The Colorado Department of Revenue (DOR) issued a private letter ruling discussing the taxability of sales of grass seed, erosion control blankets and fertilizer to a construction contractor. Per the letter ruling, sales of grass seed and erosion control blankets are exempt from sales tax as construction and building materials if the sales are made to a construction contractor who provides a current contractor’s exempt certificate (DR 0163) to the seller. Sales of fertilizer are not exempt from sales tax as construction and building materials.
The phrase “construction and building materials” is not defined in a Colorado statute or rule. The letter ruling notes that the Court of Appeals has explained that the plain meaning of the phrase “construction and building materials” suggests that the materials must lose their identity and become a permanent part of the realty. The Court of Appeals’ analysis is consistent with the DOR rule that products that become an integral and inseparable part of the realty and are removable only with substantial damage to the premises lose their identity as tangible personal property.
The state’s exemption for construction and building materials generally applies to materials such as wood, cement, concrete, metals, bricks, and clay used in the construction of buildings. However, the DOR notes that the construction of structures, roadways, and other public works (as referenced in the exemption) can include landscaped areas. The DOR states that landscape construction generally involves altering the land to make it visibly functional. Landscaped areas are constructed using components such as grass seed and erosion control blankets that become a permanent part of the realty, similar to wood or metal. Therefore, sales of grass seed and erosion control blankets are exempt from sales tax as construction and building materials if a construction contractor provides a valid exemption certificate.
Landscape construction does not generally include regular maintenance of the landscaped areas – such as applying fertilizer – after construction. Since fertilizer does not contribute to landscape construction but rather landscape maintenance, fertilizer does not qualify for the exemption on construction and building materials.
This is a good example of a situation where an exemption may apply to sales or purchases that may not initially be considered exempt by a taxpayer. In cases where a taxpayer is uncertain if an exemption applies, it can be worthwhile to request a private letter ruling to get a state’s guidance.
(PLR 23-001, Colorado Department of Revenue, January 13, 2023)