Use Tax on Construction Materials in Colorado

Colorado's use tax regime applies to construction materials purchased outside the state or acquired without paying Colorado sales tax, creating a parallel obligation that affects contractors, developers, and owner-builders on both public and private projects. This page covers how use tax is defined under Colorado law, how the tax is calculated and remitted, the most common situations that trigger liability, and the boundaries between taxable and exempt transactions. Understanding these mechanics is particularly relevant for projects spanning Colorado construction permits processes or governed by Colorado construction contract essentials.

Definition and scope

Use tax is a complement to sales tax. Where sales tax is collected by a vendor at the point of sale, use tax is self-assessed by the purchaser when materials are consumed, stored, or used in Colorado without having paid an equivalent sales tax. The obligation arises under Colorado Revised Statutes (C.R.S.) § 39-26-202, which imposes the tax on the privilege of using tangible personal property in the state.

For construction purposes, "tangible personal property" includes building materials, fixtures, equipment, and supplies that are physically incorporated into a structure or consumed during the construction process. The Colorado Department of Revenue (CDOR) administers the state-level use tax at a rate of 2.9% (Colorado Department of Revenue, Sales/Use Tax Rates), matching the state's general sales tax rate.

Scope and coverage limitations: This page addresses Colorado state-level use tax on construction materials only. Local jurisdictions — including Home Rule cities such as Denver, Aurora, and Colorado Springs — impose their own separate use taxes, which are administered independently of the state. Rates, exemptions, and filing requirements vary by municipality and are not covered here. Federal procurement rules, tribal lands, and out-of-state project work do not fall within this page's scope.

How it works

The use tax calculation and remittance process follows a defined sequence:

  1. Purchase without Colorado sales tax: A contractor purchases lumber, steel, or mechanical components from an out-of-state vendor or an online supplier that does not collect Colorado sales tax.
  2. Determine taxable cost: The taxable base is the purchase price of the materials, including freight charges to deliver them to the Colorado job site.
  3. Apply the applicable rate: The state rate is 2.9%. If the project is in a jurisdiction with a local use tax (e.g., Denver imposes a 4.81% combined rate as of its most recent published schedule), the local portion is added separately.
  4. Credit for taxes paid elsewhere: If the purchaser paid sales tax in another state on the same materials, Colorado allows a credit against the Colorado use tax liability — but only up to the Colorado rate.
  5. File and remit: Contractors and businesses registered with CDOR report use tax on the Colorado Sales Tax Return (DR 0100) or a dedicated use tax return (DR 0173 for consumer use tax). Filing frequency (monthly, quarterly, or annual) depends on the filer's average tax liability.
  6. Building permit trigger: Certain local jurisdictions — including several along the Front Range — collect use tax at the building permit stage, requiring payment before a permit is issued. This integrates use tax collection into the Colorado construction permits workflow directly.

Common scenarios

Out-of-state material purchases: A Denver commercial contractor orders $400,000 in steel framing from a Kansas supplier. The Kansas vendor does not collect Colorado tax. The contractor owes 2.9% state use tax ($11,600) plus any applicable local use tax.

Online and catalog purchases: Electrical subcontractors who purchase specialty components through national distributors that lack Colorado nexus face use tax liability on those purchases. Relevant licensing context for subcontractors is addressed under Colorado subcontractor licensing.

Materials used on exempt projects: Construction materials incorporated into projects for qualifying governmental entities or certain nonprofit organizations may be exempt. Exemption certificates must be properly documented and retained; CDOR may audit these records during examination.

Equipment vs. materials distinction: Use tax applies to consumable materials incorporated into structures. Construction equipment brought into Colorado temporarily for project use is generally subject to different treatment — the equipment itself may trigger a use tax filing only if it remains in the state permanently. Contractors should distinguish between materials (taxable on first use in Colorado) and rentals or equipment (governed by separate provisions).

Public projects: On publicly bid construction work, use tax obligations factor into bid cost calculations. This intersects directly with Colorado public construction bidding requirements, where misallocating tax costs can affect bid competitiveness and project viability.

Decision boundaries

The critical classification questions for Colorado construction use tax center on two contrasts:

Sales tax paid vs. not paid: If a Colorado-registered vendor collected Colorado sales tax at the correct rate at the point of sale, no use tax is owed on those materials. The obligation exists only where the correct tax was not collected — the two taxes are mutually exclusive on any single transaction.

Materials incorporated into real property vs. supplies consumed: Materials that become part of a permanent structure are taxed at the time of purchase or use. Supplies that are consumed during construction (drill bits, sandpaper, masking tape) may be treated differently depending on how CDOR and local jurisdictions classify them in published guidance.

Contractor-pay vs. owner-pay allocation: On some project types, contracts specify whether the contractor or the property owner bears use tax liability. Colorado law ultimately places the burden on the consumer of the materials, but contract language governs the internal allocation of that cost between parties. Disputes over this allocation can interact with Colorado construction lien law if tax costs are embedded in claimed amounts.

CDOR provides the DR 0173 form and associated instructions as the primary filing mechanism for consumer use tax, with detailed guidance available through the agency's Taxation Division resources at tax.colorado.gov.

References

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