon rods as a “class” or category were exempt, suggesting that if
some part of the property was used then all of the property, as part of a class of exempt property, was exempt.
5 39-26-102.20, Example 3 (“(3) Flux if used as a cleaning agent or as a means of reducing oxidation, is taxable to
the manufacturer at the time of purchase. It may also be used for transmitting desirable alloys to the deposited
metal. To the extent it is used for the latter purpose, it is not subject to sales tax to the manufacturer at the time of
purchase. Since the different functions are not mutually exclusive, exempt and nonexempt purposes may be served
simultaneously and in such cases the tax will have to be apportioned between the various uses.” Emphasis added)
6 Company represents, at least implicitly, that the raw materials are the most economical alternative to replace the
components desired in the coal ash. We make no determination that this is correct, or that the factual assumptions

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An alternative method for computing the exemption is to subtract from the unit price of coal the
market price of coal ash of a similar composition (excluding transportation costs because the
coal ash is already present). For example, if one ton of coal yields 100 lbs of coal ash, and a
similar coal ash has a market value of $3.00 per ton (or $.0015/lbs) then $.15 of the ton price of
coal is exempt from sales tax.
Whether the Company must use the XXX% or the modified ton price for coal ash method is
determined by which resource (other raw resources or coal ash) would be the least cost to the
Company. Which approach is the most economical resource (excluding the sales tax burden)
may vary over time as the market price for these commodities varies. For this reason, we
authorize the Company to use either of these two methods, but it must choose that method that
reflects the least cost approach for the Company.
2. A portion of Company’s purchase price for shredded tires is exempt from sales and use tax
pursuant to §39-26-102(20), C.R.S.
For reasons set forth above, we find that a portion of the price for shredded tires is exempt
pursuant to 39-26-102(20), C.R.S., quoted above, because the iron becomes a component part
of the Product during the manufacturing process. As in the case of coal ash, we rule that, in
order to prevent an excessive exemption claim, the methodology to be used is one that reflects
the least cost resource to the Company. The Company’s methodology for computing the
percentage (XXX%) to calculate the exemption is reasonable and authorized by this ruling, but
we do not rule here that the raw resource identified by this methodology is the least cost
resource.7
3. Company’s purchases of coal made on or after July 1, 2012 are exempt from sales and use
taxes because §39-26-102(21)(a), C.R.S. exempts purchases of coal used in manufacturing.
Prior to March 1, 2010, the purchase of coal was exempt from sales and use tax if it is used in
manufacturing. In 2010, the legislature suspended this exemption until Jul 1, 2012. We find
that Company is engaged in manufacturing (the Product) and uses coal in the manufacturing.
Thus, and subject to further legislation, we rule that Company’s purchases of coal on and after
July 1, 20128 will be exempt from sales and use taxes under this exemption.
4. Company’s purchases of shredded tires made on or after July 1, 2012 are not exempt from
sales and use taxes pursuant to §39-26-102(21)(a), C.R.S. because shredded tires are not
listed as an exempt fuel.
Section 39-26-102(21), C.R.S. exempts from sales and use taxes, the sales and purchases of
“electricity, coal, gas, fuel oil, steam, coke or nuclear fuel” for use, among other uses, in
manufacturing. Company argues that “fuel oil” should be expansively read to include any
combustible petroleum-based material such as shredded tires.

underlying other components of the Company’s formula are correct (e.g., the meal to clinker ratio is .6060), and
expressly reserve the right to review the accuracy of these representations.
7 As in the case of the Company’s factual representations regarding coal ash, the department reserves the right to
independently review the representations made in the calculation.
8 Company’s purchases of coal prior to July 1, 2012 and which are used in manufacturing after July 1, 2012 are not
exempt under this exemption.

4

Fuel oil is not specifically defined by statute. However, it is a term commonly used and
understood to refer to a liquid petroleum product that is burned in a furnace or boiler for the
generation of heat or used in an engine for the generation of power, such as kerosene and
home heating oil. We have found no authority to expand this term to include any combustible
petroleum-based material. Indeed, statutes governing exemptions must be narrowly
construed. Regional Transp. Dist. v. Charnes, 660 P.2d 24, 25 (Colo. App. 1982). The party
asserting the exemption has the burden of establishing that it clearly is entitled to the
exemption. General Motors v. City and County of Denver, 990 P.2d 59 (Colo. 1999). We rule
that Company’s purchase of shredded tires does not clearly fall within the definition of fuel oil
and, therefore, is not exempt under subsection 102(21).
5. Making claims for exemption for coal and shredded tires for past and future periods.
Company paid Suppliers sales tax on exempt purchases of coal and shredded tires. Company
has two options for obtaining a refund. Company can file with the Department a claim for a tax
refund (form DR 0137), together with supporting documents demonstrating the basis for it claim
or request from Suppliers a refund of tax and interest. If Company submits a claim for refund
to the Department, Company will be paid the tax, together with interest, less the vendor fee,9 if
any,10 retained by Suppliers for the relevant tax periods. If Company submits the claim to
Suppliers, then Suppliers refund the appropriate tax and interest, but do not subtract the
vendor’s fee. Lastly, Company cannot obtain a tax refund by claiming a credit on sales tax
returns it files for its retail sales of Product to customers.
If Company requests Suppliers issue the refund, Suppliers can, thereafter, either file with the
Department a claim for refund (DR 0137) or claim a credit on their sales tax returns filed with
the Department. If Suppliers choose to claim a credit, the credit is not reduced by the vendor’s
fee retained, if any, by the Suppliers for the tax period for which the refund is claimed.
Suppliers can claim a credit up to the amount of sales tax due for any particular period and any
excess credit can be carried over to the next filing period. Suppliers shall include in their
calculation of the credit the interest accrued from the date of the overpayment to Suppliers from
Company to the due date of the payment of sales tax against which the credit is taken.
Suppliers shall pay Company an amount equal to the refund or credit. All claims for refund or
credit are limited to a three year period from the date of overpayment. §39-26-703, C.R.S.
(three year period to claim refund or credit).
For future purchases of coal and shredded tires, Company may claim at the time of purchase
from Suppliers an amount equal to that portion of the coal and shredded tire purchase price
which is exempt. Suppliers will report the sales and exemption on its sales tax return.
Alternatively, Company can pay Suppliers the tax on the entire purchase price and periodically
file a claim for refund with the Department.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. You may wish
to consult with local governments which administer their own sales or use taxes about the
applicability of those taxes.

9 §39-26-105(1), C.R.S (requiring deduction of vendor fee from tax refund payment)

10 Colorado suspended the vendor’s fee for returns made on or after July 1, 2009 and prior to June 30, 2011.

105(1)(f)(I)(B), C.R.S.

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39-26-

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 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. 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

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