Did water-treatment programs sell chemicals or provide services when the provider also performed testing, studies, training, and chemical handling?

Plain-English summary

A water-treatment company offered testing, efficiency studies, laboratory work, inspections, training, special studies, chemical-container return, and treatment chemicals. It also separately charged $500 for test kits and solution; that sale was taxable.

Under the provider-administered program, the company delivered, distributed, and fed the chemicals while performing the broader program. California treated that lump-sum arrangement as a nontaxable service, with the provider consuming the chemicals and owing tax when purchasing or using them.

Under the self-administered program, the company only delivered the chemicals and the customer distributed and fed them. That program included a taxable chemical sale measured by the chemicals' usual list price. Separately stating chemical charges under either program also would create a taxable sale.

What this means for you

Water-treatment providers

Who applies and controls the chemicals materially changed the result.

Facility operators

Customer administration pointed toward buying chemicals rather than only a treatment service.

Accountants and tax professionals

Separate test kits, chemical list price, chemical handling, testing, and operational responsibility.

Common questions

Q: Was the provider-administered program taxable?

A: Not as a customer charge; it was treated as a service.

Q: Was the self-administered program taxable?

A: Its chemical component was taxable at list price.

Q: Was the $500 test-kit charge taxable?

A: Yes.

Q: What if chemical charges were separately stated?

A: The opinion would treat them as taxable property sales.

Citations and references

• The opinion states its conclusions without numbered statutory or regulatory citations.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0062
• Original supporting opinion: 515.0062 PDF

Original ruling text

515.0062

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 322-2976

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

April 8, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

Mr. R--- D--Supervisor
State & Local Taxes
N--- C--- Company
One --- Center
---, Il XXXXX-XXXX
Re:

────────
BURTON W. OLIVER
Executive Director

Application of Sales Tax to Contract for Water
Treatment With K--- N--- C--- Company
Account No. SZ --- XX-XXXXXX

Dear Mr. D---:
This is in response to your letter dated February 9, 1994 in which you request our opinion as to the application of tax to N--- C--- Company's (N---) contract with K--- P--- Co. (K---) for "water treatment services". N--- believes that the contract with K--- is one for a non-taxable service rather than a contract for a taxable sale of tangible personal property. Attached to your letter was a purchase order describing in detail the water treatment program. The program is divided into two types: the N--- Administered Program and the Self Administered Program. Under both programs, N--- is to provide the following:
•

2-4 service visits/month

•

complete testing of cooling towers each month

•

complete testing of boilers each month

•

complete testing of closed loop each month

•

Microbiological testing of cooling towers

•

90 day corrosion coupons for each tower and closed loop

Mr. R--- D---

-2-

•

chiller efficiency studies

•

boiler efficiency studies

•

condensate iron studies

•

OSHA training for operators

•

testing and control training for operators

•

available for equipment inspections

•

analytical laboratory services as needed.

•

special studies as needed.

April 8, 1994
515.0062

• softener elution studies
• boroscope inspection capabilities
• ultrasonic flow detector studies
• Metallorgraphic analyses
  •

quarterly business reviews

•

return of all chemical containers

•

deliver, distribute and feed all N--- chemicals

In addition to those items listed above, there is a one time $500 charge for test kits and solution. This separately stated charge for the sale of the kits is subject to sales tax. The remainder of the charges relate to the two types of water treatment programs consisting of the items listed above. Under the "Self Administered Program", N---'s responsibilities are identical except as to the last one listed above. Under this program, N--- delivers the chemicals only. K--- is responsible for distribution and feeding of all N--- chemicals. There is a lumpsum charge for the water treatment program at each of the various K--- locations and charges for the chemicals are not separately stated. If N--- were to separately state the charges for the chemicals, under either of the programs, we would regard the contract as including a sale of tangible personal property subject to sales tax. However, under the facts as related in your letter, we regard only the contract for

Mr. R--- D---

-3-

April 8, 1994
515.0062

the Self Administered Program to include a sale of the chemicals. Sales tax is due on the sale of the chemicals measured by the list price (the amount usually charged for the sale of the chemicals alone). In the N--- Administered Program, we regard this contract to be a non-taxable contract for services rather than a contract for the sale of the chemicals. Since you are regarded as consuming the property you incidentally transfer to your customers under this contract, the sale of such property to you is subject to sales tax, or your use of the property is subject to use tax. Our conclusions herein are based on the assumption that neither the service element nor the chemical element of the contracts is insignificant. If this assumption is incorrect, our conclusions would differ. If you have any further questions, please do not hesitate to write again. Sincerely,

Sukhwinder K. Dhanda
Staff Counsel
SKD:plh

cc:

Out-of-State Chicago Area Office