Is a separately stated charge to install a custom-made, freestanding closet organizer into a customer's home included in the Colorado sales/use tax calculation?

Plain-English summary

A retailer sells custom-designed closet organizers. Each unit is built to the customer's measurements: a supplier custom-builds the components and ships them unassembled to the home, where the retailer's subcontractors assemble the unit on site and place it — freestanding in a room or against a wall (secured, if against a wall, by an anti-tip bracket screwed in with two screws, plus optional rear paneling held by finishing nails). The final receipt separately states the "installation" (assembly and placement) charge and the product/material charge. The question: is that separately stated installation charge taxable?

The Department's answer is yes, and the key is that assembly is manufacturing labor, not installation. Colorado calculates sales tax on the full purchase price of an article "made to order," which by statute includes the full purchase price for materials used and the service performed in connection therewith (§ 39-26-102(12)). The organizer is a made-to-order article that isn't finished until it's assembled — so the assembly labor is part of the taxable labor to manufacture the product to a finished state.

Now the twist on the "installation" label:

• True installation labor is generally exempt — it isn't part of manufacturing the product to a finished state.
• But the Department assumed a significant part of this "installation" charge is really assembly (the request itself said actually installing the finished unit is relatively simple). Because the taxable assembly portion is not separated from the (otherwise exempt) installation portion, the entire combined charge is taxable — and the Department didn't need to figure out how much was genuine installation.
• If the company separately stated assembly vs installation: the Department said it generally treats installation charges for custom-made goods as separable and nontaxable if the buyer has a reasonable option to buy just the finished product without the install. But if the customer must buy the installation to get the product, the install is inseparable and tax is calculated on the full price, including the separately stated install charge (A.D. Store Co., 19 P.3d 680 (Colo. 2001)).

The Department also confirmed the organizer is taxable personal property, not exempt real property. Personal property escapes tax as part of realty only if it "loses its identity" by becoming an "integral and inseparable part of" the real estate, removable only with substantial damage. This unit is freestanding and, even when bracketed to a wall, comes off with minimal damage (a couple of screw holes per bracket plus small finishing-nail holes), so it stays personal property (Reg 26-102.15; Noble Energy, 232 P.3d 293).

What this means for you

Custom furniture, cabinetry, and closet-organizer makers

If your product isn't finished until your crew assembles it on site, that assembly labor is taxable manufacturing labor — and calling it "installation" on the invoice doesn't make it exempt. To preserve nontaxable treatment for genuine installation, you must separately state assembly from installation (not just installation from product), and the installation has to be genuinely optional — the customer must be able to buy the finished product without buying your install. Bundle them, or make install mandatory, and the whole charge is taxed.

Why "separately stated" wasn't enough here

The retailer did separate "installation" from "product," but it folded the taxable assembly into the installation line. Separate statement only helps when it separates the taxable component from the exempt one — here that meant separating assembly from true installation, which the company didn't do.

Accountants advising made-to-order sellers

Two doctrines stack: (1) § 39-26-102(12) pulls manufacturing-connected labor (including on-site assembly to finish a made-to-order good) into the taxable price; (2) A.D. Store separability governs genuine installation — exempt only if optional and separable. And run the real-property test (Reg 26-102.15 / Noble Energy): freestanding, easily removable units are personal property, so the sale is taxable. A PLR binds the Department only for this taxpayer; watch the home-rule-city caveat.

Common questions

Q: Is a separately stated installation charge for a custom closet organizer taxable in Colorado? A: On these facts, yes. The "installation" charge included on-site assembly, which is taxable manufacturing labor for a made-to-order article. Because assembly wasn't separated from true installation, the whole charge was taxed.

Q: Isn't installation labor exempt?
A: Genuine installation labor generally is. But assembling a made-to-order product to its finished state is manufacturing labor, not installation, and it's taxable. Lumping the two into one "installation" charge makes the whole thing taxable.

Q: How could the install charge have been nontaxable? A: By separately stating assembly from installation, and by making installation genuinely optional — the customer must have a reasonable option to buy the finished product without the install. Then the true installation piece can be separable and nontaxable (A.D. Store).

Q: Is the organizer "real property" so the sale isn't taxed? A: No. It's freestanding and removable with only minor damage (a few screw and nail holes), so it doesn't become an integral, inseparable part of the home. It's taxable personal property.

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:

• § 39-26-102(12), C.R.S. (purchase price of a made-to-order article includes materials and the service performed in connection with it)
• 1 CCR 201-4, Regulation 26-102.15 (when personal property becomes real property)

Case law (cited by the Department):

• A.D. Store Co. v. Department of Revenue, 19 P.3d 680 (Colo. 2001) (optional, separable services nontaxable; inseparable ones taxed on full price)
• Noble Energy v. Department of Revenue, 232 P.3d 293 (Colo. App. 2010) (real vs personal property)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: PLR-15-007.pdf

Original ruling text

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

PLR-15-007
November 16, 2015
XXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
Re: Custom-Made Closet Organizer
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXX (“Company”) a request for a private letter ruling to the Colorado Department of Revenue (“Department”) pursuant to Department Regulation 24-35-103.5. This private letter ruling cannot be relied upon by any taxpayer other than the taxpayer to whom the ruling is made. Issue Is a separately stated charge for installing Product into a home included in the calculation of sales and use tax? Conclusion The separately stated charge for installing Product into a home is included in the calculation of sales and use tax. Background Company is a retailer of home organizational products. Company operates both brick and mortar retail locations and an internet business. Company is introducing a new product ("Product") to help organize its customers’ closets. Company custom-designs each Product based on specifications and measurements provided by each customer (“Customer”). Product rests on the floor but it is not connected or attached in any manner to the floor. Product can be placed against walls or freestanding in the center of a closet. Customer can customize Product design to include various implements for storing items or other functionalities such as retractable mirrors or hampers.

After Company designs Product to Customer’s specifications, Customer provides a down payment covering the costs of both materials and installation for Product. Company then orders Product from the supplier (“Supplier”). Supplier custom-builds Product components to Company’s specifications and then ships the components to Customer’s location. Supplier does not assemble product before shipment. Company hires subcontractors to assemble Product on Company’s behalf. The subcontractors assemble Product at Customer’s location using components shipped by Supplier. After assembly, Product is placed freestanding in the center of a room or against a wall according to design specifications. If Product is placed against walls, it is secured by an anti-tip bracket that connects Product to the wall with two screws and generally consists of one anti-tip bracket per wall. Product can be augmented with rear paneling to give the appearance of installed cabinets. Finishing nails secure such rear paneling if desired. Because of this, damage to Customer’s real property is limited to two screw holes for each anti-tip bracket installed and any small holes from finishing nails used to secure the rear paneling. Additionally, any freestanding Product does not require anti-tip brackets. Upon completion of Product installation, Company collects remaining balance from Customer. Company presents Customer with a final receipt that separately states charges for Company's assembly and placement costs (i.e.,"installation") and Company's material costs for Product purchased from Supplier. Both installation and product costs include a profit markup. Discussion Charges for the sale of tangible personal property are subject to sales and use tax. Charges for services are generally not subject to sales tax. However, a charge for certain services is included in the calculation of sales tax if the service is incurred in connection with the manufacturing of a taxable product made to order. Specifically, section 39-26102(12), C.R.S. states, in pertinent part, that sales tax is calculated on the, full purchase price of articles sold after manufacture or having been made to order and includes the full purchase price for materials used and the service performed in connection therewith …(emphasis added) We understand that Product is an article “made to the order” for each customer. Product is not fully finished until it is assembled. We assume that a significant portion, if not most, of the charge for “installation”1 is actually for assembling the Product prior to installation. The assembly portion of the charge is subject to tax as part of the labor used to manufacture Product to a finished state. However, charges for installation are generally exempt from tax because they are not part of the labor used to manufacture Product into a finished state. Because the charge for assembling the product is not separately stated from the portion of the charge for installation, the whole charge for the installation and

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The request for ruling indicates that the process for installing the fully assembled Product is relatively simple. DR 4010A (06/11/14)

assembly of Product is subject to tax and there is no need to determine whether the true installation portion of the charge is taxable.2 However, if Company were to charge separately for assembly and installation, we generally treat installation charges for custom-made goods as separable and non-taxable if the buyer has a reasonable option to purchase only the finished Product and not the installation service.3 On the other hand, if the customer must purchase the installation charge in order to purchase the finished Product, then the installation charge is inseparable from the sale of the Product and sales tax is calculated on the full purchase price, including any separately stated charge for installation. Finally, and as noted in your letter, sales tax applies to the sale of tangible personal property, not real property. If personal property “loses its identity” by becoming “an integral and inseparable part of reality” and is removable only with substantial damage to the premises”, then the sale of the property may not be subject to sales tax.4 It does not appear from the facts you provided that the Product qualifies as real property. Product is physically attached to Customer’s real property only if it is placed against walls and, even then, it can be removed without substantial damage (usually limited to two screw holes for each anti-tip bracket installed and any small holes from finishing nails used to secure the rear paneling). Therefore, Product is not real property. Miscellaneous 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. This ruling is binding on the Department to the extent set forth in Department Regulation 24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the ruling is made. 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. Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this 2 3

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To the extent there is any actual installation of Product. A.D. Store Co. v. Department of Revenue, 19 P.3d 680 (Colo. 2001). A.D. Store is not to the contrary. The sale of a dress and the sale of alteration services were separable because the dress was fully manufactured at the time of sale and, therefore, sales tax is computed only on the price of the dress; See 1 CCR 201-4, Reg. 26-102.15; Noble Energy v. Department of Revenue, 232 P.3d 293 (Colo. App. 2010) DR 4010A (06/11/14)

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 This ruling cannot be relied upon by any other taxpayer other than the taxpayer to whom the ruling is made.

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DR 4010A (06/11/14)