Were customer charges for provider-controlled water-conditioning systems taxable equipment rentals or nontaxable services?

Plain-English summary

The provider offered two water-conditioning arrangements. In the portable-exchange system, it replaced, cleaned, sterilized, and regenerated cartridges. In the automatic system, it installed tanks and a clock, checked the equipment regularly, added salt, and flushed accumulated minerals as needed.

Customers had virtually no operating control. They could not refill salt, change filters, or repair the equipment, and the provider retained ownership and control.

On those facts, both arrangements were services rather than equipment rentals. Customer charges were not taxable whether billed as a lump sum or separated into equipment and service charges. The October 2, 1984 changes did not make the service taxable, but the provider had to pay sales tax on taxable items used to provide it.

Common questions

Did separately stating an equipment charge create a rental? No under the described facts. What operational facts mattered? The provider retained ownership and control and performed all maintenance. Did the provider buy its inputs tax free? No; it paid tax on taxable items used in the nontaxable service.

Citations and references

The reproduced letter cites no numbered statute or rule. It references an enclosed proposed hearing decision that is not reproduced.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8503L0634C03

Original ruling text

March 22, 1985

Dear ***:

In our recent telephone conversation, you requested a ruling on the
effect of the October 2, 1984 law changes on your business. You provide
water conditioning and softening equipment to your customers.

Water conditioning or softening may be provided using one of two
systems. The portable exchange system contains a cartridge that
performs the necessary conditioning to produce acceptable water. When
the cartridge looses its effectiveness, you replace it with a fresh
one. You then clean, sterilize and regenerate the used cartridge before
returning it to service.

The automatic service system involves the installation of a resin bed
tank to remove minerals and a salt storage tank. The system is
regulated by a clock that you install. You make regularly scheduled
visits to check the clock, the salt and the build-up of minerals in the
resin bed tank. If the system needs it, you add salt and flush the
minerals from the resin bed tank.

The customer has virtually no operating control over either system. You
must perform all maintenance and service. The customer is not allowed
to refill the salt, change the filters, or perform any repairs to the
equipment. The equipment remains under your control and ownership.

In both of these situations, you are providing a service rather than
renting equipment. The amount you charge your customer is not taxable
whether you bill lump-sum or separately for equipment and service
charges. The October 2, 1984 law changes did not make this service
taxable. You must pay sales tax on any taxable items you use to provide
these nontaxable services.

The enclosed proposed hearing decision explains our position on water
softening and conditioning services in more detail.

This opinion is based on the facts presented. If there are additional
or different facts, the opinion may change.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the
Tax Administration Division.

Sincerely,

Tax Policy
Tax Administration Division