Taxability of Delivery Services in Colorado Before and After A.d. Store

• Publication year: 2002
• Pages: 97
• Citation: Vol. 31 No. 5 Pg. 97

31 Colo.Law. 97 Colorado Lawyer 2002.

2002, May, Pg. 97. Taxability of Delivery Services in Colorado Before and After A.D. Store

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97

Vol. 31, No. 5, Pg. 97

The Colorado Lawyer
May 2002
Vol. 31, No. 5 [Page 97]

Specialty Law Columns
Tax Tips
Taxability of Delivery Services in Colorado Before and After A.D. Store
by Andrew W. Swain
C 2002 Andrew W. Swain

This column is sponsored by the CBA Taxation Law Section to provide timely updates and practical advice on federal state, and local tax matters of interest to Colorado practitioners

Column Editor

John R. Wilson of Holland & Hart LLP, Denver - (303) 295-8000

About The Author:

Andrew W. Swain, Denver, a tax manager with KPMG LLP-(303) 382-7335, aswain@kpmg.com

The taxability of contemporaneously purchased delivery services is frequently contested in sales- or use-tax audits. This article addresses Colorado's rules regarding the taxability of such charges prior to the Colorado Supreme Court's holding in A.D. Store Co., their likely invalidation by the holding, and the case's effect on local taxation.

The taxability of freight, delivery, and transportation services ("delivery services") is almost always a contested issue in sales- or use-tax audits performed by Colorado or home-rule taxing jurisdictions. Taxing jurisdictions' statutes, ordinances, and regulations define when delivery services purchased contemporaneously with tangible property may be taxed.

Although taxpayers seemingly may satisfy the requirements making delivery services non-taxable, jurisdictions still attempt to tax them. Some of these attempts are simply aggressive auditing, while others derive from jurisdictions' failure to understand and consistently apply their own laws regarding the taxation of contemporaneously purchased delivery services. Added to the uncertainty is the Colorado Supreme Court's recent decision in A.D. Store Co. v. Executive Director ("A.D. Store"),1 which appears to make the taxation of most contemporaneously purchased delivery charges improper.2

This article discusses Colorado's rules regarding the taxability of contemporaneously purchased delivery services prior to the holding in A.D. Store, and their likely invalidation by the decision. It also examines A.D. Store's effect on the taxability of delivery services by Colorado's autonomous taxing jurisdictions, the home-rule cities.

Taxability of Delivery Charges Before A.D. Store

Colorado imposes sales and use taxes on the purchase price paid in conjunction with the sale, storage, use, or consumption of tangible personal property in the state.3 Colorado defines purchase price as "the price to the consumer."4 According to state tax statutes and regulations, Colorado imposes its sales and use taxes only on enumerated services - that is, services listed as taxable in the state's tax code, especially in CRS § 39-26-104.5 However, the Colorado Department of Revenue ("CDOR") has argued that the amount paid for delivery services can constitute a part of the taxable purchase price of the tangible property. The CDOR premises this argument on CRS § 39-26-102(12), which provides, in pertinent part, that sales tax is imposed on:

. . . the full purchase price of articles sold after manufacture or after having been made to order and includes the full purchase price for material used and the service performed in connection therewith. . . . [T]he sales price is the gross value of all materials, labor, and service, and the profit thereon, included in the price charged to the user or consumer. (Emphasis added.)

The CDOR interprets "service performed in connection therewith" to mean any services performed in connection with the sale of a completed product, rather than just those performed to create, produce, or manufacture a finished product for sale.6 Based on this interpretation, the CDOR argues that certain services are subject to Colorado's sales and use tax even though they are not enumerated as taxable in the state's tax statutes.7

According to the CDOR's reasoning, a non-enumerated service, such as a delivery service, is taxable because: (1) it was purchased and performed contemporaneously with the taxpayer's purchase of tangible personal property; and (2) the charge for the service - even if stated separately from charges for the property - appears on the invoice evidencing the purchase. Following this taxability rationale, the CDOR promulgated two general regulations on delivery services8 and one that specifically deals with sand and gravel.9 These three regulations are examined below.

The Numbered Regulation - The Passage-of-Title Rule

The first regulation, 1 CCR 201-4 § 26-102.7(a), deals with delivery services by amplifying the vague statutory definition of "purchase price." The regulation provides that the "purchase price" includes:

(5) Installation, delivery and wheeling-in charges included in the purchase price and not separately stated.

(6) Transportation and other charges to effect delivery of tangible personal property to the purchaser if the sales agreement requires such delivery to consummate the sale.

Generally, charges for transportation to the place where title is to pass are included in the purchase price and charges for transportation after title passes are not included; the determining factor is the agreement between the vendor and the purchaser. The manner of payment of the transportation charges does not control but may be evidence of the sales agreement. An actual discount given to a purchaser based on freight charges may be deducted from the gross price billed.

Colorado's use-tax provisions incorporate this same definition of purchase price.10

According to the flush paragraph after subsection (6) in the above-quoted numbered regulation, the CDOR adopts a general passage-of-title rule. Delivery services that occur before the passage of title are included in the taxable purchase price because a seller performs them to effect the sale, making their performance no different from any other service performed by the seller to complete a finished product for sale. On the other hand, separately stated delivery services that occur after title passage are excluded from the purchase price because: (1) they do not effect the sale since the property's purchase as a finished product did not depend on the seller's performance of delivery services before title passage; and (2) the contemporaneous purchase of separately stated delivery charges is equivalent to the purchaser's entering into a separate agreement with the seller or a third party to purchase non-enumerated, non-taxable delivery services. Many other U.S. states have adopted similar passage-of-title rules.11

The Special Regulation - F.O.B. Terms

Granted that the CDOR has adopted a passage-of-title rule in the numbered regulation, the question then becomes: What determines when title passes? The CDOR provides an answer in the second regulation, 1 CCR 201-5, Special Regulations: Freight, Delivery, and Transportation,12 in which the CDOR generally bases the taxation of delivery services on the moment at which title to property passes as determined by the F.O.B. designation. The special regulation provides the following:

(1) Where tangible personal property is sold "F.O.B. shipping point" and the purchaser at that point assumes the risks of ownership, and transportation costs do not appear on the seller's invoice, the cost of transportation paid by the purchaser to the carrier is not subject to the tax.

(2) Where tangible personal property is sold "F.O.B. shipping point" and the invoice allows a credit for transportation charges paid or to be paid by the purchaser, the tax shall be computed on the total invoice charge.13

(3) Where tangible personal property is sold on a delivered or "F.O.B. destination" basis, the tax...