Are bulk water sales subject to Colorado sales or use tax when the water is sold to the oil and gas industry — and does it matter whether the customer takes it by tanker truck or through a pipeline?

Plain-English summary

A company owns water rights and a well in Colorado and sells bulk water to unrelated oil-and-gas customers, who use it for hydraulic fracturing. Customers take the water at the company's automated pumping station — title and possession pass there — by one of two methods: (1) filling tanker trucks from a pipe at the wellhead, or (2) taking delivery into a pipeline the customer owns and operates that connects to the company's system. The question: are these bulk water sales taxable?

The Department split the answer by the mode of delivery, driven by a single regulation. Water is corporeal personal property — physical, tangible, capable of being possessed and exchanged — so it's tangible personal property in general (§ 39-26-102(15)). But water also has a historical "dual nature" (sometimes treated as part of real property), and Department Regulation 26-102.15 codifies the line: tangible personal property includes "water in bottles, wagons, tanks or other containers," but does not include "water in pipes, conduits, ditches or reservoirs."

Applying that rule:

• Tanker-truck (tank) water — taxable. Water obtained by tanker truck is water "in tanks or other containers," so it's a taxable sale of tangible personal property. This holds whether the truck is owned by the company, the customer, or a third-party hauler.
• Pipeline water — not taxable. Water the customer takes through its own pipeline is "water in pipes," which the regulation carves out of tangible personal property. The Department was candid that, on its own instinct, it would have been inclined to tax this pipeline sale — title passes at the wellhead, into the customer's pipes and possession, not at the far end of a seller-owned pipe. But the regulation doesn't draw that distinction, so the Department concluded the pipeline water sale is not subject to tax.

The dividing line is purely container vs conduit: the same water is taxable in a tank and non-taxable in a pipe.

What this means for you

Bulk water suppliers (especially to oil & gas)

How your customer takes the water decides the tax. Fill a tanker truck and you've made a taxable sale of tangible personal property — collect tax (or the customer owes use tax), regardless of who owns the truck. Deliver through a pipeline and the sale falls outside tangible personal property under Regulation 26-102.15, so it isn't taxed. If you sell both ways, you can't apply one tax treatment across the board — track delivery method per transaction.

Oil & gas operators buying frac water

Water trucked to your site is taxable; water piped in generally isn't. The treatment turns on the conduit, not on the water or its use. Factor this into how you contract for and take delivery of water.

Accountants advising water and energy clients

This is a regulation-driven result, and the Department flagged the tension: its substantive instinct (title passing at the wellhead) pointed toward taxing the pipeline sale, but Regulation 26-102.15's pipes/conduits carve-out controlled. That makes the holding somewhat formal and rule-bound — useful, but vulnerable if the regulation changes. Remember a PLR binds the Department only for this taxpayer, and watch the home-rule-city caveat.

Common questions

Q: Is bulk water taxable in Colorado?
A: It depends on delivery. Water sold by tanker truck (in tanks/containers) is taxable tangible personal property. Water delivered through a pipeline is not taxable, under Regulation 26-102.15.

Q: Does it matter who owns the tanker truck?
A: No. Water taken by tanker truck is taxable whether the truck belongs to the seller, the customer, or a third-party hauler — it's "water in tanks or other containers."

Q: Why isn't pipeline water taxed if title passes at the wellhead?
A: The Department said it would otherwise have leaned toward taxing it, but Regulation 26-102.15 excludes "water in pipes, conduits, ditches or reservoirs" from tangible personal property without making a title-location distinction, so the pipeline sale isn't taxed.

Q: Can I rely on this ruling?
A: Not unless you're the taxpayer it was issued to. A private letter ruling binds the Department only as to that taxpayer and facts and can't be relied on by anyone else. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes and rules:
- § 39-26-104(1)(a), C.R.S. (sales tax on tangible personal property)
- § 39-26-202, C.R.S. (use tax)
- § 39-26-102(15), C.R.S. (tangible personal property = corporeal personal property)
- 1 CCR 201-4, Regulation 26-102.15 (TPP includes water in bottles/wagons/tanks/containers; excludes water in pipes, conduits, ditches, reservoirs)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: PLR-15-004.pdf

Original ruling text

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

PLR-15-004

January 30, 2015
XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Cc:XXXXXXXXXXXXXXXX
Re: Bulk Water
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXX ("Company") a request for a private
letter ruling to the Colorado Department of Revenue ("Department") pursuant to
Department Rule 24-35-103.5. This letter is the Department's private letter ruling.
Issue
Are bulk water sales subject to Colorado sales or use tax?
Conclusion
Bulk water sales sold in tanks are subject to Colorado sales or use taxes, but sales of
water through a pipeline is not subject to Colorado sales and use taxes.
Background
Company owns water rights and operates a water well in Colorado. Company sells
water in bulk to unrelated parties primarily in the oil and gas industry for use in
hydraulic fracturing. The water is sold through an automated pump system that is
owned by Company. Customers obtain the water by one of two methods. In the first
method, customers fill tanker trucks with water from a pipe at the wellhead pump
station. In the second method, customers take delivery of the water from a pipeline
that the customer owns and operates and that connects to Company's system at the
automated pumping station. Under both methods, the sale takes place at the
automated pumping station where the Company passes title and possession to the
customer or customer's agent. Once water is pumped, the customer bears the risk of
loss. The customer is billed monthly based on the amount of water purchased, which
is tracked by the automated pump system. In certain circumstances, customers hire a
third party to transport the water by tanker truck from the automated pumping station

to the customer rather than use the customer's own tanker trucks. Neither the
customer nor the delivery company is related to Company.
Discussion
Colorado levies sales and use tax on the sale or use of tangible personal property.1
Tangible personal property is statutorily defined as "corporeal personal property."2
Corporeal is typically defined as that which is of physical, tangible, or material nature.3
Water is corporeal personal property because it is physical, tangible, and material in
nature, and is a commodity that is capable of being possessed and exchanged.
However, water has also been historically viewed as part of real property in some
situations. Department Regulation 26-102.15 describes this dual nature of water:
embraces all goods, wares, merchandise, products and commodities,
and all tangible or corporeal things and substances which are dealt in,
capable of being possessed and exchanged, except newspapers
excluded by the law...
...Property severed from real estate becomes tangible personal
property...
...The term also does not include water in pipes, conduits, ditches or
reservoirs, but does include water in bottles, wagons, tanks or other
containers.4
It is clear under this regulation that the sale of water in "wagons, tanks, or other
containers" constitutes the sale of taxable tangible personal property Therefore, sales
of water that are obtained by tanker truck, whether owned by Company, customer, or
a third-party, is subject to sales tax.
The question of whether water sold to a customer that owns and operates a pipeline
from Company's facilities is more difficult. Department Regulation 26-102.15 states,
"[t]he term [tangible personal property] also does not include water in pipes, conduits,
ditches or reservoirs." This rule has its strongest footing when the seller or common
carrier owns the pipeline and the title to the water passes to the customer when
delivered at the end of the pipe. In the case before us, title to the water passes at the
wellhead once it enters into the customer's pipes and into the customer's possession
and control. In the absence of this regulation, we would be inclined to conclude that
the sale is taxable. However, the regulation does not make the distinction we
describe here and, therefore, we conclude that the sale of the water is not subject to
tax.

2
3

§§39-26-104(1)(a) and 202, C.R.S.
§39-26-102(15), C.R.S.

Merriam-Webster Desk Dictionary (1995); American Heritage College Dictionary, 3rd Ed. 1993;
Black's Law Dictionary, Eighth Edition.
4
Department Regulation 1 CCR 201-4, 26-102.15
2

DR 4010A (06/11/14)

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 web site at
www.colorado.gov/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

3

DR 4010A (06/11/14)