When a buyer pays a separately stated fee for a program that pays a credit toward a replacement vehicle if their car is totaled or stolen, is that fee taxable — and does the credit count in the sales tax on the replacement vehicle?

Plain-English summary

A company runs a program that protects car buyers against depreciation: if your vehicle is totaled or stolen, the program pays a benefit — a credit toward a replacement vehicle bought from the same dealership. You buy in by paying a separately stated, optional fee when you purchase a car. The company asked the Colorado Department of Revenue three questions, and the Department drew a clean line between the protection product (not taxable) and the eventual car purchase (taxable, including the benefit).

1. The program fee is not taxable. Sales tax applies to sales of tangible personal property. When you pay the program fee, you don't receive any tangible property — you receive an intangible right to future compensation, which the Department compares to an insurance premium. So the fee is not a taxable sale. And because the fee is optional and separately stated from the price of the vehicle, it doesn't get pulled into the sales tax on the car either. (If a non-taxable add-on is not separately stated, or is inseparable from a taxable sale, it can be dragged into the taxable price — that's the rule from AD Stores — but that didn't happen here.)

2. The company's payment of the benefit to the dealership is not taxable. When a vehicle is totaled and the company pays the benefit directly to the dealership, that payment by itself isn't a sale. The buyer's tax obligation arises only when the buyer takes ownership or possession of a vehicle — not from money moving between the company and the dealer.

3. But the benefit value IS counted in the sales tax on the replacement vehicle. Sales tax is calculated on the purchase price of the replacement car. Payments made to the retailer by a third party on behalf of the buyer are part of that purchase price. So if the replacement vehicle's price is $20,000 and the program benefit is $5,000, the buyer pays the dealer $15,000 in cash — but sales tax is computed on the full $20,000. The dealership reports the full $20,000 as gross sales.

The throughline: buying protection against future loss is not buying a thing, so it isn't taxed; but when that protection later pays out toward a car, the payout is just someone else's money covering part of a taxable car purchase — and the tax follows the full price of the car.

What this means for you

Car dealers and finance/insurance managers

If you sell an optional vehicle-protection or depreciation product, keep its fee separately stated on the contract and make it genuinely optional — that keeps the fee out of the car's taxable price. The trap is on the back end: when a customer redeems a benefit toward a replacement vehicle, don't calculate sales tax on only the cash the customer hands over. Tax the full purchase price, including the third-party benefit credit, and report the full price as gross sales (here, on Department form DR 0024).

Buyers of vehicle-protection products

The fee you pay for the protection isn't taxed. But if you collect on it later, expect to pay sales tax on the sticker price of the replacement vehicle, not just the reduced amount you pay out of pocket — the benefit credit is treated as part of what you paid for the car.

Accountants and tax professionals

This is a textbook third-party-consideration ruling: money paid to the retailer by someone other than the buyer, on the buyer's behalf, stays in the taxable purchase price (Department Regulation 39-26-102.7(a)(1), (3)). The protection fee escapes tax on the intangible-right theory (an insurance-premium analogue, not tangible personal property), reinforced by the AD Stores separately-stated/separability test. Colorado's analysis closely tracks Utah PLR 19-001, which reached the same split for a near-identical total-loss "down payment" product.

Common questions

Q: Is the fee I pay for vehicle depreciation protection taxable in Colorado?
A: Not under this ruling. The fee buys an intangible right to future compensation (like an insurance premium), not tangible personal property, and because it's optional and separately stated it isn't folded into the sales tax on the vehicle either.

Q: If my car is totaled and I get a credit toward a new one, do I pay tax on the discounted price?
A: No — you pay sales tax on the full purchase price of the replacement vehicle. The benefit credit is a third-party payment made to the dealer on your behalf, so it stays in the taxable price even though you don't pay it in cash.

Q: Does this ruling apply to my dealership or product?
A: Not automatically. A private letter ruling binds the Department only for the taxpayer and exact facts it was issued to and explicitly cannot be relied on by anyone else. It shows how the Department reasons; your facts and product terms may differ.

Q: Does this cover city sales tax?
A: No. The Department administers state and state-administered local taxes only. Colorado's self-collected home-rule cities set their own rules and may treat these charges differently. Check with each home-rule city.

Citations and references

Statutes, rules, and cases:
- § 39-26-104(1), C.R.S. (sales tax imposed on sales of tangible personal property)
- Department Regulation 39-26-102.15 (tangible personal property; buyer's tax obligation arises on ownership/possession of the vehicle)
- Department Regulation 39-26-102.7(a)(1) and (3) (third-party payments to the retailer included in the purchase price)
- AD Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001) (non-taxable item sold with a taxable sale; separately-stated/separability test)
- 1 CCR 201-1, Rule 24-35-103.5 (private letter ruling procedure)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-18-007.pdf

Original ruling text

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

PLR 18-007
August 27, 2018
XXXXXXXX
Attn: XXXXXXXX
XXXXXXXX
XXXXXXXX
Re: Private letter ruling
Dear Ms. XXXXXXXX,
You submitted a request for a private letter ruling on behalf of your client, XXXXXX
(“Company”) and XXXXX (“Credit Union”) to the Colorado Department of Revenue
(“Department”) pursuant to Department Rule 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 24-35-103.5. It cannot be relied upon by any taxpayer
other than the taxpayer to whom the ruling is made.
Issues
1. Is buyer’s payment to a Dealership to participate in the Program subject to
sales or use tax?
2. Is the payment of the Benefit by Company pursuant to the Program to
Dealership subject to sales or use tax?
3. Is the value of the Benefit paid by Company to Dealership included in the
calculation of sales tax collected from the buyer for the purchase of the
replacement motor vehicle?
Conclusions
1. No.
2. No.
3. Yes.

Background
Company offers a program (“Program”) that provides motor vehicle owners
compensation (“Benefit”) for the loss of a vehicle’s value due to depreciation when
the vehicle is destroyed or stolen. Motor vehicle buyers can participate in the
Program by paying a fee when they purchase a vehicle from a participating motor
vehicle dealership (“Dealership”).1 Buyers are not required to purchase the
Program. The Program fee is separately stated from the price of the motor
vehicle. The Program fee is collected by the Dealership either directly from the
buyer or from the proceeds of a car loan obtained by the buyer from a finance
company, such as from Credit Union.
In the event that a vehicle is a total loss or is stolen, the buyer receives the Benefit
in the form of a credit toward the purchase of a replacement vehicle from the
Dealership. The buyer must purchase the replacement vehicle from the same
Dealership from which buyer purchased the original vehicle.2 Company pays the
Benefit directly to the Dealership. Buyers are not entitled to a cash payment as a
substitute for the credit. The Benefit value is equal to the cash selling price for the
original motor vehicle minus any insurance proceeds paid by buyer’s own
insurance carrier.3 Buyer pays the Dealership the purchase price for the
replacement vehicle minus the Benefit value.
A buyer who purchased the Program4 has a 30-day free look period in which a full
refund may be received, and the buyer may cancel the Program at any time
before the expiration date of the contract. After the 30-day free look period
elapses, the Program fee is refundable on a pro-rata basis and will be assessed a
$50 cancellation fee. If buyer’s vehicle has not suffered a total loss or has not
been stolen before the expiration of the Program period, the buyer has no right to
the Benefit or to a refund of the Program fee.
Company enters into an agreement with a Dealership to administer the Program
and to maintain a Universal Contractual Liability Insurance Policy. The insurance
policy insures the Dealership for the Benefit to which the buyer is entitled.

1 Dealership may be a single dealership or a group of participating dealerships.

In this ruling,
Dealership refers collectively to both.
2 In the event the customer is more than 100 miles from where they purchased the original vehicle,
or the Dealership is out-of-business, the customer may contact Company for assistance with
locating another Dealership from whom buyer can purchase a replacement vehicle and receive
the Benefit.
3 The cash selling price is the price prior to the addition of tax, title, additional front end products,
or documentation fees. The cash selling price does not include any manufacturer or dealer
rebates or discounts.
4 The Program is effective for a set period of time.
2

DR 4010A (06/11/14)

Discussion
1. Tax does not apply to payments by buyer for the Program.
Sales tax applies to the sale of tangible personal property.5 A buyer does not
acquire tangible personal property when the buyer pays the Program fee.6
Therefore, the payment of the Program fee is not a taxable sale.
However, the price for a non-taxable product or service sold in connection with the
sale of a taxable product is included in the calculation of tax for the taxable
product if the price for the non-taxable product or service is not separately stated
or the sale of the non-taxable product or service is inseparable from the sale of
taxable product.7 Based on Company’s and Credit Union’s representation that
customers have the option to purchase the Program as part of their purchase of a
motor vehicle but are not required to and, if the Program is purchased, the
Program fee is separately stated from the purchase price for the vehicle, the
Program fee is not included in the calculation of tax for the motor vehicle.
2. Tax does not apply to the payment of the Benefit by Company to the
Dealership.
Company’s payment of the Benefit to the Dealership is not an event that gives rise
to a sales or use tax obligation. The buyer does not acquire the motor vehicle in
exchange for the payment from Company to the Dealership. The buyer’s tax
obligation arises only when the buyer obtains ownership or possession of the
vehicle.8
3. The Benefit value is included in the purchase price on which tax is
calculated.
Tax is calculated on the purchase price paid by a buyer.9 Payments made to the
retailer by a third party on behalf of a buyer are included in the purchase price on
which tax is calculated.10 Therefore, the value of the Benefit paid by Company to
Dealer is included in the calculation of the tax due on the purchase of the
replacement vehicle.11
5 § 39-26-104(1), C.R.S.

6 Department Regulation 39-26-102.15.

The payment is similar to an insurance premium. A buyer
of insurance is not purchasing the replacement of the item insured but, rather, an intangible right
to receive monetary compensation in the future.
7 AD Stores v. Department of Revenue, 19 P.3rd 680 (Colo. 2001)
8 Department Regulation 39-26-102.15
9 § 39-26-104(1), C.R.S.
10 Department Regulation 39-26-102.7(a)(1) and (3)
11 For example, if the purchase price for the vehicle is $20,000 and the value of the Benefit is
$5,000, tax is computed on $20,000, even though the cash paid by the buyer is only $15,000.
3

DR 4010A (06/11/14)

Miscellaneous
This ruling is premised on the assumption that Company has completely and
accurately disclosed all material facts and that all representations are true and
complete. The Department reserves the right, among others, to independently
evaluate Company’s representations and assumptions. The ruling is null and void if
any such assumption or 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 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 ruling cannot be relied upon by any other taxpayer other than the
taxpayer to whom the ruling is made.

The Dealership will report the purchase price ($20,000), without deducting the Benefit value, as
gross sales on Department form DR 024.
4

DR 4010A (06/11/14)