Is the industrial equipment a retailer buys to mass-produce baked goods in its in-store bakeries exempt from Colorado sales and use tax under the manufacturing machinery exemption — and does that exemption reach local taxes?

Plain-English summary

The Colorado Department of Revenue ruled that the industrial equipment a large retailer buys for its in-store bakeries is exempt from Colorado sales and use tax under the state's manufacturing machinery and machine tools exemption (§ 39-26-709, C.R.S.). The equipment included mixers, bowl lifts, dough dividers, bread rollers and presses, depositors, unifillers, proofing and baking ovens, oven racks, glaze sprayers, and labeling machines.

Colorado taxes purchases of equipment like this at retail, but § 39-26-709(1)(a)(II) exempts machinery or machine tools costing more than $500 that are used in Colorado directly and predominantly to manufacture tangible personal property for sale or profit — provided the machinery is of a type that would have qualified for the old federal investment tax credit under IRC section 38. (The requester asked the Department to assume the ITC and $500/new-purchase conditions were met, so the Department assumed them rather than ruling on them.)

The Department found each piece fit the test:

• It's "machinery." Machinery is interrelated parts used to produce tangible personal property, including any adjunct or attachment a basic unit needs to do its job — so an oven counts, and so do the oven racks that rotate inside it.
• The bakery "manufactures." Manufacturing means producing a new product with a distinctive name, character, or use from raw or prepared materials. The bakeries turn flour, eggs, sugar, and the like into thousands of finished baked goods daily — a new product different from the ingredients.
• It's used "directly" and "predominantly." Direct use runs from the point raw material leaves plant inventory through completion, including packaging. The segregated bakery space is a "contiguous plant site," each machine acts on the goods or moves them through a continuous flow, and the labeling machine is part of that final packaging step. The equipment is used exclusively for production — the racks are never used to store or display finished goods.

Local tax is the wrinkle. The manufacturing machinery exemption is an optional local exemption: it applies to a state-administered city, town, or county's sales tax only if that locality has expressly adopted it (the Department's DR 1002 publication lists which ones have). It does, however, apply to the Regional Transportation District (RTD) and Scientific and Cultural Facilities District (SCFD) taxes, because those special districts aren't allowed to deviate from the exemption. Self-collected home-rule cities set their own rules and aren't covered.

What this means for you

Manufacturers and producers (not just bakeries)

If you buy machinery costing over $500 that's used directly and predominantly to make products for sale, Colorado's manufacturing exemption likely reaches it — and "directly" extends all the way through packaging, including labeling equipment. The key tests are that you're producing a genuinely new product from raw/prepared materials, that the equipment acts on the product or moves it through a continuous production flow, and that it's used predominantly (here, exclusively) for manufacturing rather than storage or display.

Bakeries and food producers specifically

A production bakery that mass-produces baked goods from scratch is "manufacturing" for this exemption, even when it sits inside a retail store, as long as the production area is a segregated plant site dedicated to production. Note this is the equipment exemption — separate from the food-for-home-consumption exemption that governs whether the baked goods themselves are taxed when sold.

Accountants and tax professionals

The decisive elements are the $500/new/ITC-eligibility thresholds in § 39-26-709(1)(e) (the Department assumed these), the machinery/manufacturing/direct-use definitions in § 39-26-709(1)(c)–(d), and the "contiguous plant site" and packaging-inclusive scope of direct use. Don't overlook the local-tax mechanics: this is a local optional exemption under § 29-2-105(1)(d), so state-administered city/county tax applies unless the jurisdiction adopted the exemption — check DR 1002 — while RTD and SCFD can't opt out. Home-rule cities are outside the ruling.

Common questions

Q: What equipment qualifies for Colorado's manufacturing machinery exemption?
A: Machinery or machine tools (and their necessary attachments) costing more than $500 each, used in Colorado directly and predominantly to manufacture tangible personal property for sale or profit, and of a type that would have qualified for the former federal investment tax credit. Here that covered mixers, ovens, oven racks, depositors, labeling machines, and similar bakery equipment.

Q: Does the exemption cover packaging and labeling machines?
A: Yes. "Direct use" in manufacturing runs through the completed form, including packaging if required, so a labeling machine used to label individual packages for sale is within the exemption.

Q: Do I get the exemption on local sales tax too?
A: Only partly. It applies to state tax, to RTD and SCFD district taxes, and to any state-administered city, town, or county that has expressly adopted the optional machinery exemption (see DR 1002). Localities that haven't adopted it still tax the purchase, and self-collected home-rule cities set their own rules.

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 — and here several conditions (price over $500, new purchase, ITC eligibility) were assumed, not decided.

Q: Does this cover city sales tax too?
A: Not for self-collected home-rule cities. The Department administers state and state-administered local sales tax only. Home-rule cities set their own rules and may tax differently. Check with each home-rule city.

Citations and references

Statutes and rules:
- § 39-26-709(1)(a)(II), (2), C.R.S. (manufacturing machinery and machine tools exemption — sales and use tax)
- § 39-26-709(1)(c), (1)(d), C.R.S. (definitions of machinery, manufacturing, and direct use)
- § 39-26-709(1)(e), C.R.S. (federal investment tax credit / IRC section 38 requirement)
- § 39-26-104, C.R.S. (imposition of sales tax)
- § 39-26-102(15), C.R.S. (definition of "tangible personal property")
- § 29-2-105(1)(d), C.R.S. (local optional exemptions; express adoption required)
- 1 CCR 201-1, Rule 24-35-103.5 (private letter ruling procedure)
- Department publication DR 1002 (which jurisdictions have adopted the machinery exemption)

Case law:
- Coors Brewing Co. v. Fagan, 949 P.2d 110 (Colo. App. 1997) (machinery acting on the product being produced)
- Breckenridge v. Egencia, LLC, 442 P.3d 969 (Colo. App. 2018) (using a dictionary for undefined statutory terms)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-23-008.pdf

Original ruling text

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

PLR 23-008
December 27, 2023
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Via Electronic Mail: XXXXXXXXXX
Re: Applicability of the Manufacturing Machinery Exemption to Certain Bakery Equipment
Dear XXXXXXXXXX:
You submitted a request for a private letter ruling on behalf of XXXXXXXXXX (“Company”), to
the Colorado Department of Revenue (“Department”) pursuant to 1 CCR 201-1, 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 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 purchase and use of certain tangible personal property used in Company’s
bakeries is exempt from Colorado sales and use tax pursuant to section 39-26-709(1)(a)(II) and
(2), C.R.S., and related state-administered local taxes.
Conclusion
Company’s purchase and use of the bakery equipment detailed herein is exempt from Colorado
sales and use tax pursuant to section 39-26-709(1)(a)(II) and (2), C.R.S. This exemption
applies to related state-administered local taxes except when the bakery equipment is
purchased or used in a locality that has not adopted the optional manufacturing machinery and
machine tools exemption.
Background1
Company operates retail stores worldwide, most of which are in the United States. Within these
stores, Company sells varied merchandise, including packaged food and sundries (such as dry
grocery, frozen foods, drinks, candy, liquor, and tobacco); non-food items (such as electronics,
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 initial request or in any
supplement or amendment thereto, which is not an indication that the Department found such facts relevant to its
analysis. Some relevant facts may be redacted or omitted to ensure confidentiality as required by section 24-35103.5(5), C.R.S. The terms used in this section to describe the factual background are generally those of the
requester.

PLR 23-008
December 27, 2023
Page 2

major appliances, apparel, health and beauty aids, garden and patio, furniture, office supplies,
housewares, and jewelry); and fresh foods (such as meat, produce, and bakery items).
Company also sells goods and services ancillary to its primary retail business.
Almost all of Company’s stores include a bakery. Company’s typical bakery occupies 2,7003,000 square feet. Each bakery’s production facilities are segregated within a portion of the
store that is physically inaccessible to customers, and typically, only a portion of the production
facilities is visible to customers. The bakeries generally begin operations each morning at 4
a.m., hours before the store opens to customers.
Each day the store is open, each bakery produces, from raw ingredients, thousands of units of
freshly baked products, including muffins, croissants, rolls, bagels, bread, cookies, danishes,
cakes, mini-cakes, pound cakes, and pies. By way of example, a typical individual Company
bakery will sell, in a given week, approximately 2,000 “units” of croissants (with one dozen
croissants in each unit) and approximately 1,000 units of cookies (two dozen cookies in each
unit). The bakeries’ largest raw ingredient needs include flour, milk, eggs, sugar, oil, shortening,
yeast, butter, salt, chocolate, cream cheese, lemon juice, and an assortment of natural fillings
such as apples, pumpkin, and pecans. Company sources these raw ingredients from national
and local vendors. Its bakeries receive shipments of the raw ingredients 6 days per week.
Company produces many of its baked goods from scratch, using individual raw ingredients. For
example, it produces its cakes, muffins, pound cakes, mini-cakes, and many of its fillings and
icings, among others, entirely from scratch. For other of its baked goods, Company purchases
partially prepared materials from vendors, such as the dough for its bagels and artisan rolls.
All baked products are packaged for sale in large quantities (e.g., a minimum of one dozen
croissants or two dozen cookies) and/or large sizes (e.g., 4-pound, 12-inch pies). For many of
these products, the Company produces multiple varieties or flavors. For example, the bakeries
produce up to 4 different varieties of bagels, 4 varieties of bread, and 5 types of cookies at any
given time. Almost all of the baked goods are labeled and sold under Company’s proprietary
brand. All of the baked goods are packaged and sold for off-premises consumption.
A majority of the freshly baked goods are displayed in the store shopping area for selection and
purchase by customers. Customers wishing to purchase particularly large quantities of baked
goods may call in advance to place an order for pick-up.
Customers purchasing from Company’s bakeries may be end consumers or wholesale
customers. Many restaurants, coffee shops, and similar businesses purchase Company baked
goods, under exemption certificates, for resale in their own establishments. By way of example,
a cursory review of resale transactions in one recent week at one Company location revealed
that a coffee shop purchased 8 six-packs of muffins and 6 four-packs of danishes; a cafe
purchased 4 six-packs of muffins, 5 dozen croissants, and two dozen bagels; and a third
customer purchased for resale 4 six packs of muffins, two dozen bagels, and 8 four-packs of
danishes.
Each bakery requires substantial industrial baking equipment to satisfy its largescale production
needs. This equipment is used by Company solely for the production of baked goods. The
principal types of equipment purchased by Company for its bakeries—often found in multiple

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December 27, 2023
Page 3

quantities at any bakery—include the following:
•

Mixers: Motorized mixers, generally 80-quart or 140-quart in volume, mix large quantities
of raw ingredients to create a dough, filling, or glaze.

•

Bowl Lifts: Mechanical lifts raise the heavy bowls coming from the mixers to facilitate
pouring of mixed ingredients into the dough dividers and presses.

•

Dough Dividers, Bread Rollers, and Presses: Dividers cut mixed dough into desired
sizes. Bread rollers and presses manipulate the dough into desired thicknesses and
shapes (e.g., for bread loaves and pie crusts).

•

Depositors: Release prescribed quantities of mixed ingredients in precise locations on or
into baking sheets, muffin tins, or molds.

•

Unifillers: Deposit prescribed quantities of filling ingredients or icing on or into pies and
cakes.

•

Proofing Ovens and Baking Ovens: Proofing ovens introduce warm air and moisture to
dough mixtures to promote rising. Large ovens bake the risen dough.

•

Oven Racks: Racks are filled with unbaked goods and rolled into an oven, where a
clamp lifts the rack slightly off the ground to permit rotation during the baking process.
The racks turn throughout the baking process, ensuring an even distribution of heat
across the baked items. When the baking is completed, the racks are dropped back to
the ground and removed from the ovens. The baked goods will remain on the racks to
cool (before packaging). For certain items (e.g., cheesecakes), the racks may be placed
temporarily in the industrial refrigerator to speed the cooling process. Once the goods
are cooled, the racks are moved to “production tables,” where the individual items are
transferred, by employees, into containers for sale. The racks are never used to store
finished goods or to display them on the retail floor.

•

Glaze Sprayers: Spray liquified coatings, in consistent amounts and in precise locations,
generally onto baked goods.

•

Labeling Machines: Print labels for each of the packaged items, showing such
information as nutritional content, weight, and price. These machines only print labels for
individual packages for sale to Company’s customers.

For purposes of this PLR request, please assume the following: (1) that Company purchases
each of the foregoing items of equipment for a price in excess of $500; (2) that all of the subject
equipment would have qualified for the federal investment tax credit that was provided in section
38 of the Internal Revenue Code of 1954; and (3) that Company purchases all of the subject
equipment new (and therefore, the purchases would not have been subject to the former
investment tax credit limitation for used equipment).

PLR 23-008
December 27, 2023
Page 4

Discussion
Company’s purchase and use of the bakery equipment detailed above is exempt from Colorado
sales and use tax pursuant to section 39-26-709(1)(a)(II) and (2), C.R.S. This exemption
applies to related state-administered local taxes except when the bakery equipment is
purchased or used in a locality that has not adopted the optional manufacturing machinery and
machine tools exemption.
Colorado imposes a sales tax on most sales of tangible personal property at retail, as well as
certain services.2 Tangible personal property embraces all tangible or corporeal things and
substances which are dealt in, capable of being possessed, and exchanged.3 Retail sales
include all sales made within the state except wholesale sales.4 A wholesale sale is a sale by a
wholesaler to a retail merchant, jobber, dealer, or other wholesaler for resale and does not
include a sale by a wholesaler to a user or consumer not for resale.5 Colorado also imposes a
use tax upon the storage, use, or consumption of tangible personal property in this state
purchased at retail.6
The bakery equipment is tangible personal property, as all the items listed above are corporeal
goods that are dealt in, capable of being possessed, and exchanged. Company’s purchases of
the bakery equipment are purchases at retail because Company uses and does not resell the
bakery equipment.
Nevertheless, section 39-26-709(1)(a)(II), C.R.S., exempts from sales tax purchases of
machinery or machine tools, or parts thereof, in excess of $500 to be used in Colorado directly
and predominantly in manufacturing tangible personal property, for sale or profit. In order to
qualify for exemption, the purchase of the machinery must be of such nature that it would have
qualified for the investment tax credit pursuant to section 38 of the Internal Revenue Code.7
Section 39-26-709(2), C.R.S., provides a corresponding use tax exemption.
Each of the types of bakery equipment described above is machinery. “Machinery” means any
apparatus consisting of interrelated parts used to produce an article of tangible personal
property.8 That term includes both the basic unit and any adjunct or attachment necessary for
the basic unit to accomplish its intended function.9 Therefore “machinery” encompasses, for
example, a baking oven—which is used to produce baked rolls from raw dough. “Machinery”
also encompasses the oven racks described above because they are an adjunct or attachment
used by the oven to accomplish its intended function.
Company’s bakeries are engaged in manufacturing. “Manufacturing” means the operation of
producing a new product, article, substance, or commodity different from and having a
distinctive name, character, or use from the raw or prepared materials.10 Company’s bakeries
2 Section 39-26-104, C.R.S.
3 Section 39-26-102(15), C.R.S.; 1 CCR 201-4, Rule 39-26-102(15), paragraph (1).
4 Section 39-26-102(9), C.R.S.
5 Section 39-26-102(19)(a), C.R.S.
6 Section 39-26-202(1)(b), C.R.S.
7 Section 39-26-709(1)(e), C.R.S.
8 Id. at (1)(c)(II).
9 Id.
10 Id. at (1)(c)(III).

PLR 23-008
December 27, 2023
Page 5

operate daily to mass produce goods for sale at retail and wholesale. The process begins with
raw and prepared ingredients, which Company receives six days per week. These ingredients
are moved in a continuous and systematic flow through a series of steps using the industrial
machinery described above. In totality, this system of mass production, including the space and
machinery that comprise it, can properly be described as an “operation of producing.” Company
uses both raw and prepared ingredients. These ingredients are altered by this process resulting
in new products that are different from the raw and prepared ingredients.
The machinery is used directly in this operation of producing these new products. Although it
does not explicitly define the term “directly,” the statute instructs:
For purposes of this subsection (1), direct use in manufacturing is deemed to begin for
items normally manufactured from inventoried raw material at the point at which raw
material is moved from plant inventory on a contiguous plant site and to end at a point at
which manufacturing has altered the raw material to its completed form, including
packaging, if required. Machinery used during the manufacturing process to move
material from one direct production step to another in a continuous flow and machinery
used in testing during the manufacturing process is deemed to be directly used in
manufacturing.11
The building space, the machinery, and the other fixtures dedicated to this operation of
producing constitute a contiguous plant site. The bakeries are segregated areas within the
store where this manufacturing operation takes place. This space, and the equipment therein,
is employed exclusively for largescale production of goods, which makes these bakeries “plants”
within the common meaning of that term.12 Each piece of machinery (along with its adjuncts or
attachments, if any) either acts upon and has a positive effect on the baked goods being
produced,13 or it moves material from one direct production step to another in a continuous flow
through the packaging process. The labeling machine is used in this final step of packaging to
print labels for each package. The use of the bakery equipment as described is direct use in
manufacturing.
The bakery equipment is used predominantly (in fact, exclusively) for manufacturing as
described above. The oven racks, for example, are never used to store finished goods or to
display them in Company’s stores. The label machines only print labels for individual packages
for sale to Company’s customers.
As requested, we assume that Company purchases each of the foregoing items of equipment
for a price in excess of $500 and that Company purchases all of the subject equipment new.
We do not rule on whether the subject equipment would have qualified for the federal
investment tax credit that was provided in section 38 of the Internal Revenue Code of 1954
because you asked us to assume that it would have so qualified. If any of the bakery equipment
11 Id. at (1)(d).
12 See Plant, Merriam-Webster.com Dictionary, https://www.merriam-webster.com/dictionary/plant (last visited Dec.

26, 2023) (defining “plant” to mean, “the land, buildings, machinery, apparatus, and fixtures employed in carrying on a
trade or an industrial business,” or, “a factory or workshop for the manufacture of a particular product.”). When a
statute does not define an integral term, one may refer to a dictionary to determine the common usage of the term.
Breckenridge v. Egencia, LLC, 442 P.3d 969, 976 (Colo. App. 2018).
13 See Coors Brewing Co. v. Fagan, 949 P.2d 110, 113 (Colo. App. 1997).

PLR 23-008
December 27, 2023
Page 6
above would not have qualified, it is not exempt. Subject to this caveat, we rule that Company’s
purchase and use of the bakery equipment detailed above is exempt from Colorado sales and
use tax pursuant to section 39-26-709(1)(a)(II) and (2), C.R.S.
Finally, you requested a ruling confirming the application of this exemption to certain stateadministered local taxes, specifically, those imposed by the Regional Transportation District and
the Scientific and Cultural Facilities District. The Colorado Revised Statutes authorize cities,
towns, counties, and certain types of special districts to impose a sales tax.14 These sales taxes
are collected, administered, and enforced by the Department in the same manner as the state
sales tax.15 Certain special districts, namely the Regional Transportation District,16 the Scientific
and Cultural Facilities District,17 and certain regional transportation authorities,18 also impose
general use taxes applicable to the property at issue in this ruling. This ruling will refer to the
taxes imposed by these cities, towns, counties, and special districts collectively as stateadministered local sales or use taxes.
In addition to these state-administered local sales taxes, certain self-collecting home-rule cities
may impose sales and use taxes under the independent authority allowed to them by the state
constitution.19 This ruling does not extend to the sales taxes imposed by those cities.
In most cases, state-administered local sales taxes are imposed upon the same property and
services subject to the state sales tax.20 Cities, towns, and counties are, however, permitted to
deviate from the state sales tax base with respect to certain optional exemptions.21 Importantly,
the exemption for sales of machinery and machine tools allowed by section 39-26-709(1),
C.R.S. will not apply to the sales taxes imposed by state-administered cities, towns, and
counties unless their local ordinances or resolutions expressly include the exemption.22
Therefore, our ruling with respect to the bakery equipment will only apply to those stateadministered cities, towns, and counties that have expressly adopted the exemption.
Department publication DR 1002 details which jurisdictions have done so.
Special district sales taxes differ in very limited respects, and those deviations are normally
14 Section 29-2-102, C.R.S. (regarding incorporated towns and cities); 29-2-103, C.R.S. (regarding counties). The

taxing authority for those entities that the Department refers to generally as “special districts” is found in the statutes
establishing or permitting the establishment of the entity. See, e.g., section 32-9-119(2)(a), C.R.S. (empowering the
board of the Regional Transportation District to impose a sales tax); 32-13-107(1)(a), C.R.S. (same with respect to
the board of the Scientific and Cultural Facilities District); 43-4-605(1)(j)(I) (same with respect to regional
transportation authorities).
15 Section 29-2-106, C.R.S. For special districts, refer to the enabling statutes as described in note 14, above.
16
Section 32-9-119(2), C.R.S.; Howard Elec. & Mech. v. Dept. of Revenue, 748 P.2d 1321, 1323–24 (Colo. App.
1988).
17 Section 32-13-107(1)(a), C.R.S.
18 Section 43-4-605(1)(j), C.R.S. Refer to Department publication DR 1002 for a list of regional transportation
authorities that impose a use tax.
19 Colo. Const. art. XX, § 6. Section 29-2-106(4) permits the Department to collect the sales taxes of home-rule cities
at their request. The Department generally does not distinguish these state-administered home-rule cities from other
state-administered cities and towns because subsection (4)(a)(I)(A) of that section requires them to conform their
ordinances to the requirements under article 2 of title 29 applicable to statutory cities and towns. This ruling applies
to state-administered home-rule cities accordingly.
20 Section 29-2-105, C.R.S. (with respect to cities and towns). For special districts, refer to the enabling statutes as
described in note 14, above.
21 Section 29-2-105(1)(d), C.R.S.
22 Id. at (1)(d)(I)(A) and (1)(d)(III).

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December 27, 2023
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mandatory.23 Neither the Regional Transportation District nor the Scientific and Cultural
Facilities District may deviate with respect to the exemption for machinery and machine tools.24
Therefore, our ruling applies to the sales and use taxes imposed by those special districts.
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.
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.

23 The most common deviation requires special districts to exempt sales of cigarettes from the districts’ sales taxes.

E.g., 29-1-204.5(3)(f.1), C.R.S. (regarding multi-jurisdictional housing authorities); 32-1-1003.5(5) (health assurance
districts).
24 See, section 32-9-119(2)(a), C.R.S.; 32-13-107(1)(a), C.R.S.