Did connecting purchased water-purification components prevent a lessor from electing tax on cost, and was replaceable resin part of the lease?

Plain-English summary

A redacted senior manager asked about an unidentified client's leases requiring adjustments after property was put in place. The client connected fiberglass water-purification tanks to customer supply lines so water passed through chemically charged resin before continuing through the customer's plumbing.

The package contained a shell, boot, connectors, head, cap, collector and resin. Shell and boot arrived preassembled; the durable remaining pieces arrived prethreaded. A technician took about 10 to 12 minutes to connect them and fill the tank, adding an estimated $2 of labor to an average $150 component cost.

The opinion compared two historical irrigation examples. Adding a sprinkler head, welded coupler and latch left pipe in substantially the same form; expanding a pipe end, welding a coupling, drilling nine holes and adding gate valves did not. It placed this system in the first category because the client merely connected components so they operated together—expressly only if no component was altered first.

The lessor could therefore elect consumer treatment for the shell, boot, connectors, head, cap and collector. It could pay California tax to the vendor or directly with the timely return for the period of first rental service. Without that election, it had to collect lessee use tax measured by rent when paid.

The resin was different. The opinion expressly assumed periodic replacement, limited useful life and inability to reuse it. On those assumptions, resin was consumed in purifying customer water and transferred as a taxable sale rather than a lease. A timely resale certificate could support ex-tax supplier purchases.

Section 6596 was the only stated written-advice relief. It required a written request disclosing every relevant fact, including taxpayer identity. Because the representative did not identify the client, the opinion said it did not qualify.

The request, identity/contracts, component and resin invoices/tax, actual assembly and plumbing, resin lifecycle, election, resale certificate, returns, audit and later outcome are absent. Live Annotation 330.4188 omits the $2/$150 figures, irrigation-example details and section 6596 limit. It also says the unit was “substantially completed” before taxpayer preparation, wording the PDF does not use.

Common questions

Did simple assembly make the equipment different from what was acquired?

No on these facts, expressly so long as the components were not altered before connection.

What cost and work did the source describe?

About 10 to 12 minutes and $2 of added labor for components averaging $150 to acquire.

Could the lessor choose tax on the components' cost?

Yes, through the timely election described in Regulation 1660.

Was the resin treated as leased equipment?

No. The opinion treated the limited-life, nonreusable resin as sold to customers and taxable.

Were the resin's limited life and nonreuse established?

No. The opinion states those points as assumptions.

Could the unidentified client rely on this as section 6596 advice?

No. The opinion expressly says withholding the taxpayer's identity prevented that relief.

Citations and references

• Revenue and Taxation Code sections 6006(g), 6006.1, 6010(e) and 6010.1 — continuing-sale lease framework
• Sales and Use Tax Regulation 1660(c)(1) and (c)(3) — rent tax and purchase-price election
• BTLG Annotation 330.3980 (Nov. 1, 1967; Aug. 21, 1990) — two irrigation examples restated
• Revenue and Taxation Code section 6596 — reliance unavailable without client identity
• Live Annotation 330.4188 — published lease/resin result and added “substantially completed” wording
• Request, identity/contracts, purchases/tax, work/resin facts, election/certificate, returns/audit and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.4188
• Original supporting opinion: 330.4188 PDF

Original ruling text

330.4188

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION - MIC: 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P. O. BOX 942879, SACRAMENTO, CA 94279-0082)
TELEPHONE: (916) 327-2291
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

BURTON W. OLIVER
Executive Director

February 8, 1996

Ms. J--- L. P---, Senior Manager
---, --XXXXX --- --- Avenue, Suite XXX
---, CA XXXXX-XXXX
Re:

Modifications to Leased Property

Dear Ms. P---:
This is in response to your letter of January 2, 1996, in which you inquired about the application of California sales and use tax on leases of tangible personal property which require adjustments after the property is in place. Your client, who you refer to as “The Company,” leases fiberglass tanks which are filled with chemically charged resin for use as water purification systems. These tanks are attached to the customer’s water supply whereby the water passes through the resins which filter the impurities from the water before the water continues through the customer’s plumbing system. The leased “tank” package is comprised of a shell, a boot, connectors, a head , a cap, a collector and resin. The shell and boot are purchased pre-assembled and the remaining components, except the resin, are purchased pre-threaded. You explain that it takes approximately 10 to 12 minutes for a technician to install the components together and fill the tank with resin which results, according to your estimation, in approximately $2.00 in additional labor costs. You state that your client’s average cost in acquiring the tank and the necessary components for the water purification system is $150.00. In California, the general rule is that a lease of tangible personal property is a continuing sale and purchase. For most leases that are continuing sales, the applicable tax is the use tax which is measured by the rentals payable and which must be collected by the lessor from the lessee at the time the rentals are paid. (Rev. & Tax. Code §§ 6006(g), 6006.1, 6010(e), 6010.1,
& Reg. 1660(c)(1).)

Ms. J--- L. P---

-2-

February 8, 1996
330.4188

However, a lessor leasing tangible personal property in “substantially the same form as acquired” may elect to pay California tax or tax reimbursement measured by its purchase price. (Reg. 1660(c)(3).) A lease of such California tax-paid property is not a taxable continuing sale. The lessor may make this election by paying California sales tax reimbursement or use tax to its vendor when purchasing the property or by paying use tax, measured by the purchase price, directly to the Board with its timely return for the reporting period in which the property is first placed into rental service. When a lessor makes an election to pay tax on the purchase price it is making an election to be treated as the consumer of the property rather than the reseller to the lessee. Your question is whether the components that The Company purchases for the water purification systems it leases are considered to be leased in “substantially the same form as acquired.” Business Taxes Law Guide (BTLG) Annotation 330.3980 (11/1/67; 8/21/90), which discusses two separate leases of irrigation pipe and fittings, provides relevant examples for determining when property has been substantially changed from the form in which it was originally acquired. The first situation addressed by this annotation involves the lease of pipes and fittings in which a sprinkler head has been attached, a coupler has been welded to one end, and a latch has been attached to the other end. Under these circumstances it was concluded that the property was leased in substantially the same form in which it had been acquired. The second situation addressed by this annotation involves the lease of irrigation pipes and couplings in which the pipe has been altered by expanding one end and welding a coupling thereon and by drilling nine holes into the pipe with gate valves screwed into each of the holes. Under these circumstances, it was concluded that the property had been substantially changed from the form in which it was originally acquired. From the information you have provided it appears that the adjustments made by your client are analogous to the first circumstance addressed by Annotation 330.3980, that is, the adjustments made by your client were to connect the components together to enable them to operate as a water purification system. Thus, so long as the components are not altered prior to attaching them together, the components are leased in substantially the same form as acquired. Accordingly, under these circumstances, your client may elect to pay California sales tax reimbursement or use tax to its vendor when purchasing the components (except for the resin) that comprise the water purification systems or by paying use tax, measured by the purchase price, directly to the Board with its timely return for the reporting period in which the property is first placed into rental service. If your client does not make this election, use tax, measured by the rentals payable must be collected by your client from the lessee at the time the rentals are paid. This foregoing analysis only applies to your client’s purchase of the shells, boots, connectors, heads, caps, and collectors. The resin, we assume, is periodically replaced with new resin to filter out the impurities of the water. This being the case, the resin, which has a limited useful life and is not capable of being reused, is not leased but rather is consumed in the process of purifying the water for your client’s customers. Thus, your client’s purchase of the resin is for

Ms. J--- L. P---

-3-

February 8, 1996
330.4188

the purpose of reselling this product to its customers. Accordingly, the transfers of resin by your client to its customers are not leases but sales which are subject to sales tax. However, your client may purchase the resin ex-tax if it timely submits a resale certificate to its resin supplier. As I have previously explained, Revenue and Taxation Code section 6596 provides the only basis for relief from tax when a taxpayer reasonably relies on written advice from the board. The primary conditions to qualify are that the request for opinion must be in writing and must disclose all relevant facts, including the identity of the taxpayer. Since you have not identified your client, this opinion does not come within the provisions of section 6596. If you have any further questions, please feel free to contact us again. Sincerely,

Patricia Hart Jorgensen
Senior Staff Counsel
PHJ:cl
cc:

--- --- District Administrator