Was in-home water softening a service rather than lease because customers rarely manipulated units, and did periodic exchange matter?

Plain-English summary

A petitioner argued at unspecified redetermination hearing it provided service rather than leased equipment. Staff said lease need not be financing device or specified term; temporary possession while parties agree could qualify under former Civil Code section 1925. Important service elements alone did not decide.

Equipment attached to customer plumbing, operated in house under customer dominion/control and beyond petitioner's continuing dominion. Customer never/rarely manipulated it while operating, but neither did petitioner. Though not entirely free from doubt, staff found lease and recommended redetermination without adjustment.

Alternative theory also did not eliminate tax. If customer never possessed unit and petitioner instead processed customer-system water by ion exchange/deionizing, changed water properties were what customer bought. Section 6006(b) made processing sale whether processor equipment tax paid or not. All Item A charges would be taxable, not only 13.84% set up in determination as receipts from ex-tax units.

Petitioner could request oral Board hearing within 30 days. No request or final action appears. Undated note added after 1976 says issue now free from doubt and cites Culligan.

Live Annotation 330.3100 says residential unit attached by leasing company remains lease although periodically exchanged and homeowner does not manipulate it. Periodic exchange is absent from supporting letter. Live text omits temporary-possession law, service elements, petition/recommendation, alternative processing holding, Item A/13.84%, hearing offer and outcome gap.

No petition, hearing transcript/exhibits, customer agreement, unit or affixation record, service/exchange log, water/process evidence, Item A schedule, 13.84% computation, determination, oral-hearing request, final order, payment/refund, appeal or later outcome appears.

What this means for you

Document where unit sits, who can use/control/manipulate it, term and service/exchange obligations. Analyze both branches: customer possession may be lease; provider retention plus processing of customer water may itself be taxable sale.

Common questions

Did periodic exchange make service?

No under live annotation, but supporting letter does not state exchange fact. It relies on attachment and in-home control.

Did customer need manipulate unit?

No. Neither party normally manipulated it while attached.

Would processing theory produce no tax?

No. Letter says all Item A charges taxable under section 6006(b), regardless whether processor's equipment tax paid.

What was 13.84%?

Determination percentage attributed to ex-tax units. Supporting calculation and dollar amounts are absent.

Was recommendation final?

No. It offered oral Board hearing within 30 days; no request/order appears.

What did later source add?

Live annotation adds periodic exchange. Undated note adds that issue was free from doubt after Culligan.

Citations and references

• Former Civil Code section 1925 — agreed temporary-possession lease
• Revenue and Taxation Code section 6006(b) — alternative processing sale
• Culligan Water Conditioning, 17 Cal.3d 86 — later undated note; citation verified
• Item A/13.84% determination — identified, underlying record absent
• Live Annotation 330.3100 — adds periodic exchange
• Every petition/hearing/final-outcome record — absent

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.3100
• Original supporting opinion: 330.3100 PDF

Original ruling text

330.3100

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

November 8, 1968

Gentlemen:
You will recall that the issue presented at the hearing was whether your operations should be characterized as a service or as a lease of equipment to your customers. At the hearing you presented a number of factual points to support your argument that you are a service and not a lessor. It is the staff's position that the term lease is not limited to a transaction which is chiefly a financing device, nor is it necessary that a lease be for a specified period. A temporary possession for so long as both parties agree still qualifies as a lease (CC 1925). We recognize that a large number of leasing businesses extend expensive services to their lessees during the period of the lease. Therefore, we do not believe that it is solely determinative that your business has important service elements. We have focused our attention on the fact that the equipment is attached to the customer's plumbing system, and it operates in the house under his dominion and control and beyond the continuing dominion of the petitioner. It is significant that the customer never, or very seldom, manipulates the equipment while it is attached and operating, but neither does the petitioner. Although the matter is not entirely free from doubt, it seems to us that this fact determines the question, and we have concluded that petitioner is leasing the water softening units. Our recommendation will be that the redetermination be made without adjustments. We are aware, and so bring to your attention, how the tax law would apply to the opposite conclusion. It is your position that the customer does not obtain possession of the softener unit on his premises and that you are providing soft water which the customer then uses. In this instance the soft water "service" is the ion exchange or deionizing of water supplied by your client's water system. We note that the water has different qualities and properties after it has been softened. Petitioner has argued that the change in the water is what the customer is paying for, that the customer is completely unconcerned with the kind of tangible personal property which may be used by the petitioner to perform the service, and that the charge is due so long as petitioner provides soft water whether he uses any equipment or none. If the petitioner is right in that it does not lease, rent, hire or license equipment to customers for their water system, then the

petitioner is processing (softening) water for its customers with its own equipment. The processing of tangible personal property would constitute a sale (§ 6006(b)) whether or not the equipment of the processor is tax paid. All the Item A type of charges would be taxable, and not just the 13.84 percent of those charges which were set up in the determination as receipts attributable to units acquired ex tax. If you desire an oral hearing before the Board, please let us know within 30 days.

Very truly yours

Philip R. Dougherty
Tax Counsel

PRD: smk [lb]
Note: This issue is now free from doubt. Culligan (1976) 17 C 3d 86