Response
October 29, 1992
October
29, 1992
XXXXX
Re:
Water Softener Sales & Leases
Dear
XXXXX:
Your
request for an advisory opinion that the "industry practice" of taxing
the sale or lease of water conditioning equipment is correct and your request
that an alternative procedure to tax the provider of a water conditioning
service as the final consumer has been referred to the Auditing Division for
their analysis. It is the division staff recommendation that:
1. The first five items in your statement of
facts outlining industry practice for taxing water softeners are correct.
2.
A leased or rented water softener, even if attached, would be considered
tangible personal property. The cost of parts used to repair a leased water
softener at no extra charge (warranty included in the rental price) would not
be taxable. Tax would be due on the total lease/rental charge which would
include the cost of the repair parts.
3.
If an extended warranty is sold to a lessee for a separate charge, tax would be
due on the charge for the extended warranty, since a leased water softener
would be considered tangible personal property. If an extended warranty is sold
on a water softener that is sold and installed by the seller, tax would not be
due on the extended warranty since the water softener would be considered real
property. If the extended warranty is subject to tax, then the cost of the
repair parts would not be taxable. If the extended warranty is not subject to
tax, the cost of the repair parts would be taxable.
4.
The theory that a lessor of a water softener or conditioning system could
charge a water service fee which would not be taxable is rejected. The customer
is the one who would have use or control of the equipment. The primary activity
is the use of the equipment.
Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously, if there are deviations from these facts,
this opinion may be negated.
If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are
attached.
To
arrange for Americans with Disabilities Act accommodations, please contact the
Tax Commission at (801) 530-6920, (801) 530-6077 or TDD (801) 530-6269 allowing
three working days notice.
For
the Commission
Joe
B. Pacheco
Commissioner
Mr.
Joe Pacheco, Commissioner
Utah
State Tax Commission
Heber
M. Wells Building
160
East 300 South
Salt
Lake City, Utah 84134
RE:
Advisory Opinion Request - Application of sales tax to water conditioning
services, warranty agreements and certain service contracts
Dear
Commissioner Pacheco:
In
order to clarify certain questions pertaining to water conditioning services,
we are requesting the following two opinions.
Statement
of Facts - Many companies custom design, engineer and fabricate various types
of water conditioning systems in addition to providing standard or stock
equipment for water softening or treatment. In most cases, the value of the
equipment needed to soften, treat and condition the water is substantial. The
industry practice seems to be fairly consistent in that:
A
separate charge to install the equipment is considered exempt under Rule
R865-19-78S (i.e., labor to attach equipment to realty is not taxable).
The
sales price or rental/lease charges are subject to tax unless there is some
specific exemption.
After
installation, the customer purchases chemicals, salt, etc. and places them into
units as needed. Purchase of such supplies from vendor of "conditioning
equipment" is taxable.
If
the customer elects to rent or lease rather than purchase, an interest charge
is factored into the monthly "rental" amount as provided by a
rental/lease contract. Unless such lease is an installment lease purchase
(i.e., tax may be paid on purchase price per Rule 32S), Utah sales tax is due
on the total monthly charge.
Any
necessary charges to the customer for repairs to the equipment while it is so attached,
is subject to tax under provisions of Rule 78S.
If
the lease/rental agreement requires the lessor to maintain the equipment at no
extra charge (i.e., a warranty is included in rental price) and the equipment
is "permanently" attached to realty, tax is due from the lessor on
the cost of repair parts used.
If
an extended warranty is sold to the purchaser or lessor for a separate charge,
tax would not be applied since "softener/treatment" equipment is attached
to realty. However, any parts/supplies used for repairs would be subject to tax
on the repairman's cost.
Advisory
Opinion Request - Based on the foregoing information, it is respectfully
requested that the Commission find correct the policies as stated.
Statement
of Facts - It has been suggested that companies which design and fabricate
specialized water treatment equipment could save their rental customers a
substantial amount of tax by making a few contractual changes in their
"lease" agreement. The proposal is to charge customers a monthly
"water service fee" rather than a rental or lease charge. The
"service contract" would require the owner (i.e., the lessor) to
install the necessary "filtration/KvD" equipment, service the
equipment as needed and be available for consultation. Under this service
contract it is suggested that:
The
charge for service would not be taxable since there is not a sale, rental,
repair or cleaning of tangible personal property.
Material
costs to manufacture the filtration equipment would be taxable to the owner
(i.e., vendor that produces the equipment to provide water treatment service).
Other
costs to the vendor incurred in maintaining the filtration equipment and
providing water treatment services (e.g., repair parts, needed chemicals, other
supplies) would be taxable to the vendor as goods consumed.
Under
this proposed arrangement, the Tax Commission would realize the immediate
benefit of tax up front at the time of manufacture of the equipment. The
"service provider" would be considered the consumer of repair parts,
supplies, etc. used in the maintenance of the equipment. The long-term result
of changing from a lease/rental contract to a water treatment service contract
would be a substantial savings to the vendor's customers.
Advisory
Opinion Request - Based on the foregoing information, it is respectfully
requested the Commission agree that contractual agreements for a "water
service" need not have sales or use tax added to the monthly
"fee" and conversely applied only to the cost of equipment and
supplies used.
If
you or your staff need additional information please advise; otherwise, we hope
to receive an early reply.
Thank
you.
Respectfully,
XXXXX