Is a lessee's payment to a rental company for lost or damaged rental equipment subject to Colorado sales or use tax?
Plain-English summary
The Colorado Department of Revenue ruled that a customer's payment for lost or damaged rental equipment is not subject to sales or use tax. The company rents oil-drilling tools; its contract says that if a tool is "Lost in Hole," "Lost in Transit," or "Damaged Beyond Repair," the rental ends for that tool and the customer pays (1) the Accrued Charges (the rent that built up — which the company already taxes) plus (2) a separately stated "Lost Tool Rate," equal to the value of the tool at the time it was lost or destroyed. The question was whether that Lost Tool Rate is taxable. The Department said no.
A sale is taxed when someone transfers property (or the right to use it) in exchange for consideration. Here, the customer pays the Lost Tool Rate but gets no additional right to possess or own anything — it's simply compensation for the lost value of the company's property. That makes it damages reimbursement, not a sale and not a rental payment.
The Department relied on Steamboat Springs Rental & Leasing, Inc. v. City and County of Denver, 15 P.3d 785 (Colo. App. 2000), where a rental-car company's charges to customers for vehicle damage were held not taxable: the customer's right to use the car came from the original rental agreement, and the damage payment was a separate transaction that bought no additional use. The court (and the Department's own Revenue Bulletin No. 92-14) treat "damages reimbursement" as outside the rental transaction. The Department noted that "Damaged Beyond Repair" tools (which are returned) are squarely like the Steamboat Springs damages, and "Lost in Hole"/"Lost in Transit" tools (never returned) reach the same result — because in neither case does the customer acquire any additional right to the property.
What this means for you
Equipment rental and leasing businesses
A charge that simply makes you whole for property a customer lost or destroyed is generally not taxable, because the customer isn't buying anything in exchange. Protect that treatment by keeping the damages/loss charge separate on the invoice from the taxable rent (the accrued rental charges remain taxable). Don't structure the loss charge so that the customer ends up owning the item (e.g., "pay the value and keep it") — that could look like a taxable sale rather than damages.
Customers who lose or damage rented equipment
The rent you owe up to the loss is taxable; the separate payment that compensates the rental company for the lost item generally is not.
Accountants and tax professionals
The line is "in exchange for" property or a right to use it (Rule 39-26-102.10). Compensatory damages buy no additional right, so they fall outside both the sale and the lease (Steamboat Springs; Revenue Bulletin 92-14). Note the unrelated lease-term mechanics in § 39-26-102(23)/§ 39-26-713(1)(a) — here the company already collected tax on the rental payments.
Common questions
Q: Is a "lost or damaged equipment" fee taxable in Colorado?
A: In this ruling, no. A payment that only compensates the rental company for the value of lost or destroyed equipment is damages reimbursement, not a taxable sale or rental payment.
Q: What about tools the customer never returns (lost in the hole)?
A: Same result. Even though the tool isn't returned, the customer doesn't acquire any additional right to possess or own property in exchange for the payment, so it isn't a taxable sale.
Q: Is the rent itself still taxable?
A: Yes. The accrued rental charges remain taxable (the company collects tax on rental payments). Only the separate loss/damage charge is outside the tax.
Q: Does this ruling apply to my business?
A: Not automatically. A private letter ruling binds the Department only for the taxpayer and facts it was issued to and cannot be relied on by anyone else. It shows the Department's reasoning; 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 set their own rules — check with each.
Citations and references
Statutes, rules, and authorities:
- § 39-26-104(1), C.R.S. (sales tax on tangible personal property)
- § 39-26-202(1)(a), C.R.S. (use tax on storage, use, or consumption)
- 1 CCR 201-4, Rule 39-26-102.10 (definition of "sale" — transfer of an interest in exchange for consideration)
- § 39-26-102(23) and § 39-26-713(1)(a), C.R.S. (lease-term mechanics: short-term vs long-term leases)
- Steamboat Springs Rental & Leasing, Inc. v. City and County of Denver, 15 P.3d 785 (Colo. App. 2000)
- Department Revenue Bulletin No. 92-14 ("damages reimbursement are exempt since they are not considered part of the rental transaction")
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-17-007.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
PLR 17-007
August 29, 2017
XXXXXX
Attn: XXXXXX
XXXXXX
XXXXXX
Re: Lost or Damaged Leased Property
Dear XXXXXX,
You submitted on behalf of XXXXXX (“Company”) a request for a private letter ruling to the
Colorado Department of Revenue (“Department”) pursuant to Department Rule 1 CCR 2011, 24-35-103.5. This letter is the Department’s private letter ruling. This ruling is binding on
the Department to the extent set forth in Department Rule 1 CCR 201-1, 24-35-103.5. It
cannot be relied upon by any taxpayer other than the taxpayer to whom the ruling is made.
Issue
Is a payment from a lessee to Company for the loss or damage of rental equipment
subject to sales or use tax?
Conclusion
Payment from a lessee to Company for the loss or damage of rental equipment is not
subject to sales or use tax.
Background
Company is in the business of renting1 oil drilling equipment to drilling companies. The
rental agreement states that if tools are “Lost in Hole”, “Lost in Transit”, or “Damaged
Beyond Repair” while being used by a customer, the agreement terminates with
respect to such property and the customer pays Accrued Charges and the “Lost Tool
Rate.” Accrued Charges are the rental payments that have accrued up to the date that
the rental agreement is terminated. The Lost Tool Rate is the value of the tool at the
1 Company uses the term "rental" and "lease" to refer to different types of arrangements.
For our
purposes, any right to temporary possession with the expectation of return in reusable or resalable
condition is considered a rental or lease and those terms are used here interchangeably. The ruling
applies to any such arrangement.
time it is lost or destroyed and does not include rental charges. The Accrued Charge
and the Lost Tool Rate charge are stated separately on the invoice.
Company manufactures most of the tools that it rents. Manufacturing occurs outside
Colorado. Company collects Colorado sales tax on all rental payments. Most rental
periods are less than a year and all are less than three years. Tools and bits are
typically returned by the customer to Company and only infrequently are they Lost in
Hole, Lost in Transit, or Damaged Beyond Repair. Tools Damaged Beyond Repair are
typically sold to a third party as scrap metal.
Drilling bits are rented for a repair cycle and then returned to Company to be repaired,
refurbished, and then re-rented to the same or a different customer. There is a limit to
how many times bits can be refurbished and once that limit has been exceeded, the bit
is typically sold to a third party as scrap metal. Some bits are custom made and are
sold, not rented, to the customer.
Discussion
Colorado imposes sales or use tax on the sale or use of tangible personal property in
Colorado.2 A sale occurs when possession or title to tangible personal property is
transferred in exchange for consideration.3 A taxable use occurs when a person
stores, uses, or consumes in Colorado tangible personal property.4 Colorado levies
sales tax on payments made pursuant to certain types of rentals of tangible personal
property.5 The issue in this case is whether a customer’s payment for the loss or
damage to Company’s equipment constitutes a taxable sale.
The issue has been addressed, in part, in Steamboat Springs Rental & Leasing, Inc. v
City and County of Denver, 15 P.3rd 785 (Colo C.A. 2000). The City assessed sales
tax on customers’ payments to the rental car company for damages to vehicles. The
City argued that the payments were part of the “rental payments” and, therefore,
taxable. The Court disagreed, concluding that the customer’s right to use the car was
governed by the original rental agreement and payment for damages was a separate
transaction. The Court also concluded that the payment for damages was not a sale
because the customer did not receive any additional right to use the vehicle in
exchange for the payment of damages.6 The Court cited with approval the
2
§ 39-26-104(1) and 202, C.R.S.
3 Department Rule 1 CCR 201-4, 39-26-102.10 (““Sale” or “sale and purchase” shall mean 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 these
things: (a) transfers or agrees to transfer all or part of his interest, or the interest of any other for whom
he is acting as an agent, in any tangible personal property to any other person; or (b) performs or
furnishes, or agrees to perform or furnish, or contracts to have another perform or furnish, any service
taxable under this Act for any other person.”)
4 § 39-26-202(1)(a), C.R.S.
5 §§ 39-26-102(23) and 713(1)(a), C.R.S. For leases for more than three years, the lessor must collect
sales tax on lease payments. For leases for a shorter duration, the lessor has the option either to
collect sales tax when it acquires the equipment or, with the department’s permission, purchase the
equipment without payment of tax and collect sales tax on lease payments. For purposes of this ruling,
Company has represented that it collects sales tax on rental payments. We proceed on that basis
notwithstanding Company’s further representation that tax has been paid on some ingredient parts of
the manufactured items.
6 A contract may provide, as in the case of Company’s rental contract, that a party agrees to reimburse
the other for damage to the former’s property. In some sense, this is a part of the rental agreement, but
2
DR 4010A (06/11/14)
Department’s Revenue Bulletin No. 92-14, which states, in part, “[d]amages
reimbursement are exempt [from Colorado sales tax] since they are not considered
part of the rental transaction.”
Tools and bits damaged beyond repair are typically returned to Company. The
Damaged Beyond Repair charge is indistinguishable from the compensatory damages
discussed in Steamboat Springs. However, charges for tools “Lost in the Hole” and
“Lost in Transit” are slightly different from the damages discussed in Steamboat
because these tools are not physically returned to Company. However, the customer
does not pay the charges to acquire any additional right of possession or title to
property. Therefore, the Department rules that payment of damages in recompense
for Company’s equipment Damaged Beyond Repair, Lost in Hole, or Lost in Transit
are not subject to Colorado sales or use tax.
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. The ruling is null and
void if any such representation is incorrect and has a material bearing on the
conclusions reached in this ruling and is subject to modification or revocation in
accordance to Department Regulation 24-35-103.5.
This ruling applies to the sales and use taxes administered by the Department. This
ruling is not binding on sales and use taxes of home rule cities and counties. See
Department publication DRP 1002 for a list of state-administered and home rule tax
jurisdictions.
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.
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 is not an agreement the purpose of which is to acquire property as is contemplated by the tax code,
but, rather, a contractual commitment to reimburse for the loss of value. See, Steamboat Springs,
supra.
3
DR 4010A (06/11/14)
This ruling cannot be relied upon by any other taxpayer other than the taxpayer
to whom the ruling is made.
4
DR 4010A (06/11/14)