Colorado Sales Tax and Independent Contractors – Facts Matter

Colorado Sales Tax and Independent Contractors – Facts Matter is a post about how to begin navigating the abyss of complexity.  The following is an overview of the last file I efficiently reconciled with the Colorado Department of Revenue.

Facts:

• Historically, the Colorado taxpayer’s customer engagement involves lump-sum building and construction contracts to deliver custom products or art.
• The taxpayer makes various purchases to fulfill these lump sum contracts predominantly or perhaps solely composed of building materials.

Analysis:

• CDOR FYI 6 advises that for lump-sum building contracts, the taxpayer is generally treated as the consumer of all building materials included in their customer contracts.
• Assuming the above point is accurate, the taxpayer must pay sales tax on the purchase of needed materials or use tax if the supplier did not collect sales tax at the time of the sale.
• Further clarification is germane for the taxpayer to differentiate whether delivered sales constructively constitute non-building or building materials.
  • CDOR FYI 6 defines building materials as materials incorporated into real property to such an extent that they lose their identity as tangible personal property and become an integral, permanent, and inseparable part of real property.
  • CDOR FYI 6 defines NON-building materials as a complete unit not made to order or because the delivered items are NOT incorporated into real property in such a way as to become integral and inseparable parts of the real property.

Opinion:

• The standing facts indicate that the taxpayer purchases building materials to construct their final delivered custom products.
• When the taxpayer engages exclusively for hire in lump sum contracts AND pays sales tax to the supplier source(s) for building materials, the following is interpreted as CDOR guidance:

• • A sales tax license is not required.
  • Sales tax is not assessed to its customers nor remitted to CDOR.
  • Form DR0100 is NOT required.

• Because the taxpayer sells custom works of art via lump sum contracts to customers, it seems to make sense that the taxpayer’s best practices for CDOR compliance should involve the following:

• • Paying sales tax when purchasing building materials.
  • Not charging customers sales tax.
  • Not remitting sales tax to CDOR.
  • Not filing CDOR Form DR0100.

• Further – assuming the taxpayer begins paying sales tax to its suppliers at the time of sale and adopts this operating SOP, it should close down its sales tax account with CDOR.
• The closest I’ve been able to come in supporting the above opinion is a CDOR Private Letter Ruling (PLR) involving the installation of private entry towers.
  • In this PLR, the towers are treated as building fixtures and deemed building materials for Colorado sales tax purposes.

Guidance:

• The safest next step to remove any likelihood of misunderstanding is to request a Private Letter Ruling from CDOR.
• The application request is $500 and would, IMHO, be worth the peace of mind of having our esteemed taxing authorities render their written opinion.
• Please feel welcome to use this email as a basis for the PLR request.

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