Sales tax on invoices in Colorado

In Colorado, the form of your contract decides the sales tax. On a lump-sum contract you’re the consumer of the building materials and charge your customer no sales tax; on a time-and-materials contract you’re the retailer of the materials and collect sales tax on their marked-up price, but not on your labor.

Sales tax license: only if you collect

A retailer doing business in Colorado must get a sales tax license and collect sales tax on its retail sales of tangible personal property or taxable services made in Colorado. The tax is added to the price, and until your customer pays it, it’s a debt they owe you. If you fail to collect it, you’re still liable for the full amount. For contractors:

• Lump-sum contracts only: FYI Sales 6 says you don’t need a sales tax license, and should not get one.
• Time-and-materials contracts: FYI Sales 6 says you must have a sales tax license.
• Retailer-contractors need a Colorado sales tax license for each store location, under Special Rule 10.

Lump sum or time and materials

For Colorado sales tax, a contractor is anyone who performs construction work on real property for another party under an agreement. Special Rule 10 names building, road, grading and excavating, electrical, and plumbing and heating contractors among them.

• Lump sum (one price, materials not stated separately from labor): you’re the consumer of all the construction and building materials in the contract. Pay sales tax when you buy them, or use tax if the seller didn’t collect sales tax, and collect no sales tax from your customer.
• Time and materials (materials priced separately from labor): you’re the retailer of the construction and building materials. Buy them without paying sales tax, then collect sales tax from your customer on the marked-up price of the materials and remit it. Don’t collect sales tax on the labor.

FYI Sales 6 works through a $29,000 garage for a homeowner, with $15,000 of materials:

Step	Time and materials	Lump sum
The contract	$19,000 for materials (with $4,000 markup), $10,000 for labor	$29,000, not broken down
Buying the materials	No sales tax	State sales tax on $15,000
Collect from the homeowner	State sales tax on $19,000	No sales tax

Installed appliances, fixtures and sod: a retail sale

Special Rule 10 says an over-the-counter sale of a complete unit not made to order, with an agreement to install it, isn’t a building contract. The rule covers stoves, refrigerators, furnaces, air conditioners, washing machines, dryers, carpets, electrical fixtures, ready-made cabinets, storm and garage doors, storm windows, screens, sod and similar items. As the retailer-contractor, you collect sales tax from the purchaser, but installation charges segregated in the bid proposal or sales invoice aren’t taxable. Repairs of these articles aren’t repairs to real property.

Services: generally not taxed, with limits

Colorado doesn’t generally impose sales tax on services; it taxes telephone and telegraph services, and gas and electric service for commercial consumption. In a bundled sale of tangible personal property and a service, the entire price may be taxable unless certain conditions exist. Installation, delivery and other service charges tied to a sale of goods are part of the taxable price unless the service is separable (performed after the goods are offered for sale, with the purchaser free to decline it) and separately stated on the invoice or receipt.

Your invoice: the tax as a dollar amount

When you collect sales tax, disclose it as a separate and distinct item, stated as a dollar amount; the tax rate alone isn’t enough. If you give the buyer a receipt, invoice or other document showing the price, state the tax separately on it. Without such a document, show the tax on each item on signage the purchaser can clearly see.

On a lump-sum contract, your invoice carries no sales tax. On time and materials, the tax is on the materials only. FYI Sales 6 says a retailer-contractor shouldn’t collect tax on installation or labor charges listed separately on the bid proposal, sales invoice or contract.

Local taxes and home-rule cities

Cities, counties and special districts can tax sales within their boundaries. The Department collects the sales taxes of many cities, most counties and a number of special districts, and you report them on the same return as the state tax. In general, a sale takes place in a state-administered local jurisdiction when it’s delivered to the purchaser there. The Department’s GIS database finds the jurisdictions and rates for an address, and if you use it properly, you aren’t liable for local tax you failed to collect only because of an error or omission in it.

Certain home-rule cities administer their own sales taxes, outside the Department, and its Sales Tax Guide covers only state and state-administered local taxes. The Department’s DR 1002 (Colorado Sales/Use Tax Rates) gives details of local taxes and exemptions; the exemptions of state-administered local jurisdictions aren’t entirely identical to the state’s. For a home-rule city’s taxes, contact the city directly.

Building permits: no state-administered city or county sales tax applies to construction and building materials when you give the seller a building permit or similar document showing that local use tax has been paid or must be paid. Permits don’t affect state or special district taxes on the materials.

Tax-exempt customers: DR 0172 for each project

Construction and building materials you buy for projects for governmental entities (in their governmental capacities), charitable organizations (in their regular charitable functions) and schools not run for profit are exempt from state sales and use tax. The exemption doesn’t cover your equipment, supplies or tools. Before starting work, apply to the Department for a certificate on the Contractor Application for Exemption Certificate (DR 0172), one per project. A prime contractor gets one certificate and gives copies to its subcontractors on the project.