Were provider-controlled portable-exchange and automatic water-softening systems taxable equipment rentals or nontaxable services?

Plain-English summary

The provider used two water-conditioning systems:

• a portable-exchange cartridge that the provider replaced, cleaned, sterilized, regenerated, and returned to service; and
• an automatic resin-bed and salt-storage system that the provider installed and visited on a schedule to check the clock, salt, and mineral buildup, add salt, and flush minerals.

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

The Comptroller therefore treated both arrangements as services rather than equipment rentals. Customer charges were nontaxable whether billed lump-sum or separated between equipment and service. The provider had to pay sales tax on taxable items used to perform the service.

The letter also said sales of water remained exempt.

What this means for you

The historical result turned on control and responsibility, not invoice labels. Separately stating equipment did not create a rental when the provider retained the equipment and handled every operational task.

Common questions

Were the customer charges taxable? No.

Did separate equipment and service billing change the result? No.

Who paid tax on taxable supplies or equipment used to provide the service? The provider.

Was the sale of water taxable? No, under the letter.

Citations and references

The letter cites no numbered statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8801L0855A09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

January 15, 1988

Dear **:

In your recent letter, you asked whether the October 1, 1987 and January
1,
1988 law changes affected the information in my letter to you dated March
22,
1985. The information I provided in that letter, which I've restated
below,
has not been changed by the recent legislation.

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. You must
pay
sales tax on any taxable items you use to provide these nontaxable
services.

As we discussed, the sale of water continues to be exempt from sales tax.

There may be other aspects of your business that were affected by the
recent
law changes. I will be glad to answer any other questions you have.

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 our
toll-free
number 1-800-531-5441. The regular number is 512/463-4600. You may write
me
at the Tax Policy Division.

Sincerely,
Mona Ezell Shoemate
Tax Policy Division