Are outsourced paper and electronic billing services subject to Colorado sales tax, even though a paper bill changes hands?

Plain-English summary

An outsourced billing company (headquartered out of state but with a Colorado presence) takes its clients' raw billing data, runs it through its own custom software, and produces paper bills (printed, folded, mailed) and electronic bills (email PDF, online, fax) for the clients' customers. It asked whether these billing services are taxable, and whether handing over a paper bill turns the deal into a taxable sale of property. The Department ruled the services are not taxable, and the paper bill is just an incidental transfer of property tied to a nontaxable service.

The analysis runs on the true-object test (City of Boulder v. Leanin' Tree, Inc., 72 P.3d 361 (Colo. 2003)): when property changes hands, is the buyer's real objective the service (with property incidental) or the property itself? Paper invoices — and, the Department said, electronic invoices — are tangible personal property, but "simply because tangible personal property is transferred for consideration does not necessarily mean that there is a taxable sale" if the true object is a service.

The Department concluded billing here is "commonly understood to be a service," because the company does far more than print and mail: it "bullpens" bills (its software holds bills until they reach a threshold so a customer isn't sent several tiny bills), pulls past account information, and provides extra information to people behind on payments. That's "similar to the work of an accountant or bookkeeper," whose services are nontaxable even when they hand over invoices or other documents as an incidental part of the service. (A single coupon at the bottom of a bill is de minimis and doesn't change the character; but note that if the company bought printed marketing inserts from a printer, that purchase from the printer would itself be a taxable sale of goods.)

One consequence flagged: a person "engaged in the business of rendering a service is considered the consumer of the tangible personal property and must pay tax on the purchase" (Special Regulation 40) — so the billing company pays tax on the paper and supplies it buys.

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

Billing, mailing, and business-process-outsourcing companies

If your real product is a service — processing, batching, account management — and any paper you hand over is incidental to that service, the transaction is generally a nontaxable service in Colorado, even though a physical bill changes hands. The more your offering looks like pure print-and-mail of customer-supplied content, the more it risks being characterized as a taxable sale of printed goods. As a service provider you're treated as the consumer of the paper and supplies you use, so pay tax on those purchases rather than charging your client tax.

Companies buying outsourced billing

Expect billing services to be billed to you without Colorado sales tax when they're genuinely services. Watch separately purchased printed marketing materials, which can be taxable.

Accountants and tax professionals

Pure true-object analysis under Leanin' Tree (72 P.3d 361): the court's seven factors (relative value, alternative transfer methods, durability of intangible value, use constraints, post-use disposition, finished-product character, skill/expertise) all feed the ultimate "commonly understood to be a service or a sale of TPP" question. Service-enterprise consumer rule: Special Regulation 40 (1 CCR 201-5). De-minimis incidental property (single coupon) doesn't flip the characterization.

Common questions

Q: Are billing services taxable in Colorado?
A: No. Outsourced billing is a nontaxable service. The paper bill that changes hands is an incidental transfer of property tied to that service, so the whole charge is untaxed.

Q: Doesn't handing over a paper bill make it a taxable sale?
A: Not when the true object is the service. Under the true-object test, property transferred incidentally to a service doesn't make the transaction a taxable sale of goods.

Q: Why is this a service rather than printing?
A: Because the company does far more than print and mail — it batches ("bullpens") bills, pulls account history, and helps with overdue accounts — like the nontaxable work of an accountant or bookkeeper who incidentally provides invoices.

Q: Do I charge my client tax, or pay tax on my supplies?
A: As a service provider you're the consumer of the paper and supplies you use, so you pay tax on those purchases rather than charging your client sales tax.

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.

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, rules, and cases:
- § 39-26-104(1)(a), C.R.S. (sales tax on tangible personal property; services generally untaxed)
- City of Boulder v. Leanin' Tree, Inc., 72 P.3d 361 (Colo. 2003) (true-object test and its factors)
- 1 CCR 201-5, Special Regulation 40 (a person rendering a service is the consumer of the property used and pays tax on its purchase)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-16-003.pdf

Original ruling text

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

PLR-16-003
March 10, 2016
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Billing Services
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 Department Rule 24-35103.5. This letter is the Department's private letter ruling. 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.
Issue
1. Are Company's paper or electronic billing services subject to Colorado state sales tax?
2. If the sale of a personal service includes the incidental transfer of tangible personal
property-Le. a paper bill-does this inclusion of personal property render the transaction
fully taxable or is this transfer of personal property incidental to the provision of the billing
services?
Conclusion
1. The paper or electronic billing services are not subject to sales tax because it is an
nontaxable service.
2. The paper billing is an incidental transfer of personal property related to the provision of
a nontaxable service.
Background
Company is headquartered outside of Colorado, but has a physical presence in Colorado.
Company provides outsourced billing services to its customers. Company creates both
paper bills that are mailed and electronic bills that are sent electronically.

Company receives billing data and other information from its clients through an electronic
data exchange. Company processes this raw data using its own in-house, customdeveloped software.
Clients specify the preferred billing delivery method for each client's customers. Clients'
customers can choose either paper bill invoices or various forms of electronic delivery. If a
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client's customer selects paper invoices, Company prints, folds, and mails bills to that
client's customer. These customers may be located in several different states. Company
has three forms of electronic delivery: (1) email billing; (2) online billing; and (3) fax billing.
If an email billing is selected, Company sends an electronic copy of the bill in pdf format
via email. For online billing, Company notifies the client's customer via email that the bill is
available for viewing via Company's online application.1 If a fax billing is selected,
Company sends a copy of the bill via fax.
Company also provides its clients with the optional services such as payment processing,
information or marketing inserts, and online invoice archiving. For payment processing,
Company electronically processes its clients' customers' payments via online payment
applications. Company can also include pre-printed inserts provided by the client with
either electronic or paper bills. Finally, Company can digitally store invoices for its clients
for a specified length of time.
Discussion
Colorado levies sales tax on the sale of tangible personal property but generally not on
services.2 A sale generally takes place when there is a transfer of tangible personal
property for money or other consideration. The transfer of tangible personal property need
not be between the seller and buyer in order for there to be a sale. For example, a buyer
may purchase goods and have the seller ship the goods to a third party.
The facts in this case raise the question of whether Company is selling tangible personal
property (invoices) to customers. Paper invoices are clearly tangible personal property.
Electronic invoices are also tangible personal property.3 However, simply because
tangible personal property is transferred for consideration does not necessarily mean that
there is a taxable sale. Sales tax does not apply if the "true object" of the transaction is
the sale of a service with an incidental transfer of tangible personal property.
To determine the true object of a transaction, we look at whether the true object of the
buyer was the purchase of services or of tangible personal property. In other words, was
the buyer's ultimate motivation the performance of a service with some incidental property
transferred or the acquisition of tangible personal property.4 As is true in most cases
involving the true object test, the issue here is deceptively difficult to resolve on a
conceptual level. For example, a company that hires a printer to create billing inserts that
include marketing material has engaged in a taxable purchase of tangible personal
property from the printer. Thus, the Department would likely view the printing of the
marketing inserts as a taxable sale from the printer to Company because printing
marketing material is commonly understood to be the sale of tangible personal property.5

Company described additional services but did not request a ruling on them. Therefore, the
DOR will not rule on the taxability of these services.
2 § 39-26-104(1)(a), C.R.S.
3
Tangible personal property is property that is corporeal and is In contrast to intangible property
which is merely conceptual in nature.
4
City of Boulder v. Leanin' Tree, Inc., 72 P.2d 361 (Colo. 2003).
5
Company asks whether one coupon included at the bottom of a bill would be considered the
printing of marketing material subject to tax. The Department would likely view a single coupon
included at the bottom of a bill as di minimis and, therefore, not change the character of the
billing service.
1

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Colorado courts have identified several factors for assessing the true object: (1) the value
of the property compared to that of the service; (2) whether there was an alternative
method of transfer; (3) the length of time intangible property provided retains its value; (4)
constraints on buyer's ability to use the tangible personal property; (5) what the buyer
actually does with the property after using its intangible components; (6) whether the
tangible personal property represents the finished product the buyer sought; and (7) the
skill and expertise used to create the tangible personal property. Ultimately, the question
is resolved by whether the transaction is commonly understood to be one for a service or
one for the sale of tangible personal property.
We need not examine each of these factors because we conclude that the creation of
invoices is one which is commonly understood to be a service. Our conclusion is based,
in part, on the fact that Company does more than just simply print or sends billing inserts.
Company bullpens bills, which means Company's software will hold bills until they reach a
certain amount so a customer does not get several small bills. In addition, Company can
pull past account information and can provide additional information to those who are
behind on their bills. We view this service to be similar to the work of an accountant or
bookkeeper whose services are nontaxable even though they may provide billing invoices
or other tangible products as an incidental part of their service. Because Company does
more than just print and send billing invoices, we believe it is more appropriate to
characterize the transaction as one for a service rather than for tangible personal service.
We note that a person engaged in the business of rendering a service is considered the
consumer of the tangible personal property and must pay tax on the purchase of such
tangible personal property.6
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
6
3

1 C,C.R. 201-5, SR-40.
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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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