United States

Colorado: Department Considers Taxability of Assembly and Installation Charges

Feb 01, 2016
From KPMG TaxWatch

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Recently, the Colorado Department of Revenue issued a private letter ruling addressing whether a taxpayer’s charges for assembling and installing closet organizational systems would be subject to Colorado sales tax. The taxpayer, a retailer of home organizational products, was planning to introduce a new product to help organize closets. Each product would be custom-designed based on customer-provided specifications. Once the taxpayer completed the product design, the component parts would be built by a third-party supplier and shipped by the supplier to the customer’s location. Subcontractors hired by the taxpayer would assemble the custom-made component parts and install the organization system at the customer’s location. On receipts provided to customers, the taxpayer planned to separately state a single charge for both assembly and installation of the system.  

The question posed to the Department was whether the assembly and installation charges would be included in the sales tax base.  Under Colorado law, sales of tangible personal property are generally subject to sales and use tax, while charges for performing services are not. However, charges for certain services are taxable if the service is incurred in connection with the manufacturing of a taxable product “made to order” or specifically designed for a single customer. The Department concluded that the assembly of the component parts into an organizational system at the customer’s location constituted manufacturing a product to a finished state, as the system was not fully finished until it was assembled. Therefore, the assembly charges would be taxable. The Department noted that installation charges are generally exempt from tax because installing a product is not considered part of the manufacturing process. However, because the taxpayer was not planning to separately state the installation charge, the entire charge for assembly and installation would be subject to tax.

If the taxpayer were to charge a customer separately for assembly and installation, the installation charges would not be taxable if the customer had a reasonable option to purchase only the finished product and not the installation service. On the other hand, if the customer would be required to purchase the installation services to purchase the finished product, the installation charge would be inseparable from the sale of the product, and sales tax would be calculated on the full purchase price. Please contact Stephen Metz at 303-382-7177 with questions on this private letter ruling, PLR-15-007.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.