Response
July 9, 1993
Request
March
11, 1993
Utah
State Tax Commission
Heber
M. Wells Building
160
East 300 South
Salt
Lake City, Utah 84114
Re: Advisory Opinion
Dear
Commissioners:
Please
be advised that this firm represents XXXXX d/b/a XXXXX.
We
have had the opportunity to discuss the XXXXX v. Utah State Tax Commission Case
with XXXXX and he has suggested that we request an advisory opinion from
you. My client is concerned that the
same rules be applied to all water softener companies so that they may compete
on a level playing field.
FACTS
XXXXX
has done business in Utah for many years and has collected and remitted sales
tax during all of that time. XXXXX
purchases materials from a vendor and assembles, customizes and attaches these
materials to the particular plumbing of its customers homes. Installation on the premises of a customer
is done either pursuant to a customer order rental agreement (Exhibit “A”) or a
Retail Installment Contract and Security Agreement (Exhibit “B”). The Rental Agreement is used as part of a
marketing strategy to place water softeners in homes. This strategy helps
overcome the initial reaction of customers who do not like the initial feel of
softened water. After using softened
water for a time many customers determine that they like it and often purchase
the water softener. The whole idea of
renting or leasing a water softener is to convert the Rental Agreement into a
sale. The Rental Agreement provides that XXXXX will apply the rental payments
towards the purchase price of a water softener if the water softener is
purchased within ninety (90) days of the date of the rental agreement.
Almost
without fail, XXXXX installs the water softeners, however in some rare cases a
customer will purchase a water softener to be installed by themselves or a
plumber which they hire. Once a water
softener is installed it cannot be removed without special tools, usually by a
qualified plumber.
ISSUES
PRESENTED
Please
address the amount of sales or use tax XXXXX should collect and when it accrues
under each of the following conditions:
1. Outright sale of a water conditioning unit
without installation.
2. Outright sale of a water conditioning unit
with installation.
3. In a case where a customer rents and then
purchases the unit within three (3) months:
I. Sales or use tax on interim rental payments;
ii. Sales or use tax upon ultimate sale of unit.
4. Rental then sale after three (3) months:
I. Sales or use tax on interim rental payments;
ii. Sales or use tax upon ultimate sale of unit.
5. Repairs to unit after sale.
6. Repairs to unit while it is being rented.
XXXXX
is also considering changing its documentation to provide for outright sale of
the water conditioning unit with a satisfaction guarantee. In the event a customer decided they did not
want to keep the unit they would only be obligated to pay XXXXX the fair rental
value while the customer retained the unit. Under such documentation please
address when and whether XXXXX would be required to collect sales or use tax
under the following conditions:
7. Sale of the unit with a three (3) month
right of the Buyer to have the unit removed with the Buyer only paying fair
rental value for the time in which the unit was in the Buyer's possession;
8. Sale of the unit with a three (3) year right
of the Buyer to have the unit removed with sole obligation of the Buyer to pay
fair rental payments;
9. Sale of the unit with unlimited right of the
Buyer to have the unit removed with XXXXX to receive payments equal to the fair
rental value.
RELEVANT
LAW
The
Utah Sales and Use Tax Act provides in pertinent part:
(1) There is levy to tax on a purchaser for the
amount paid or charged for the following:
(a)
Retail Sales of tangible personal property made within the State;
.
. .
(k) Leases and rentals of tangible personal
property the property situs is in this State, if the Lessee took possession in
this State, or if the property is stored, used or otherwise consumed in this
State;
Utah
Code Annotated Section 59-12-103(1)(a)(k) (1978).
The
Tax Act, however, also defines, “tangible personal property” as not including,
“real estate or any interest therein or improvements thereon . . .”. Utah Code Annotated Section 59-12-102
(13)(b)(I) (1978).
In
XXXXX v. State Tax Commission, 201 Utah Adv. Ret. 49 (1992) the Tax Commission
conceded that the sale of a water softener pursuant to a Sales and Installation
Contract is considered a sale of real property, not tangible personal property.
In its informal decision of XXXXX, the Tax Commission noted that, “[w] water
softeners which are sold and installed become part of the realty . . .”. As stated in the Tax Act, the sale of water
softeners, sold pursuant to sales and installation contracts, are sales of improvements
to real estate, and not sales of tangible personal property subject to sales
tax.
The
issue presented in the XXXXX case was, “Whether a lease agreement, prior to the
sale of an improvement to real estate, changes the nature of the improvement so
that it becomes taxable as the sale of tangible personal property under Section
59-12-103(1)(a).” Id. at 51.
The
Court of Appeals found that a lease agreement prior to a sale would not change
the rational or policy behind exempting the sale of a water softener under
either the Sales and Use Tax Act or the Tax Commission's owns rules.
The
Court of Appeals reasoned that, “XXXXX, like contractors in Utah Concrete, is a
real estate contractor. The sale of
materials by the vendor to XXXXX is taxable under Section 58. With the inseparable commingling of labor,
materials and real estate, XXXXX converts these materials into real property.
The tangible personal property in the form of materials is consumed to make the
water softener. XXXXX is the final
consumer. The Tax Commission has failed to show how the form of financing the
sale has any bearing on the rational or policy of taxing the final consumer.”
CONCLUSION
I
have enclosed the full text of the XXXXX case for your convenience in issuing
this advisory opinion. Hopefully, this
decision will be helpful to you in answering these questions, however, the
decision leaves many unanswered questions which we now request you to address.
Thank
you for your careful consideration of this matter.
Sincerely,
XXXXX
Enclosure
TO:XXXXX,
Director
FROM:
XXXXX, Secretary
DATE:
XXXXX
SUBJECT: Request for Advisory Opinion - No. 93-009DJ
Attached
is a request for an advisory opinion from XXXXX for XXXXX. Will you please review the request of XXXXX regarding
taxation of water softener companies.
Please
prepare the response for signature by the Commission as per the guidelines
established by them.
Thank
you.
XXXXX
Re:
Advisory Opinion - Sales Tax Applicability to Various Sales and Leases of Water
Softeners
Dear
XXXXX:
Your
request (copy attached) for an advisory opinion as to how sales tax applies to
your client's sales and/or leases of water softeners was referred to the
Auditing Division for their analysis.
The division's staff recommendations are as follows:
1. An outright sale of a water conditioning
unit without installation is, if sold to an end user, a taxable sale of
tangible personal property. Tax should
be collected from the customer and must be shown as a separate item on the
sales document.
2. In the case of an outright sale of a water
conditioning unit including installation to the real property, XXXXX is
considered the consumer of the tangible personal property converted to realty. As such, XXXXX is responsible for the tax on
its cost of materials so converted. Tax
should not be separately stated on any invoice or billing to the customer. XXXXX's tax liability may be extinguished by
paying the tax to its material supplier; or if the materials have been purchased
tax-free (as provided in Administrative Rule R865-19-23S, enclosed), XXXXX
should report and remit the tax directly on its return covering the period of
the transaction.
3.
and 4. In both cases of rentals with subsequent
purchases either within or after three months, the treatment is as follows:
I. Sales tax must be collected on the periodic
rental payments up to the point where a purchase option is exercised. Up to that point, we believe the water
conditioner is, by intent (and probably contractually), tangible personal
property. Rule R865-19-32S applies.
ii. At the time a purchase option is exercised,
the conditioner becomes real property and is deemed to be consumed by
XXXXX. If the contract is such that any
portion of the rental payments previously paid are refunded or applied against
the purchase, then the sales tax applicable to such credit or refund should
also be credited or refunded to the customer.
As in the case of the conditioner sold and installed outright, tax
becomes due from XXXXX on the cost of materials which have become realty at
time of sale. See Rules R865-19-20S and
R865-19-58S.
5. Charges for repairs to a unit after sale are
exempt. Again, XXXXX is considered the
consumer of any materials used and would owe the tax on the cost of such
materials. Rule R865-19-58S applies.
6. Charges for repairs made to the unit while
under rental are also exempt. Rule
R865-19-78S applies for purposes of repair services, tangible personal property
attached to realty in a permanent or semipermanent manners is treated as if it
were part of the realty. Again, XXXXX
is considered as the consumer of material used in performing the repair and
owes tax on material costs of items so used.
7,
8 and 9. If the contracts for these
three alternatives are termed as a sale and intent is to have the materials
treated as becoming part of the realty, then XXXXX is considered the consumer
of materials installed and owes tax on the material costs thereof. Subsequent removal, regardless of
time-frame, has no impact for sales or use tax purposes.
Since
the variety of transaction types results both in treatment of your client as a
retailer and lessor of tangible personal property required to collect sales
tax, and treatment as a consumer of material converted to realty, the
provisions of Administrative Rule R865-19-23S should be noted. In part, the
referenced rule indicates:
D.
If a purchaser is unable to segregate tangible personal property or services
which he purchases for resale from tangible personal property or services which
he purchases for his own consumption, everything should be purchased
tax-free. He must then report and pay
the tax on the cost of goods or services purchased tax free for resale but
which are used or consumed.
If
your client's purchases are such that the quoted portion of the rule applies,
then XXXXX should purchase tax-free, collect sales tax on the types of
transactions considered to be sales or rentals of tangible personal property,
and report the tax on items deemed consumed at the time it is determined
which treatment applies under the above
paragraphs.
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.
For
the Commission,
Joe
B. Pacheco