When a company installs fire sprinkler/alarm systems into buildings through subcontractors and bills clients time-and-material, who owes Colorado sales tax?

Plain-English summary

A company contracts with national, multi-state clients to install, repair, and inspect fire sprinkler and fire alarm/detection systems ("Systems") built into their buildings. It does none of the work itself — it dispatches a network of third-party subcontractors — and then bills its clients, generally on a time-and-material basis, marking up what the subcontractors charged it. The Systems are an integral, inseparable part of the realty that would cause substantial damage if removed. The company asked (1) whether its charges to clients are taxable, and (2) whether its payments to subcontractors are taxable.

The Department's conclusions: (1) yes, the client charges are taxable; (2) no, the subcontractor payments are not.

The contractor framework. Colorado taxes tangible personal property, but Regulation 39-26-102.15 excludes property that loses its identity when it becomes an integral and inseparable part of the realty (removable only with substantial damage). Because the Systems become fixtures, the tax turns on how the contractor bills (Special Regulation 10):

• Time-and-material billing → contractor is treated as a retailer. The sale is deemed to occur before installation, so the contractor must charge the owner sales tax on the marked-up price of all materials.
• Lump-sum billing → contractor is the consumer. The sale is deemed to occur after the property is installed and has become realty, so there's no taxable sale to the owner; instead the contractor pays sales or use tax when it acquires the building materials (use tax measured by the price paid to the manufacturer, not including the installer's labor).

Applied here: the company bills clients time-and-material, so it's a retailer and must charge sales tax on the marked-up materials.

Why the subcontractor payments aren't taxed. The subcontractors sell the materials to the company (a sale of tangible personal property). But the company isn't liable for tax on those purchases because it's reselling the materials to its clients — an exempt wholesale purchase for resale (§ 39-26-102(9)).

The cases the company raised — distinguished. The company cited Raynor Door v. Department of Revenue, 765 P.2d 650 (Colo. 1988), and Noble Energy v. Department of Revenue, 232 P.3d 293 (Colo. 2010), to argue no sales tax applies. The Department said neither is dispositive: Raynor Door involved a lump-sum contract and never addressed the time-and-material exception, and Noble Energy turned on separability and the true-object test (its discussion of Reg 39-26-102.15 was dicta) and itself relied on Raynor Door. (The Department also noted the company has nexus in Colorado because it uses in-state subcontractors to fulfill its contracts; Tyler Pipe.)

What this means for you

Contractors and fire-protection companies

If you build fixtures (fire systems, wiring, piping) into a client's building and bill time-and-material, Colorado treats you as a retailer: charge the client sales tax on the marked-up materials. If you instead bill lump-sum, you pay the tax when you buy the materials and charge the client no tax. Pick the model deliberately — it decides who pays and when.

Companies that work through subcontractors

Using subs doesn't create a second layer of tax. The sub's sale of materials to you is a wholesale (resale) purchase — not taxable to you — because you resell those materials to your client. Provide your resale documentation so the sub doesn't charge you tax. (Note: doing work through in-state subs gives you nexus.)

Accountants and tax professionals

This is the classic fixture/contractor analysis under Reg 39-26-102.15 and Special Regulation 10: time-and-material = retailer (tax the owner on marked-up materials, sale deemed pre-installation) vs. lump-sum = consumer (contractor pays on acquisition, sale deemed post-installation). The subcontractor's sale to the prime is an exempt resale. Note how the Department distinguished Raynor Door and Noble Energy as not reaching the time-and-material exception. Watch the home-rule-city caveat below.

Common questions

Q: When does a contractor charge the customer Colorado sales tax?
A: When it bills on a time-and-material basis. Then it's treated as a retailer and must charge tax on the marked-up price of the materials. On a lump-sum contract it charges the customer no tax but pays tax itself when it buys the materials.

Q: Are payments to subcontractors taxable?
A: Not to the company here. The subcontractor's sale of materials to the company is an exempt wholesale (resale) purchase, because the company resells those materials to its clients.

Q: The systems become part of the building — doesn't that make them non-taxable?
A: They stop being tangible personal property once built into realty, which is exactly why the contractor rules apply. With time-and-material billing the taxable sale is deemed to occur before installation, so tax is still due on the materials.

Q: Don't Raynor Door and Noble Energy say no tax applies?
A: The Department said neither controls here — both involved different facts and neither addressed the time-and-material exception that governs this company's billing.

Q: Can my business rely on this ruling?
A: No. A private letter ruling binds the Department only as to the taxpayer and facts it was issued to and cannot be relied upon by anyone else. It's also void if the taxpayer's representations were inaccurate.

Citations and references

Statutes and rules:
- §§ 39-26-104(1), 202, C.R.S. (sales/use tax on tangible personal property)
- Department Regulation 39-26-102.15 (fixtures excluded from tangible personal property)
- Department Special Regulation 10 (contractor/subcontractor; lump-sum vs. time-and-material)
- § 39-26-102(9), C.R.S. (purchase for resale = exempt wholesale sale)

Cases:
- Raynor Door v. Department of Revenue, 765 P.2d 650 (Colo. 1988) (distinguished)
- Noble Energy v. Department of Revenue, 232 P.3d 293 (Colo. 2010) (distinguished)
- Tyler Pipe Indus. v. Washington State Dept. of Revenue, 107 S. Ct. 2810 (1986) (nexus through in-state agents)

Related rulings: [[gil-15-015-contractor-pay-tax-when-billing-on-a-time-and-material-contract]], [[gil-15-011-audio-visual-equipment]], [[gil-14-002-modular-homes]] (lump-sum vs. time-and-material), [[gil-15-013-asset-acquisition-through-foreclosure-and-manufacturing-machinery-in-a]].

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-13-004.pdf

Original ruling text

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

PLR-13-004

August 8, 2013

xxxxxxxxxxxxxxxx
ATTN:XXXXXXXXXXX
xxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxx
Re: Private Letter Ruling

Dear XXXXXXXXXX,
You submitted on behalf of your client ("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.
Issues
1. Are Company's charges for installation, repair, or inspection of Systems that are built
into real property subject to sales tax when billing Clients on a time and material
basis for work performed by a subcontractor engaged by Company on real property
located in the State of Colorado?
2. Are Company's payments to third party subcontractors for work performed pursuant
to the Systems contracts subject to sales tax in the state of Colorado?
Conclusions
1. Company's charge for installation, repair, or inspection of Systems built into real
property are subject to sales tax when billing Clients on a time and material basis for
work performed by a subcontractor on real property located in the State of Colorado.
2. Company's payments to third party subcontractors for work performed pursuant to
the Systems contracts are not subject to sales tax in the State of Colorado
Background
Company contracts with national multistate companies to install, repair and inspect fire
sprinkler systems and fire alarm and detection systems ("Systems") built into buildings of

Company's customer ("Clients") locations. The general terms of the contracts cover multiple
buildings where the Systems must be maintained. Some contracts also cover expansion plans
of Company's Clients, and include the original installation of the Systems or reconfigurations
of existing Systems to a building. Company meets the overall terms of the contracts through a
network of third party subcontractors.
Company operates from a single location outside of Colorado,1 and manages a Client service
/ response center from this location. When an emergency or standard Client service call is
received, the most appropriate third party subcontractor is dispatched to resolve the issue.
The third party subcontractor performs all the work (i.e., electrical, water pipe installation, fire
sprinkler head installation, etc.) related to the contract obligations.
After work at a Client's location is complete, Company prepares a sales invoice and bills their
Client, generally on a time and material basis, marking up charges that they have received on
the purchase invoice from the subcontractor. Company exclusively uses subcontractors to
perform the work on customer buildings and does not perform any of the construction, repair,
or installation work on the Systems. Systems are an integral and inseparable component of
the realty and would cause substantial damage if removed.
Discussion
Colorado levies sales and use tax on the sale, use, consumption or storage of tangible
personal property in Colorado.2 Department Regulation 39-26-102.15 defines tangible
personal property to exclude property that is a fixture to real property:
... tangible personal property that loses its identity when it becomes an integral and
inseparable part of the realty, and is removable only with substantial damage to the
premises.
The application of this tax to tangible personal property installed in real property arises most
often in the case of contractors. Contractors include plumbers, electricians, and heating and
ventilation installers.3 Contractors collect sales tax from the real property owner when the
contractor bills on a time and material basis.

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Although the question of nexus was not specifically raised, we note that Company has nexus with
Colorado because it employs subcontractors to perform work on its behalf to fulfill its contractual
obligations to Clients. See, Tyler Pipe Indus. V. Washington State Dept. of Revenue, 107 S.Ct. 2810,
2821 (1986).
§§39-26-104(1) and 202, C.R.S.
See Department Special Regulation 10(1) "Contractor" ('""'Contractor" includes building contractors,
road contractors, grading and excavating contractors, electrical contractors, plumbing and heating
contractors, and also includes any other person engaged, under a contractual arrangement, in the
construction, reconstruction, or repair of any building, bridge or structure. For the purpose of this rule,
"subcontractor" has the same meaning as "contractor."") This regulation can be viewed at
www.colorado.gov/revenue/tax > Tax Library > Regulations > Final Regulations > Sales and Use.

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The contractor who invoices separately for labor and materials must charge sales
tax on the marked up billing price of all materials.4
In such cases, the sale is deemed to occur prior to the installation of the tangible personal
property into the real property.
When the contractor bills on a lump sum contract, the contractor does not collect sales tax
from the homeowner.
(2) ... All contractors, as defined in (1) above, who purchase in this state tangible
personal property which is to be built in by them into some building or structure, are
regarded for purposes of the Act as retail purchasers and must pay sales tax to the
vendors.
Contractors must pay tax on all tangible personal property used in their business or
on their jobs if the delivery, storage, use or consumption of the property is in
Colorado. The contractor must pay the use tax directly to the state. Sales or use tax
is payable on all purchases of equipment, material, supplies, tools, etc.
(3) ... If the contractor bills with a lump sum contract, all supplies and materials are
taxable on the contractor's cost.5
In the case of a lump sum contract, the sale is deemed to occur after the property is installed
and has become part of the real property and, therefore, there is no sale of tangible personal
property to the homeowner. In this case, the contractor must pay sales or use tax when it
acquires the building materials or supplies.
Company argues that the decisions in Raynor Door v. Department of Revenue6 and Noble
Energy v. Department of Revenue7 indicate that sales tax does not apply to Company's
contracts with Clients. In Raynor Door, a garage door manufacturer and installer was
assessed sales tax on its contract price with the homeowner. The Department argued that
Raynor Door fell within an "over-the-counter retailer" exception to the contractor rule for lump
sum contracts. The over-the-counter retailer exception states that a contractor is a retailer,
not a contractor, if the contractor sells and installs over-the-counter (i.e., not custom-made)
property. For example, a retailer who sells and installs dishwashers or hot water heaters
must charge the homeowner sales tax even if the retailer uses a lump sum contract. The
Court in Raynor Door concluded that Raynor Door did not fall within the "over-the-counter
retailer" exception and, therefore, did not owe sales tax on the sale of the garage door
because the door was no longer tangible personal property when installed into the home.

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Id, at paragraph (3).
Id, at paragraphs (2) and (3).
Raynor Door v. Department of Revenue, 765 P2d 650 (Colo. 1988)
Noble Energy v. Department of Revenue, 232 P3d 293 (Colo. 2010)

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Noble Energy involved the use of sand as part of oil and gas extraction. The Department
argued that the contract between Noble Energy and the real property owner was a "mixed"
transaction of a sale of tangible personal property (sand) and of services (tracking). Noble
Energy argued that the sale of services was inseparable from the sale of the tangible personal
property and that the "true object" of the "bundled" sale was the sale of a service, not the sale
of tangible personal property. Noble Energy argued in the alternative that, if the Court found
that the sale of services and sale of sand were separable, then the sale of sand is not taxable
because it is incorporated into real property and, as such, is no longer tangible personal
property. The Court ruled that the sales of services and sand were inseparable and that the
true object of the transaction was the sale of a service.
The Department believes that neither case is dispositive of this ruling. With respect to
Raynor Door, the Court was never asked to consider, nor did it rule upon, the application
of the "time and material" exception (presumably because Raynor Door used a lump sum
contract). The Noble Energy case is similarly not dispositive because it does not
address the "time and material" exception. Moreover, Noble Energy was resolved on the
issues of separability and the true object test; the discussion of Noble Energy's
alternative theory regarding Department Regulation 39-26-102.15 was unnecessary and
dicta. Finally, we are reluctant to view Noble Energy as dispositive given its reliance on
Raynor Door which, as noted above, did not address the application of the "time and
material" exception.
Assuming the Systems are fixtures, the application of sales and use tax will depend on
the type of contract Company, as a contractor, uses with the owner. Contractors who
charge the owner a lump sum amount do not collect sales tax from the owner. Instead,
the contractor (or subcontractor) pays sales tax when it acquires the building materials
from the supplier or manufacturer. If the Systems manufacturer does not collect sales
tax from Company when Company acquires the Systems, then Company must pay use
tax. The use tax is calculated on the price paid to the Systems manufacturer and the
use tax calculation does not include Company's, or their subcontractors, labor costs for
installation.
Additionally, Company engages subcontractors to perform the necessary installation,
maintenance and repair work. Company states that these subcontractors bill Company on a
time and material basis. The price paid for materials is a sale of tangible personal property by
the subcontractor to Company. However, Company is not liable for sales tax on such sales
because Company is reselling the materials to Clients.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. Please note
that the Department administers state and state-collected city and county sales taxes and
special district sales and use taxes, but does not administer sales and use taxes for self­
collected home rule cities and 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

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web site at www.colorado.gov/revenue/tax for more information about state and local sales
taxes.
This ruling is premised on the assumption that 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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