Is the sale of bulk non-potable water — withdrawn from ditches and reservoirs and delivered through surface hoses to oil and gas wells — subject to Colorado sales tax?

Plain-English summary

A company sells bulk, non-potable river water to oil and gas operators for hydraulic fracturing. It withdraws water from ditch and reservoir systems with transfer pumps and pushes it through temporary surface lay-flat hoses straight to the well sites, metering and invoicing monthly. The company asked whether these water sales are subject to Colorado sales tax. The Department said no.

Colorado sales tax applies to retail sales of tangible personal property, which the statute defines as "corporeal personal property" — goods, wares, merchandise, commodities, and tangible things capable of being possessed and exchanged. But the Department's rule contains a specific carve-out: "tangible personal property" does not include water in pipes, conduits, ditches, or reservoirs. Because this company sells water drawn from ditches and reservoirs and delivered through conduits (the surface lay-flat hoses), it is not selling tangible personal property — so there is no retail sale of TPP for the state sales tax to attach to.

The dividing line is how the water moves. Water delivered through pipes/conduits/ditches/reservoirs falls outside taxable TPP. (By contrast, water packaged and sold in a possessable container — for example, bottled water, or water hauled and sold by the truckload — can be taxable tangible personal property. The mode of delivery is what matters here.)

What this means for you

Water suppliers to oil and gas and other industrial users

If you deliver bulk water through pipes, conduits, ditches, or reservoir systems, those sales are outside the definition of taxable tangible personal property and aren't subject to state sales tax. Document the delivery method — the conduit/ditch/reservoir delivery is exactly what takes it out of TPP. Watch the home-rule caveat: self-collected cities set their own rules.

Oil and gas operators buying frac water

Bulk water piped or hosed to your well sites generally won't carry state sales tax under this reasoning. But don't assume the same treatment for water delivered in a different form (e.g., packaged or possibly truck-hauled), where the analysis can differ.

Accountants and tax professionals

The hook is the rule exclusion in 1 CCR 201-4, Rule 39-26-102(15)(2)(c): water in pipes, conduits, ditches, or reservoirs isn't TPP under § 39-26-102(15)(a)(I), so § 39-26-104(1)(a) sales tax doesn't reach it. Focus on the conveyance method when distinguishing this from taxable packaged/containerized water.

Common questions

Q: Is bulk frac water subject to Colorado sales tax?
A: Not when it's water from ditches/reservoirs delivered through conduits. The Department ruled that's not tangible personal property, so the state sales tax doesn't apply.

Q: Why isn't the water taxable?
A: Colorado's rule excludes "water in pipes, conduits, ditches, or reservoirs" from the definition of tangible personal property, and this water is delivered through conduits (surface hoses).

Q: Would bottled or containerized water be different?
A: Water sold in a possessable container (like bottled water) can be taxable tangible personal property. The exclusion here turns on delivery through pipes/conduits/ditches/reservoirs.

Q: Does this cover city taxes too?
A: No. The Department administers state and state-administered local taxes only; self-collected home-rule cities set their own rules, so check with each city.

Q: Can other businesses rely on this ruling?
A: No. 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.

Citations and references

Statutes and rules:

• § 39-26-104(1)(a), C.R.S. (sales tax on retail sales of tangible personal property)
• § 39-26-102(15)(a)(I), C.R.S. (definition of "tangible personal property")
• 1 CCR 201-4, Rule 39-26-102(15) ¶(2)(c) (TPP excludes water in pipes, conduits, ditches, or reservoirs)

Related Colorado rulings on water and tangible personal property: [[gil-07-013-rental-of-various-items]].

Source

• Landing page: Colorado Letter Rulings
• Original PDF: PLR-22-001.pdf

Original ruling text

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

PLR 22-001
April 8, 2022
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Re: Bulk Water Sales
Dear XXXXXXXXXX:
You submitted a request for a private letter ruling on behalf of XXXXXXXXXX (the “Company”), regarding the sales taxation of bulk water sales, to the Colorado Department of Revenue (“Department”) pursuant to 1 CCR 201-1, 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 1 CCR 201-1, Rule 24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the ruling is made. Issue Whether Company’s sales of water are tangible personal property subject to Colorado sales tax. Conclusion Company’s sales of water are not sales of tangible personal property and are, therefore, not subject to Colorado sales tax. Background1 Company is engaged in the business of selling bulk water to customers’ oil and gas well locations for hydraulic fracturing. Bulk water is non-potable river water. Company sets up water transfer pumps to withdraw water for delivery from the ditch and reservoir systems and pushthrough temporary surface lay-flat lines to customers’ well locations. Company sources the water, secures the private right-of-way for its surface lay-flat hoses and access to the ditch infrastructure, and operates the transfer. Water transfer pumps and lay-flat hoses are staffed and monitored 24 hours per day while transferring the water. Daily meter readings are taken, and customers are invoiced at the end of the month. All of this is done in coordination with the XXXXXXXXXX or in one instance the XXXXXXXXXX as the source of water, the ditch

1 Paragraph (4)(b)(ii) of 1 CCR 201-1, Rule 24-35-103.5 requires the request for a private letter ruling to include a

statement of facts. This section generally recites the statement of facts provided in the request, which is not an indication that the Department found such facts relevant to its analysis. Some relevant facts may be omitted to ensure confidentiality as required by section 24-35-103.5(5), C.R.S. The terms used in this section to describe the factual background are generally those of the requester.

PLR 22-001
April 8, 2022
Page 2
companies, and the river commissioner in order to transit the water while accepting Company’s share of shrink and loss within each of those systems. Discussion Company’s sales of water are not sales of tangible personal property and are, therefore, not subject to Colorado sales tax. Colorado generally imposes a sales tax on the retail sale of tangible personal property.2 The term “tangible personal property” means “corporeal personal property,” and generally embraces all goods, wares, merchandise, products and commodities, and all tangible or corporeal things and substances that are dealt in and capable of being possessed and exchanged.3 However, “tangible personal property” does not include water in pipes, conduits, ditches, or reservoirs.4 Company is selling water from the ditch and reservoir system to customers via conduits (surface lay flat hoses). Therefore, company is not making retail sales of tangible personal property upon which the state sales tax is imposed. Miscellaneous This ruling is premised on the assumption that Company has completely and accurately disclosed all material facts, that all representations are true and complete, and that Company has otherwise complied with the requirements of section 24-35-103.5, C.R.S., and the rules promulgated pursuant thereto. The Department reserves the right, among others, to independently evaluate Company’s facts, representations, and assumptions. The ruling is null and void if any such fact, representation, or assumption is incorrect and has a material bearing on the conclusions reached in this ruling. This ruling is binding on the Department and is subject to modification or revocation, in accordance with 1 CCR 201-1, Rule 24-35-103.5. The Department administers state and state-administered local sales and use taxes. This letter does not address sales and use taxes administered by self-collected home-rule cities. You may wish to consult with those local governments that administer their own sales or use taxes about the applicability of those taxes. Visit our website at tax.colorado.gov for more information about state and local sales taxes. Thank you for your request. 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.

2 Section 39-26-104(1)(a), C.R.S.
3 Section 39-26-102(15)(a)(I), C.R.S.
4 1 CCR 201-4, Rule 39-26-102(15), paragraph (2)(c).