Are CCTV consulting and project-management fees taxable in Colorado, and can a company credit sales tax it paid another state on equipment it bought to resell to its client?

Plain-English summary

A security company's subsidiary designs and manages closed-circuit / digital video-surveillance systems, offering three things: (1) consulting and design (site review, operational parameters, recommendations, cost estimates), (2) project management during installation (pre-install meetings, inspections, setup/programming, operator training, final certification), and (3) at the client's option, procuring the equipment on the client's behalf, then billing the client the equipment cost plus a 5% management fee. Vendors charge the company sales tax on the equipment. The company asked four questions.

1 & 2. Consulting and project-management fees — not taxable if separable and separately stated. Colorado taxes sales of tangible personal property, and services that are part of the sales price are taxed unless they're separable from the sale and separately stated (§ 39-26-102(12); A.D. Store Co., 19 P.3d 680 (Colo. 2001)). A retailer's help in selecting or custom-making a product is "part and parcel" of the sale and not separable; but genuinely separable services are not taxed. The Department couldn't tell from the facts, but said it likely won't challenge treating the consulting/PM fees as nontaxable if: the fee is charged even when the customer doesn't buy the equipment, there's no significant additional manufacturing after the consultation (only assembly of existing components), and — for project management — the customer has the option not to buy the PM service with the equipment.

3. No credit for tax paid to another state on a resale purchase. The company's resale of equipment to the client is a taxable Colorado sale, and the 5% management fee must be included in the tax base. The company's own purchase from the vendor is a sale for resale (wholesale) — on which tax isn't legally due in most states. Colorado gives a credit for tax paid to another state only if that tax was legally due there (§ 24-60-1301 (Art. V, ¶1); § 39-26-713(2)(f)). Since the wholesale purchase shouldn't have been taxed, neither the client nor the company gets a Colorado credit — the company should instead seek a refund from the state where it wrongly paid. (If that state rejects the refund on the ground that tax was legally due, the Department will re-examine whether to allow a credit.)

4. A related entity providing security services doesn't change the analysis. That [Company A] operates the CCTV at some sites doesn't alter the taxability of the consulting, PM, or equipment (same answer as #3).

What this means for you

Integrators selling systems plus services

To keep your consulting and project-management fees nontaxable, make them real, optional services: bill them even when the customer doesn't buy your hardware, state them separately, and don't fold meaningful fabrication into them. Services that are just steps in selling or custom-building the product get pulled into the taxable sales price.

Procurement markups are part of the tax base

If you buy equipment and resell it to your client, that resale is taxable — and your markup or "management fee" for procuring it is included in the taxable price. Don't treat the markup as a separate nontaxable service.

Don't pay wholesale tax and expect a Colorado credit

Colorado only credits tax that was legally due elsewhere. If you bought equipment for resale, the vendor's state generally shouldn't have taxed it — so there's no Colorado credit. Use a resale/exemption certificate up front, or pursue a refund from that state; don't expect Colorado to absorb a tax you shouldn't have paid.

Common questions

Q: Are consulting and project-management fees for a surveillance system taxable?
A: Not if they're genuinely separable from the equipment sale and separately stated — e.g., you'd charge them even without an equipment purchase, and no significant manufacturing follows. Services that are part of selling or custom-building the product are taxable.

Q: I bought the equipment and added a 5% fee to resell it. Is the fee taxable?
A: Yes. The resale is a taxable Colorado sale, and the management/procurement fee is included in the taxable price.

Q: Another state charged me sales tax on equipment I bought to resell. Can I credit it in Colorado?
A: Likely no. Colorado credits only tax legally due elsewhere, and a resale purchase generally isn't taxable. Seek a refund from that state instead.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department.

Citations and references

Statutes and cases:

• § 39-26-104(1)(a), C.R.S. — imposition of sales tax on retail sales
• § 39-26-102(12), C.R.S. — services in the sales price unless separable and separately stated
• § 24-60-1301 (Article V, ¶1), C.R.S. — credit only for tax legally due to the other state
• § 39-26-713(2)(f), C.R.S. — credit for tax paid to another state
• A.D. Store Co. v. Department of Revenue, 19 P.3d 680 (Colo. 2001) — services not taxable if separable

Related Colorado separability / credit letters:

• [[gil-07-001-motor-vehicles-leases-credit-for-taxes-paid-to-another]] — credit limited to tax whose legal incidence fell on the claimant
• [[gil-07-006-gift-card-stock]] — separable + separately stated bundling, and burden of proof
• [[gil-08-024-taxability-of-alteration-services]] — optional, separately stated services are not taxable

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-016.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2007-16

XXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
December 4, 2007
Re: taxability of services and equipment
Dear XXXXXXXXX,
This letter is in response to your letters to the Colorado Department of Revenue, dated June 14, 2007, re: the
taxability of products and services. We apologize for the time it has taken to respond to your inquiry.
Issues

1. Are the consulting services for digital video surveillance systems taxable in Colorado?
2. Are the project management services taxable?
3. Is property taxed in another state also taxable in Colorado?
4. Does the taxability of any service or product change if a related entity provides related services?
   Background
   You state that [Company A] provides security services and is incorporated in [State]. [Company A] has a
   “qualified” subsidiary, [Company B], which provides consulting and management of closed circuit television
   design and installation. These digital video surveillance systems are designed and used for security
   enhancement. [Company B] has three services, described below. [Company A] issues bills to customers on
   behalf of [Company B]. Some of the locations where [Company B] provide services, [Company A] provides
   security services. In such cases, employees of [Company A] operate the closed circuit television system that is
   installed by [Company B].
   The three services provided by [Company B] are:
5. [Company B] sends representatives to a client’s location and provide consulting and design services for
   digital video surveillance systems. These services include defining operational parameters, physical
   property review, and reports of technical recommendations and cost estimates. [Company B] bills for
   consulting services and related expenses incurred by the [Company B] representative who traveled to
   the location.
6. [Company B] provides project management during installation of digital video surveillance systems.
   These services include pre-installation meetings with the installation contractor, progress and technical
   inspections during installation, system set up and programming, training sessions with operators, and
   comprehensive inspection and certification following installation. [Company B] invoices for a project

management fee and associated expenses that [Company B] employees incur while working on the
project.

3. At the client’s option, [Company B] facilitates the acquisition of all required recommended equipment for
   a project. [Company B] acquires the items on behalf of the client. Vendors of the equipment charge
   [Company B] sales tax. [Company A] then invoices the client the costs incurred to acquire the
   equipment and a 5% management fee for the service and convenience that [Company B] provides.
   You ask a series of questions regarding the applicability of Colorado sales and/use tax based on the billing
   practices outlined above. You enclosed a sample billing statement.
   Discussion
4. Consulting services described in paragraph 1, above, are not taxable if separable from the sales of the
   equipment and the prices is separately stated on the invoice.
   Colorado imposes a sales tax on the sale of tangible personal property. §39-26-104(1)(a), C.R.S. Tax is
   imposed on all services that are part of the sales price, unless the services are separable from the sale of
   property and separately stated on the invoice. §39-26-102(12), C.R.S.; A.D. Store Co. v. Department of
   Revenue, 19 P3d 680 (Colo. 2001).
   A retailer will often provide its expertise in assisting a customer is selecting a product. For example, the tax on
   the sale of custom-made tangible personal property must include the cost of the retailer’s service rendered in
   connection with the manufacture of the product. Such services are part and parcel of the purchase of the
   product and the department will not view them as separable from the sale of the product. However, services
   that are “separable” from the sale of the product are not taxable.
   It is not clear from your letter whether the consulting services you provide are separable from the sale of the
   digital video system. For example, it is not clear whether consulting services you provide are chargeable even
   if the customer does not purchase your equipment or whether there is any additional manufacturing of the
   equipment resulting from the consulting. The department will likely not challenge the transaction if the company
   charges for the consulting fee even if the purchase does not purchase the equipment and if there is no
   significant additional manufacturing required after consultation, but only assemblage of existing equipment
   components.
   Please note, however, that the sales and use taxes of “home-rule” cities and counties in Colorado are not
   administered by the department. Please contact these home-rule governments for information about the
   applicability of taxes they levy. For a list of all cities, counties, special districts, and home-rule jurisdictions, see
   Department publication DRP 1002, which you can view and download from our web site at:
   www.revenue.state.co.us (go to Taxation > Forms > Businesses > Sales and Use Tax).
5. Project management fee described in paragraph 2, above, are not taxable if separable from the sale of the
   equipment and separately stated on the invoice.
   See response to Question No. 1, above. The department will likely not challenge the taxability of project
   management services if the customer has the option not to acquire project management services when it
   purchases the equipment.
6. [Company] is likely not entitled to a credit for taxes paid to another state.
   Colorado imposes a tax on the sale, use, storage or consumption or tangible personal property. In general, the
   incidence of sales or use tax should fall on the ultimate consumer. Thus, the sale by [Company B] to the client
   is subject to Colorado sales tax. The 5% management fee charged to the client for acquiring the equipment
   must be included in the sales or use tax calculation.
   [Company B’s] purchase from the vendor is a “sale-for-resale” (i.e., wholesale) transaction and, therefore, is not
   a taxable transaction in most, if not all, other states. Although Colorado allows a credit for taxes paid another
   state, the credit is allowed only if the tax was legally due in the other state. §24-60-1301 (Article V,
   subparagraph 1), C.R.S.; see, also, §39-26-713(2)(f), C.R.S. In the circumstances you describe, it is likely that

the tax was not due in the first state because most states have a “sale-for-resale” exemption from taxation.
Therefore, and assuming that the wholesale exemption applied to the purchase from the supplier, neither the
client, as the consumer, nor [Company B], as the retailer, are not entitled to a credit for tax paid to another
state.
[Company B] may have the right to claim a refund in states where it has paid sales tax on wholesale
transactions. Should the original state reject a request for a refund by you on the grounds that the transaction
was not a wholesale sale and, therefore, tax was legally due, then the department will re-examine whether to
grant a credit for the sale by [Company] technologies to the client.

4. Taxability of the above items does not change if [Company A] provides security services at the location.
   No. See response to Question 3, above.
   Finally, the Department makes a good faith effort to provide accurate and complete answers to questions posed
   to it by taxpayers. However, the information and answers provided here are not binding on the Colorado
   Department of Revenue, nor do they replace, alter, or supersede Colorado law and regulations. The Executive
   Director, who by statute is the only person having authority to bind the Department, has not formally reviewed
   and/or approved this response.
   Respectfully,

Office of Tax Policy
Colorado Department of Revenue