Were monthly water-softener equipment and maintenance services taxable when the provider kept control of the equipment?

Plain-English summary

A company supplied automatic water-softening equipment, kept control of it, checked it monthly, added salt, and performed repairs. Although the equipment generally remained the company's property, it became a permanent part of the customer's existing water system.

The Comptroller said this provider-controlled equipment-and-maintenance arrangement was a nontaxable service. The company, however, owed tax when buying the water-softening equipment, salt, and other items used to provide that service.

Different transactions produced different results. Selling and installing equipment that became part of an existing nonresidential building was taxable real-property remodeling on the total customer charge. Regularly scheduled maintenance described by Rule 3.357(a)(3) and (c)(2) was not taxable. Outright equipment rentals and outright salt sales required the company to collect tax from the customer.

What this means for you

The result depended on whether the business provided a controlled service, sold and installed real-property equipment, rented equipment outright, or sold salt. Keeping control of the system and providing all necessary maintenance supported the nontaxable-service treatment described in this letter.

Common questions

Was the monthly managed service taxable? No.

Who paid tax on the equipment and salt used in that service? The service provider paid tax at purchase.

What if the company sold and installed the equipment? The total charge was taxable as remodeling of existing nonresidential real property.

Was regularly scheduled maintenance taxable? No under the cited portions of Rule 3.357.

Were outright rentals or salt sales taxable? Yes.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(a)(3), (c)(2) — regularly scheduled maintenance and real-property remodeling

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9106L1116F09

Original ruling text

June 20, 1991

Dear **:

Thank you for your letter concerning applicability of sales tax to automatic
service water softener systems.

You stated that your company services automatic service water systems on a
regular monthly basis. You maintain control of the equipment; the customer does
not. You check the equipment, add salt as needed, and perform any repairs. A
letter to you dated August 24, 1990, indicates that you sell or rent and
install water conditioning equipment in existing nonresidential buildings. You
said that the equipment becomes a permanent part of the existing water system
although, in most cases, the equipment remains your property and is rented to
customers for indefinite lease periods. You provide all of the necessary
maintenance of the equipment.

When you provide the equipment and maintenance as stated above, you are
providing a service that is not taxable. The water softening equipment, salt,
and any other items used in providing the service are taxable to you at
purchase.

When you sell and install equipment that becomes a permanent part of an
existing nonresidential building, you are remodeling real property. You must
collect tax on the total charge to your customer for the sale and installation.
If you maintain the equipment on a regularly scheduled basis as described in
sections (a)(3) and (c)(2) of Rule 3.357, Real Property Repair and Remodeling,
the maintenance is not taxable.

If you make outright rentals of equipment or outright sales of salt, the tax
must be collected from your customer.

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 additional information, you may call toll
free 1-800-252-5555 or the regular number 512/463-4600. My extension is 3-4666.
You may write to the Tax Administration Division.

Sincerely,

Jo Ann Dieck
Tax Administration Division