When a retailer sells grass seed, erosion-control blankets, and fertilizer to a construction contractor holding a DR 0163 exempt certificate, which of those are exempt from Colorado sales tax as construction and building materials?
Plain-English summary
A retailer that sells grass seed, erosion-control blankets, and fertilizer asked the Colorado Department of Revenue which of those products are exempt from sales tax when sold to a construction contractor who hands over a current Contractor's Exempt Certificate (DR 0163). The answer split:
- Grass seed — exempt.
- Erosion-control blankets — exempt.
- Fertilizer — not exempt (taxable).
Here's the logic. Colorado normally treats contractors as the retail purchasers of the materials they build into real property, so they ordinarily pay sales/use tax on what they buy. But there's an exemption for construction and building materials used to build, alter, or repair structures and public works owned and used by (a) the federal, state, or local government in its governmental capacity, (b) charitable organizations in their charitable work, or (c) non-profit schools. The DR 0163 certificate is how a contractor signals a purchase qualifies, and a retailer who gets it at the time of sale can sell tax-free.
The phrase "construction and building materials" isn't defined by statute, but the courts and the Department read it to mean materials that lose their identity and become a permanent part of the realty — like wood, concrete, brick, or metal. The Department extended that to landscape construction: grass seed and erosion-control blankets become a permanent part of the land, just like traditional building materials, so they're exempt.
Fertilizer is different. Applying fertilizer is landscape maintenance — caring for vegetation after it's planted — not construction of the realty. Because fertilizer doesn't build the landscape, it doesn't qualify as a construction and building material, and it stays taxable even when the same contractor presents the same exempt certificate.
What this means for you
Retailers selling to contractors
The exempt certificate doesn't blanket-exempt everything in the cart. You still have to ask whether each item is a construction and building material — something that becomes a permanent part of the realty. Materials that get planted or installed into the land (grass seed, erosion blankets) can be exempt; consumables for ongoing upkeep (fertilizer) are taxable. Keep the current DR 0163 on file to document the exempt sales, and charge tax on the maintenance items.
Landscape and construction contractors
Whether your purchase is exempt turns on construction versus maintenance, and on the project. The exemption only reaches materials for projects owned and used by government, charities, or non-profit schools — a DR 0163 is issued per qualifying tax-exempt project. On a private commercial or residential job, these purchases are taxable regardless. And even on a qualifying project, fertilizer and other maintenance inputs remain taxable.
Accountants and tax professionals
The test is the "integral and inseparable part of the realty" standard in 1 CCR 201-4, Rule 39-26-102(15), reinforced by Rio Blanco v. ExxonMobil, 192 P.3d 582 (Colo. App. 2008): construction and building materials must lose their identity and become permanent realty. The construction-vs-maintenance line is the crux — installation that builds the landscape qualifies; upkeep does not. Watch the home-rule-city caveat below.
Common questions
Q: Does a contractor's exempt certificate make every purchase tax-free?
A: No. It only covers genuine construction and building materials on a qualifying tax-exempt project (government, charitable, or school). Items that don't become a permanent part of the realty — like fertilizer used for maintenance — stay taxable even with the certificate.
Q: Why is grass seed exempt but fertilizer isn't?
A: Grass seed becomes a permanent part of the landscaped realty, so it's a construction and building material. Fertilizer is applied to maintain vegetation after construction — that's landscape maintenance, not construction — so it doesn't qualify.
Q: What projects does this exemption even apply to?
A: Only construction, alteration, or repair of structures and public works owned and used by the government in its governmental capacity, charitable organizations in their charitable activities, or non-profit schools. Private jobs don't qualify.
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 explicitly cannot be relied on by anyone else. It shows the Department's reasoning, but your facts may differ.
Q: Does this cover city sales tax too?
A: No. The Department administers state and state-administered local sales tax only. Colorado's self-collected home-rule cities set their own rules and may tax differently. Check with each home-rule city.
Citations and references
Statutes and rules:
- § 39-26-102(15)(a)(I), C.R.S. (definition of "tangible personal property")
- § 39-26-708(1), (2), C.R.S. (construction/building materials exemption — government, charitable, school projects)
- § 39-26-708(3), C.R.S. (contractor exemption certificate)
- 1 CCR 201-5, Special Rule 10 (contractors as retail purchasers of materials built into realty)
- 1 CCR 201-4, Rule 39-26-102(15) (property that becomes an integral and inseparable part of realty)
- 1 CCR 201-1, Rule 24-35-103.5 (private letter ruling procedure)
Case law:
- Bd. of Cnty. Comm'rs of the Cnty. of Rio Blanco v. ExxonMobil, 192 P.3d 582 (Colo. App. 2008) (construction and building materials become a permanent part of the realty)
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-23-001.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
PLR 23-001
January 13, 2023
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Via Electronic Mail: XXXXXXXXX
Re: Sales of tangible personal property to a construction contractor who holds a contractor’s
exempt certificate (DR 0163).
Dear XXXXXXXXX:
You submitted a request for a private letter ruling on behalf of XXXXXXXXX (the “Company”),
regarding sales of grass seed, erosion control blankets, and fertilizer to a construction
contractor, 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
1. Whether sales of grass seed are exempt from sales tax as construction and building
materials if the sale is made to a construction contractor who provides Company with a current
contractor’s exempt certificate (DR 0163).
2. Whether sales of erosion control blankets are exempt from sales tax as construction and
building materials if the sale is made to a construction contractor who provides Company with a
current contractor’s exempt certificate (DR 0163).
3. Whether sales of fertilizer are exempt from sales tax as construction and building materials if
the sale is made to a construction contractor who provides Company with a current contractor’s
exempt certificate (DR 0163).
Conclusions
1. Yes, sales of grass seed are exempt from sales tax as construction and building materials if
the sale is made to a construction contractor who provides Company with a current contractor’s
exempt certificate (DR 0163).
PLR 23-001
January 13, 2023
Page 2
- Yes, sales of erosion control blankets are exempt from sales tax as construction and building
materials if the sale is made to a construction contractor who provides Company with a current
contractor’s exempt certificate (DR 0163). - No, sales of fertilizer are not exempt from sales tax as construction and building materials if
the sale is made to a construction contractor who provides Company with a current contractor’s
exempt certificate (DR 0163).
Background1
Company is a retailer that sells grass seed, erosion control blankets, and fertilizer. On occasion,
Company sells those products to construction contractors who present Company with a current
Contractor’s Exempt Certificate (DR 0163). Company works with customers to select the right
grass seed mixture based on the job site's region and growing conditions. Company's erosion
control blankets are large open-weave blankets made from a combination of synthetic and
biodegradable materials such as coconut and straw. Company offers a range of highperformance fertilizers which are mixed with existing topsoil to enrich the soil, assist with
moisture retention, and improve growing conditions for vegetation.
Discussion
Unless a specific exemption applies, Colorado generally imposes a sales tax on retail sales of
tangible personal property. 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.2 Tangible personal property does not include property that loses its
identity when it becomes an integral and inseparable part of the realty and is removable only
with substantial damage to the premises.3
For sales and use tax purposes, contractors are regarded as retail purchasers of the tangible
personal property they will build into realty pursuant to a construction contract.4 This means they
must pay sales and use taxes on their acquisition of such property. However, Colorado exempts
the sales and use of construction and building materials to contractors and subcontractors for
use in the building, erection, alteration, or repair of structures, highways, roads, streets, and
other public works owned and used by:
(a) The United States government, the state of Colorado, its departments and
institutions, and the political subdivisions thereof in their governmental capacities only;
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.
2 Section 39-26-102(15)(a)(I), C.R.S.
3 Paragraph (2)(a) of 1 CCR 201-4, Rule 39-26-102(15).
4 Paragraph (2) of 1 CCR 201-5, Special Rule 10.
PLR 23-001
January 13, 2023
Page 3
(b) Charitable organizations in the conduct of their regular charitable functions and
activities; or
(c) Schools, other than schools held or conducted for private or corporate profit.5
To facilitate this exemption, the Department issues contractors a certificate of exemption
indicating that the contractor’s purchase of construction or building materials is for a purpose
stated above and is, therefore, exempt from sales or use tax.6 The Department provides a form
to apply for an exemption certificate and has the authority to verify that the contractor is entitled
to the issuance of the certificate.7 A retailer may rely on the exemption certificate and not charge
sales tax on the construction and building materials when the exemption certificate is presented
at the time of purchase.8
The phrase “construction and building materials” is not defined in statute or rule. Because the
exemption applies to materials used to build structures or public works, the Court of Appeals
has explained that the plain meaning of the phrase “construction and building materials”
suggests that the materials must lose their identity and become a permanent part of the realty.9
The Court of Appeals’ analysis is consistent with the Department rule that products that become
an integral and inseparable part of the realty and are removable only with substantial damage to
the premises lose their identity as tangible personal property.10
While the exemption has generally applied to the purchase of materials such as wood, cement,
concrete, metals, bricks, and clay used in the construction of buildings, the construction of
structures, roadways, and other public works contemplated in the exemption can include
landscaped areas. Landscape construction generally involves altering the land to make it visibly
functional; for example, flattening it, improving drainage for erosion control, or enhancing the
overall aesthetic of the property by installing vegetation. Landscaped areas are constructed
using components like those sold by Company: grass seed and erosion control blankets, which,
similar to wood or metal, become a permanent part of the realty. Therefore, Company’s sales of
grass seed and erosion control blankets are exempt from sales tax as construction and building
materials if the sale is made to a construction contractor who provides Company with a current
contractor’s exempt certificate.
However, landscape construction does not generally include regular maintenance of the
landscaped areas after construction. Landscape maintenance includes applying fertilizer, a
substance that is added to soil to improve the growth of vegetation. Because fertilizer does not
contribute to landscape construction, but instead is a part of landscape maintenance,
Company’s sales of fertilizer are not exempt from sales tax as construction and building
materials if the sale is made to a construction contractor who provides Company with a current
contractor’s exempt certificate.
5 Section 39-26-708(1) and (2), C.R.S.
6 Section 39-26-708(3), C.R.S.
7 To obtain an exemption certificate for each tax-exempt construction project, the contractor must complete and
submit the Contractor Application for Exemption Certificate (DR 0172) to the Department of Revenue.
8 See 1 CCR 201-4, Rule 39-26-105–3, for rules regarding documenting exempt sales.
9 Bd. of Cnty. Comm’rs of the Cnty. of Rio Blanco v. ExxonMobil, 192 P.3d 582, 587 (Colo. App. 2008).
10 See Paragraph (2)(a) of 1 CCR 201-4, Rule 39-26-102(15).
PLR 23-001
January 13, 2023
Page 4
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.