Colorado Sales and Use Tax
| Publication year | 1979 |
| Pages | 1874 |
1979, October, Pg. 1874. Colorado Sales and Use Tax
Although the Colorado sales and use tax(fn1) is imposed on a variety of transactions, its application to specific situations is sometimes overlooked or not fully appreciated. The consequences of such oversight or failure to assess accurately the impact of the tax are often significant, not only because the tax itself can be substantial, but because substantial penalty and interest liability can result from failure to pay the required tax.
This article generally explains the application of the Colorado sales and use tax and identifies a few areas in which the statute, as interpreted by the courts and the Colorado Department of Revenue, produces surprising or uncertain results. The article focuses on three general aspects of the sales and use tax: identification of the transactions that are subject to the tax, statutory exemptions from the tax, and certain procedural matters involved in collecting and paying the tax. A brief note on local sales and use taxes is included at the conclusion of the article.
The Colorado sales tax is imposed upon all retail sales of tangible personal property within the state and upon telephone and telegraph services, gas and electric services, food and drink served by restaurants and similar establishments, and the renting of rooms.(fn2) The use tax, which is intended to equalize the tax burden of those who purchase tangible personal property outside the state with those who purchase within the state, is imposed on the privilege of storing, using or consuming articles of tangible personal property purchased at retail.(fn3) The terms "sale" and "purchase" are defined to include installment sales, credit sales, and exchanges of property as well as sales for cash.(fn4) Both taxes are imposed at the rate of 3 percent of the "sales price" (in the case of the sales tax) or the "storage or acquisition charges or costs" (in the case of the use tax).(fn5) Both taxes are imposed upon the ultimate user or consumer of the tangible personal property, although, as will be described in more detail below, "retailers" are generally required to obtain sales tax licenses and collect sales tax from their customers.
The distinction between those transactions that are subject to the sales and use
tax and those transactions that do not fall within the statutory definition of taxable transactions is not always clear. Although case law and regulations promulgated by the Department of Revenue(fn6) provide some guidance in identifying taxable transactions, there remain several areas of uncertainty. Questions in these areas generally involve one or more pivotal distinctions.
In order for the sales and use tax to apply with respect to an item of tangible personal property, there must first be a retail sale of that item. Wholesale purchases are not subject to the sales and use tax. However, the statutory definitions of "retail" and "wholesale" vary from the commonly accepted meanings of those terms. Under the statute, a wholesale sale is "a sale by wholesalers to retail merchants, jobbers, dealers, or other wholesalers for resale...."(fn7) A retail sale is any sale that is not considered a wholesale sale.(fn8)
The controlling factor in classifying a sale as a wholesale or retail sale is, therefore, the intended disposition of the property by the purchaser, rather than the character of the business of the seller or purchaser. Thus, a sale by a wholesaler to a retailer of tangible personal property that is used by the retailer rather than resold is a taxable retail sale. Similarly, any transaction involving a sale of tangible personal property for use by the buyer is a taxable retail sale, even if the seller is not a licensed retailer.
The determination of whether a particular sale is a sale for resale often necessitates identifying the ultimate consumer of the property involved in the transaction. The regulations create a rebuttable presumption that all purchasers except licensed retailers are the ultimate consumers of the property they purchase.(fn9) At the same time, the regulations also recognize that licensed retailers may be ultimate consumers in some cases. As a result, many parties who would not ordinarily be considered the ultimate consumers of property are designated as the ultimate consumers of property by the regulations and therefore are liable for sales tax on their purchases of such property.
For example, a contractor who purchases materials to be used in building a structure for another party is considered to be the consumer of those materials, even though the materials---in the form of a finished structure---will actually be owned and used by the third party.(fn10) Similarly, a dry cleaner is considered to be the consumer of items used in repairing articles of clothing, even though these items are transferred to and used by the owners of the articles of clothing.(fn11) Undoubtedly, an important factor underlying these rules is the fact that the items would escape sales and use tax entirely if they were not taxed at this "middleman" level---in the case of the contractor because the finished structure is real property and therefore not subject to sales and use tax, and in the case of the dry cleaner because the articles are used in a nontaxable service.
Another area in which the regulations identify a "middleman" as the ultimate consumer involves purchases of tangible personal property that is to be transferred to other parties free of charge. The regulations identify the purchaser as the ultimate consumer of items that he purchases and then gives away as gifts, prizes, or premiums.(fn12) Therefore, the purchaser is required to pay sales tax on his purchases of those items.
However, in many cases it may be unclear whether an item is being given away or whether it is being resold for a discount. For example, if a retailer offers a particular item free of charge to any customer who purchases another item of merchandise, the transaction could be viewed as either a gift of the first item (in
which case the retailer should have paid sales tax on his purchase of the item) or a retail sale of both items for a single price (in which case the retailer should not have paid sales tax on his purchase of either item).
Services, as a general rule, are not subject to sales and use tax, although, as indicated above, certain types of services (such as gas and electric services and telephone and telegraph services) are specifically made subject to the tax. However, when the performance of a service is accompanied by the transfer of tangible personal property, a question may arise as to whether there has been a taxable event and, if so, to what extent the value of the service involved in the transaction should enter into the tax base.
The regulation on service enterprises states that the determination of whether a particular transaction involves a sale of tangible personal property (which is taxable) or the provision of a service (which is not taxable) is based on the "true objects of the contract."(fn13) If the "true object of the contract" is the providing of a service, no sales or use tax is due on the contract price, even though some tangible personal property is transferred in the transaction. In such a case, the provider of the service is considered to be the ultimate consumer of the tangible personal property transferred in connection with the service, and he must pay sales or use tax when he purchases that property. On the other hand, if the "true object of the contract" is the transfer of tangible personal property, the entire transaction is taxable, without any deduction for the labor, skill, thought, time, or other expense of producing the property. While superficially simple, the application of this distinction to specific fact situations is not always easy.
The difficulties of...
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