Is the electricity a company produces and consumes at its own facilities subject to Colorado sales or use tax?

Plain-English summary

A company that produces its own electricity and consumes it at its facilities (for corporate support, lighting, powering equipment, and computing) asked whether that electric service is subject to Colorado sales or use tax. The Department's binding conclusion: it is not — because the company does not sell the electricity.

The reasoning rests on how Colorado taxes electricity:

• Electricity is a taxable service, not goods. Colorado generally doesn't tax services, but gas and electric service are exceptions — taxed when "furnished and sold for commercial consumption and not for resale" (§ 39-26-104(1)(d.1)). And in Department of Revenue v. Public Service Co., 330 P.3d 385 (Colo. 2014), the Colorado Supreme Court held the sale of electricity is taxable as a service, not as tangible personal property.
• No "sale" = no sales tax. A sales-tax liability requires a "sale" — a transaction "between two separate legal entities" for consideration (§ 39-26-102(10)). A company supplying itself isn't transacting with a separate entity, so there's no sale. The company's affiliates also consume some electricity at its facilities but pay nothing for it — with no consideration, there's again no sale and no tax.
• No use tax either. Use tax applies to tangible personal property acquired at retail (§ 39-26-202). Because electricity is treated as a service (per Public Service Co.), not tangible personal property, and there's no retail purchase here, use tax doesn't apply to the electricity the company consumes.
• The flip side — third-party purchases ARE taxable. Where the company instead buys electricity from a third party, that's a sale between separate entities for consideration, so the company must pay sales tax on its commercial consumption. A portion that is industrial use is exempt (§ 39-26-102(21)). (The Department noted it will accept any reasonable allocation across the company's locations, reported annually on line 10 of the Colorado sales tax return.)

(The public version of this ruling is heavily redacted; the holding and statutory framework above are stated in the unredacted text.) Because this is a private letter ruling, it binds the Department only as to this taxpayer and these facts and cannot be relied on by anyone else.

What this means for you

Businesses that self-generate electricity

If you produce and consume your own electricity, there's no taxable "sale" — you're not transacting with a separate entity — so that self-supplied power generally isn't subject to Colorado sales or use tax. The same logic covers electricity used by affiliates at your site who pay you nothing: no consideration, no sale, no tax. But the moment you buy electricity from a utility or other third party, that's a taxable commercial sale (with an exemption for the industrial-use share).

Companies with mixed commercial and industrial electricity use

When you do purchase electricity, separate out your industrial-use consumption, which is exempt, from commercial/administrative use, which is taxable. The Department accepts reasonable allocations across locations.

Accountants and tax professionals

The crux is the statutory definition of "sale" (§ 39-26-102(10)) — two separate entities + consideration — applied to electricity, which Public Service Co. (330 P.3d 385) classifies as a service, not TPP. That classification both (a) brings electric service into tax via § 39-26-104(1)(d.1) when sold commercially and (b) takes it out of use tax (which reaches only TPP, § 39-26-202). Self-supply and uncompensated affiliate use fail the "sale" test; third-party purchases meet it, subject to the industrial-use exemption (§ 39-26-102(21)).

Common questions

Q: Is electricity a company generates and uses itself taxable in Colorado? A: No. There's no "sale" when a company supplies its own electricity — a sale requires a transaction between two separate entities for consideration — so it isn't subject to sales tax, and use tax doesn't apply because electricity is a service, not tangible personal property.

Q: What about electricity used by affiliates at the company's site? A: If the affiliates pay nothing for it, there's no consideration and therefore no sale — so no tax.

Q: Is purchased electricity taxable?
A: Yes. Buying electricity from a third party is a sale between separate entities for consideration, so the company owes sales tax on its commercial consumption — except for any industrial-use portion, which is exempt.

Q: Why doesn't use tax apply?
A: Use tax reaches tangible personal property. The Colorado Supreme Court (Public Service Co.) treats electricity as a service, not tangible personal property, so use tax doesn't apply to the electricity consumed.

Q: Can my business rely on this ruling?
A: No. A private letter ruling binds the Department only as to the specific taxpayer and facts it was issued to and cannot be relied upon by any other taxpayer. It shows the Department's reasoning, but your facts may differ.

Q: Does this cover city sales tax?
A: No. The Department administers state and state-collected local taxes only; self-collected home-rule cities and counties set their own rules.

Citations and references

Statutes and cases:

• § 39-26-104(1)(d.1), C.R.S. (tax on gas/electric service furnished and sold for commercial consumption, not for resale)
• § 39-26-102(10), C.R.S. (definition of "sale"; includes furnishing electrical energy; requires two separate entities and consideration)
• § 39-26-202(1)(b), C.R.S. (use tax on tangible personal property)
• § 39-26-102(21), C.R.S. (industrial use exemption)
• Department of Revenue v. Public Service Co., 330 P.3d 385 (Colo. 2014) (sale of electricity is taxed as a service, not tangible personal property)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-16-001.pdf

Original ruling text

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

PLR-16-001
January 13, 2016
XXXXXXXXXXXXX
Attn: XXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
Re: Electric Use
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXXXX ("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

1. Is the electric service used at Company's facilities subject to Colorado sales or use tax?
2. If Company's use of electric service is taxable, upon what basis should the tax be
   computed, given that none of the tangible personal property purchased by Company to produce the electric service is incorporated into the electric service as consumed? Conclusion The electric service used by Company at its facilities is not subject to Colorado sales or use tax because Company does not sell the electricity. Background Company is XXXXXXXXXXXXXXXX and consumes electricity XXXXXXXXX for corporate support, general lighting, powering equipment, and computing at its facilities. Company uses an electric meter at each of its locations to measure the electric service consumed. Company pays tax on this consumption XXXXXXXXXXXXXXXXXXXXXXXXX. Company's affiliates also consume electricity when employees of those companies are located in one of Company's facilities. In such situations, the affiliates do not make any payment for this use and Company does not sell electricity to the affiliates. Company has historically treated the electrical service consumed for its own business use as a taxable use of tangible personal property. In Department of Revenue v Public Service Co., 330 P.3d 385 (Colo. 2014), the Colorado Supreme Court ruled that the sale of electricity is taxable as a service rather than taxable as tangible personal property.

DR 4010A (6/11/14)

Discussion
Colorado levies sales and use tax on the sale, use, storage, or consumption of tangible personal property.1 Colorado generally does not impose sales tax on services, with the notable exceptions of gas and electric and steam services.2 Specifically, Colorado levies a tax on "gas or electric service, whether furnished by municipal, public, or private corporations or enterprises, for gas and electricity furnished and sold for commercial consumption and not for resale.''3 Department Regulation 1 CCR 201-4, 39-26-104(1)(d.1) further explains that, Gas or electric service furnished within the state of Colorado is subject to the tax imposed by §39-26-106, C.R.S. whether furnished by public, private, mutual, cooperative, or governmental corporations or enterprises for commercial use. The tax attaches to all amounts paid by the user or consumer for gas or electric service, whether or not there is actual consumption, and regardless of the manner in which the payment is made. As noted above, electric service is an enumerated service subject to sales tax.4 The requirements of the service are that 1) it be furnished and sold 2) for commercial consumption. There is no question that Company engages in some commercial activity and, thus, some consumption is commercial in nature. The question at issue is whether XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. In order to incur a sales tax liability, there must be a "sale".5 Specifically, §39-26-102(10), C.R.S., states that "a 'sale' includes the sale or furnishing, of electrical energy, gas, steam, telephone, or telegraph services." Department Regulation 1 CCR 201-4 39-26-102.10 defines a "sale" as:
... any transaction, except as provided in 26-102.7(b), whereby a person, in exchange for any consideration, such as money or its equivalent, property, the rendering of a service, or the promise of any of... perform[ing] or furnish[ing], or agrees to perform or furnish, or contracts to have another perform or furnish, any service taxable under this Act for any other person. Whether the transaction is absolute or conditional, it shall be considered a sale if it transfers from a seller to a buyer the ownership or possession of tangible personal property or specified services... (emphasis added) A "sale," for sales and use tax purposes, requires a transaction between two separate legal entities. XXXXXXXXXXXXXXXXXXXXXX. Therefore, there is no sale XXXXXXXXXXXXXXX XXXXXXXXXXXXX. In addition, Company XXXXXXXXXXXXXXXXXX. Furnish is generally understood to mean supplying or giving (something) to someone.6 Again, because XXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX, XXXXXXXXXXXXXXXXXXXXX Therefore, there is no tax liability because there is no sale.

See, generally, §§39-26-104(1) and 202, C.R.S.
§§39-26-104(1)(c) and (d.1), C.R.S.
3
§39-26-104(1)(d.1), C.R.S.
4
Ibid.
5
§39-26-104, C.R.S.
6
"Furnish", Merriam-Webster.com. Retrieved January 29, 2015 from http://www.merriamwebster.com/dictionary/furnish. 1

2

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DR 4010A (06/11/14)

A "sale" also requires that there be some form of consideration. Company represents that it does not to charge its affiliates for their consumption of electrical service by employees located in one of Company's facilities. Because there is no consideration paid, there is no sale and, thus, no tax liability.7 In addition to the energy consumed by affiliates, XXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXX. Use tax is levied on the acquisition, use, storage or consumption of tangible personal property.8 Electricity is treated as the sale of a service and not the sale of tangible personal property.9 Therefore, Company is not liable for use tax on the electricity it consumes. More generally, use tax applies when the consumer acquires the taxable good at a retail sale. XXXXXXXXXXXXXXXXXXXXXXXXXX. Therefore, use tax would not apply because there is no retail purchase of the electricity. Our analysis is different with respect to electricity XXXXXXXXXXXXXXXXXXXXXXXX. In this case, there is a sale between two separate entities and consideration is paid by Company to the third party XXXXXXXXXXXXXXX. XXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. Most of this electricity XXXXXXXXXXX XXXXXXXXXXXX and, therefore, Company XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXX. A XXXXXXXXX portion of the XXXXXXXXXXXXXXXXXXXXXXXX and company must pay sales tax XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.10 Finally, Company's purchase and use of XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXX is an industrial use XXXXXXXXXXXXXXX and is exempt from sales tax.11 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 7

Department Regulation 1 CCR 201-4 39-26-102.10.
§ 39-26-202(1)(b}, C.R.S.
9
Department of Revenue v. Public Service Company of Colorado, 330 P.3d 385 (Colo. 2014). (Electric utility not entitled to manufacturing machinery exemption because the exemption applies only to machinery that manufactures tangible personal property and electricity is a service}. 10 Company has offices and other assets XXXXXXXXXXXXXXXXXXXXXXXX that consume electricity. Many of these may be relatively small consumers. The Department will accept any reasonable allocation that allocates at least some consumption to each of these various locations. Company will report the tax on line 10 of the Colorado sales tax return once a year. 11
§ 39-26-102(21), C.R.S.
8

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DR 4010A (06/11/14)

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 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)