87-1118 - Sales





            Petitioner,                                                         :           FINDINGS OF FACT,

                                                                                    :           CONCLUSIONS OF LAW,

v.                                                                                 :           AND FINAL DECISION

AUDITING DIVISION OF THE                                :           Appeal No. 87-1118

            UTAH STATE TAX COMMISSION,            :

            Respondent.                                                     :



            This matter came before the Utah State Tax Commission for a formal hearing on XXXXX.  Paul F. Iwasaki, Presiding Officer, heard the matter for and on behalf of the Commission.  Present and representing the Petitioner was XXXXX.  Present and representing the Respondent was XXXXX, Assistant Utah Attorney General.

            Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:


            1. The tax in question is sales tax.

            2. The period in question is XXXXX.

            3. The Petitioner manufactures water softeners which it rents and sells.  In renting or selling the water softening units, the Petitioner employs three different types of marketing strategies:

            1) The water softener is leased to the customer on a monthly rental agreement, which usually results in a rental period of two or three years.  Sales tax is imposed on the monthly lease payment as it is received by the Petitioner, and there is no dispute between the parties as to how these transactions are taxed.

            2) The water softener is sold to the customer on a furnish and install contract.  In this type of transaction, the Petitioner furnishes the materials and supplies and installs them as a water softener on the premises of the customer.  The Petitioner either pays sales tax to the vendor when materials are purchased, or, if the materials are purchased without the payment of sales tax, the Petitioner pays use tax when the materials are attached to real property. There is no dispute between the parties as to how these transactions are taxed.

            3) The water softener is leased to the customer for a period of time, but prior to the expiration of the lease, the customer purchases the water softener.  It is with respect to these transactions that a dispute between the parties has arisen as to how these transactions are to be taxed.

            4. For those water softeners which were leased and then later sold to its customers, the Petitioner would collect and remit sales tax on the lease payments as they were received.  Thereafter, if and when the lease was converted to a purchase, the Petitioner paid use tax on the cost of the materials used and not on the sales price of the water softener.

            5. Prior to the audit period, from XXXXX, the Petitioner had been collecting sales tax on the entire amount of the retail sales and was submitting them to the state.  The Petitioner stopped doing it because he was told by a competitor that water softeners were considered to be real property and should not be taxed.  As a result of this information, the Petitioner testified that he requested a meeting with the Tax Commission and at that time was informed that water softeners were considered to be real property and should not be taxed.  That meeting was conducted in approximately XXXXX.

            6. Although the Petitioner met with the Tax Commission, the appropriate method in determining sales tax on leases which were converted to sales was not discussed.

            7. The Petitioner also testified that in XXXXX he was audited by the Tax Commission and as a result of that audit no sales tax deficiency was assessed.  The Petitioner did not have any documentation to support his testimony.

            8. As a result of the audit conducted for the period XXXXX the Petitioner filed a Petition for Redetermination and an informal hearing on that Petition was held on XXXXX.

            9. On XXXXX, the Commission issued an informal decision which, in its findings stated:

            Water softeners which are first leased to a customer and then sold to that customer are subject to tax on the monthly rental payments for the duration of the lease, and are subject to sales and use tax on the residual sales price of the later sale of the water softener to that customer.

            In the Decision and Order section of that decision, the Tax Commission also stated, "Water softeners which are first leased and then sold to a customer become part of the realty at the time of the sale."

            10. Based upon the apparent confusion created by the informal decision of XXXXX, the Tax Commission, on XXXXX, held a hearing on the Respondent's Motion for Reconsideration and Clarification of the Informal Decision.

            11. On XXXXX, the Tax Commission issued its Order which held the purchases of water softeners by customers either during or upon the completion of a lease, as being taxable sales by the Petitioner.


            Tangible personal property which is attached to real property, but remains personal property, is subject to sales tax on the retail selling price of the personal property, and installation charges are exempt if separately stated.  (Utah State Tax Commission Administrative RuleR865-19S-51(E).)


            In the present case, the issue which has been before the Commission on at least two prior occasions, those being the informal hearing and the hearing on the Motion for Reconsideration and Clarification of Informal Decision, is the appropriate treatment to be given the taxation of those leases of water softeners which were subsequently converted to sales of the water softeners.

            Based upon the facts as presented at all stages of these proceedings, the Tax Commission finds that the leases of water softeners which were converted to sales are subject to sales and use tax on the residual sales price of the later sale of the water softener.  For example, if the sale is for $$$$$ less three lease payments of $$$$$ each, or a total of $$$$$, then sales tax must be collected on the residual purchase price of $$$$$.  This, of course, assumes that sales tax would have already been collected on the $$$$$ of lease payments.  The Commission thus affirms the Informal Decision of XXXXX and the Order of XXXXX.

            The Commission is not persuaded by any argument of the Petitioner that it had relied upon past representations made by former Tax Commissioners or Commission employees, when it claimed it met with those individuals in approximately XXXXX to ascertain the appropriate tax treatment which should be given to these types of transactions.  As testified to by the Petitioner's witness, the taxable treatment which should be accorded to leases which are subsequently converted to sales was not discussed with any of those individuals. Therefore, the Petitioner could not have relied upon such advice to his detriment.

            Based upon the foregoing, the Tax Commission affirms the Informal Decision and subsequent Order which affirms the determination of the Auditing Division in assessing sales tax on the sales price charged for leases of water softeners which were subsequently converted to sales.  It is so ordered.

            DATED this 6 day of February, 1992.


R. H. Hansen                                                                Roger O. Tew

Chairman                                                                      Commissioner

Joe B. Pacheco                                                            G. Blaine Davis

Commissioner   Commissioner