Consumable Personal Property
The Division developed and published the following policy language criteria, examples, and leased personal property provision to be considered together to aid in determining whether personal property is considered “consumable” and, therefore, exempt from property taxation pursuant to §§ 39-2-109(1)(e) and 39-3-119, C.R.S.
To be classified as “consumable,” personal property must fall under one of the following criteria:
- The personal property must have an economic life of one (1) year or less.
This criterion applies to any personal property regardless of the original installed cost. This category also includes non-functional personal property that is used as a source of parts for the repair of operational machinery and equipment with an economic life of one year or less.
- The personal property has an economic life exceeding one year, but the original installed cost including acquisition cost, installation cost, sales/use tax, and freight expense to the point of use, is $350 or less.
The $350 threshold should be applied to personal property that is completely assembled and ready to perform the end user’s intended purpose(s). The threshold should not be applied to the personal property’s or personal property system’s unassembled, individual component parts or separate accessories.
For more information, see ARL Volume 5, Chapter 7, Special Issues.
"First Use" Exemption
Exempted under § 39-3-118.5, C.R.S.
Business personal property shall be exempt from the levy and collection of property tax until such business personal property is "first used" in the business after acquisition. Taxpayers are to be given this exemption during the "window" between the date that the personal property is acquired and the date when the personal property is first used in the business.
The following criteria should be used when establishing the exemption period prior to first use:
- This policy applies to newly acquired personal property, whether it was acquired either new or used or for either a new or existing business.
- Information reported by the taxpayer on the applicable declaration schedule will be the primary source in establishing the period of exemption and the point in time when the property becomes assessable. The assessor should contact the taxpayer to resolve any questions regarding acquisition year and year of first use. In case of disagreement between the taxpayer and county regarding the year of first use, the burden of proof is on the taxpayer to substantiate the year the personal property was first used in the business. The Division has incorporated special language and formatting in all declaration schedules so that taxpayers can indicate both year of acquisition and year the personal property was first used in the business.
- Personal property that is on-site, but has not initially been put into service, qualifies for this exemption. The exemption also applies to property that is in a test or “shakedown” mode prior to being put into service. However, once personal property is put into service to function for its intended use it no longer qualifies for the exemption. This intended use may include testing property, research and development property, proof of concept property, and safety/emergency property. Personal property that is removed from service does not qualify.
- Until it is first leased, personal property newly acquired for lease by a lessor qualifies for this exemption. However, once this property is leased, it no longer qualifies for this exemption.
For more information, see ARL Volume 5, Chapter 2, Discovery, Listing, and Classification.
Residential Household Furnishings Not Productive of Income
Defined by § 39-1-102(6), C.R.S. and exempted under § 39-3-102, C.R.S.
Any household furniture and freestanding appliances and security systems found in private homes that are used to produce income at any time during the year are taxable for the entire year, otherwise they are exempt pursuant to § 39-3-102, C.R.S. Furniture, freestanding appliances, and security systems found in rental properties are taxable regardless of the terms or duration of the lease agreement or the physical characteristics of the rental property.
For more information, see ARL Volume 5, Chapter 2, Discovery, Listing, and Classification.
Inventories of Merchandise, Material, and Supplies
Defined by § 39-1-102(7.2), C.R.S. and exempted under § 39-3-119, C.R.S.
The elements of what constitutes exempt inventory include the following:
- Personal property which is held primarily for sale by a business, farm, or ranch;
- Component parts of personal property held for sale by a business, farm, or ranch or parts that are a part of the manufacturing process include:
- The personal property in these two categories include any inventory held for sale; raw materials, work in progress, and finished goods held by a manufacturer; and replacement parts inventory held for sale by manufacturers, wholesalers, or retailers. There is no difference in the inventory held for sale between a wholesaler or a retailer. Any personal property held for sale by a business, whose primary purpose is the sale of such inventory and that are listed as inventory on the company's financial records are exempt.
- The definition does not include equipment that is for sale by a business, which does not regularly engage in the sale of inventory. For example, an individual who claims that all of his furniture is for sale as of January 1 cannot have his property exempted as inventory. The primary use of the property is not to be held for sale; rather it is to operate the business.
- In addition, any property that is subject to an allowance for depreciation cannot be classified as exempt inventory. Careful examination of the taxpayer's financial records should reveal any allowances for depreciation taken. An exception to this requirement is property rented for 30 days at a time or less as provided for in § 39-1-102(7.2), C.R.S.
- Personal property that is held for consumption by a business, farm, or ranch
Supply property is generally considered to be consumed internally during the operation of a business, farm, or ranch and are not generally sold. Such things as paper, pencils, computer disks, baling wire, fuel, and fertilizer are normally included in this category.
- Rental property that is:
- Rented for thirty days at a time or less, and
- Which can be returned at the option of the person renting, and
- Is involved in transactions on which the sales/use tax will be collected before finally being sold, and
- Is not governed by the terms of a lease contract covering a specific period of time and which includes financial penalties for early cancellation.
In general, personal property held for rent or lease is taxable except for property with a life of less than one year, in which case, it is considered a supply and is therefore exempt. The language of § 39-1-102(7.2), C.R.S., exempts certain rental property under specific conditions. (The rental property for which exemption is claimed must meet all the criteria set forth in the law before it can be declared exempt.) The following describes certain types of personal property which are rented or leased and appear to conform, but in fact do not conform with the thirty days or less exemption criteria. This type of personal property can be discovered through the usual process of identifying such businesses and sending or delivering a personal property declaration schedule.
Automatic Rollover Leases
The personal property is typically rented for more than thirty days, even if the rental/lease agreement is structured to appear otherwise, then the personal property is actually rented for more than 30 days. Therefore, the personal property does not fall under the 30 days or less rental exemption. Examples of this type of personal property rollover leases would include water service bottle holders/dispensers and all rent-to-own furniture, appliances, construction tools, and equipment.
Service Organization Property Leases
Even if the personal property is "changed out" or replaced with an identical or closely similar property during a period of time of less than 30 days, these property are actually rented for more than 30 days. Therefore, the property does not fall under the 30 days or less rental exemption. Examples of this type of service organization property would include: compressed gas tanks, water service bottles, and live plant leasing companies.
Property Secondary (Sub) Leases
If the personal property is rented for thirty days or less and conforms to all other provisions of the 30 days or less rental exemption, but this property is leased for more than 30 days from an original distributor, the property does not qualify for the thirty days or less rental exemption.
In these cases, the personal property is actually owned by the original distributor, not by the company executing secondary (sub) leases with a consumer. Therefore, the property is actually leased for more than 30 days to the secondary lessor. Exemption of personal property held for rent in no way affects the assessment of any furniture or equipment used by the business. This property would be taxable so long as it does not meet any of the other requirements for exemption found in the law.
- Inventory owned by and in the possession of the manufacturer of the inventory when both of the following apply:
- The inventory is in the possession of the manufacturer after having been leased to a customer directly by the manufacturer.
- The inventory is designated for scrapping, reconditioning, renovation or remanufacture. Normal maintenance is not included in these criteria.
Personal property owned by manufacturers/lessors that were leased during the previous calendar year, but that have been returned to the manufacturer/lessor for scrapping, substantial reconditioning, renovating, or remanufacturing must be reported to the assessor for the assessment year following the year in which the personal property were put back into service.
The language of the statute only addresses machinery that had once been directly leased by the manufacturer to the customer and which has been returned to the manufacturer. The manufacturer must designate such property for scrapping or major reconditioning to qualify the property as exempt. Personal property that is leased through a third party or which have been returned for normal maintenance do not qualify as exempt.
Any leased property which has been returned to the manufacturer and which has not been designated for scrapping or substantial reconstruction cannot be classified as exempt inventory and must be reported to the assessor who will value and assess it as taxable equipment pursuant to § 39-5-107(1), C.R.S.