Revisiting construction equipment use tax and equipment declarations

As builders’ busy season kicks off, it’s a good time to review strategies to reduce tax liabilities
(Photo: Nuthawut Somsuk, Dreamstime)

With another spring construction season kicking off, here’s a timely reminder about construction equipment use tax and equipment declarations.

Related: Avoiding additional use tax with equipment declarations

There are 70 home-rule cities in Colorado. Many require contractors to submit an equipment declaration before bringing equipment into their city for a construction job. Doing so allows contractors to avail themselves of a proration of the city’s use tax. Typically for equipment that will spend 30 days or less in the city, cities allow a proration of 1/12th of the purchase price as the taxable amount.

Failure to file an equipment declaration can result in the city’s use tax being applied on the full original purchase price of the equipment, regardless of the equipment’s age or its current value, plus the assessment of penalties and interest.

Proration terms and refiling requirements for equipment declarations vary by city. Cities generally allow credit for sales or use tax lawfully imposed on the equipment by another comparable local jurisdiction.

Not all of the home-rule cities have a use tax on construction equipment, but contractors should definitely be mindful of sales tax due on rented or leased equipment used on job sites. See that your vendors charge you sales tax correctly, and update them on the location of leased equipment for proper taxation of subsequent lease payments.

Some cities do have a “first use” provision. It can serve as an exemption from use tax on tangible personal property (TPP) purchased and used elsewhere for a prescribed period or purpose. Some cities specifically exclude construction equipment from the exemption. Others have a first-use provision on “all TPP,” but believe that another part of their code negates the exemption of “all TPP” when it comes to construction equipment.

Recommendations for builder tax planning

  • Know before you go when considering doing construction work in the various local jurisdictions in Colorado. Start with an address verification to find out what taxing jurisdictions the jobsite is in.
  • Active Tax Planning: In the case of construction equipment, it’s generally best to file the equipment declarations if applicable to get a proration and reduce the tax liability. Even then, you may be best served to rent a piece of equipment and pay sales tax on the rental, rather than becoming subject to tax on the full original purchase price, or even on it at 1/12th of the original value.
  • Properly understanding the state’s requirements, plus county- and city-specific requirements, prior to choosing a development site or bidding on a project will bode well for all parties involved.
  • If claiming an exemption, be sure to follow qualification requirements and document such.

 

Alan Smith

Alan Smith is director of Sales Tax Colorado, LLC. He can be reached at [email protected].

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