How did Texas tax installing and maintaining reverse-osmosis water equipment when the company might sell, lease, or retain control of the units?

Plain-English summary

A company installed reverse-osmosis units in convenience stores, maintained the equipment, and received 50% of water-sale proceeds. The tax result depended on what the agreement actually transferred.

• If the company sold and installed equipment that became a permanent part of an existing nonresidential building, the full remodeling charge was taxable. Scheduled periodic maintenance described by Rule 3.357 was not taxable, but repair or remodeling was taxable.
• If the sold equipment did not become a permanent part of the real property, the full sale-and-installation charge was taxable as tangible personal property. Maintenance, repair, remodeling, and restoration were also taxable under Rule 3.292.
• If the company rented the equipment and gave the store operation and control, rent and the listed equipment services were taxable. The equipment remained tangible personal property under Rule 3.294 even if affixed, because the operating lease contemplated removal.
• If the company neither sold the equipment nor gave the store operation or control, it provided a nontaxable service. It did not collect tax on installation or maintenance, but it paid tax when buying the equipment.

What this means for you

Revenue sharing alone did not settle the tax answer. Ownership, permanence, operating control, and the sale-versus-lease-versus-service structure determined whether the company collected tax or paid tax as the equipment's consumer.

Common questions

Was every arrangement taxable? No. The retained-control service arrangement was nontaxable.

Was a sale and installation taxable? Yes, whether treated as nonresidential remodeling or as installed tangible personal property.

Was an equipment rental taxable? Yes.

Who paid tax when the company retained the equipment and control? The company paid tax on the reverse-osmosis equipment.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(a)(3) and (c)(2) — real-property repair and remodeling maintenance
• 34 Tex. Admin. Code Rule 3.292 — repair and maintenance of tangible personal property
• 34 Tex. Admin. Code Rule 3.294 — rentals and leases of taxable items

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9109L1131B05

Original ruling text

September 5, 1991

Dear **:

Thank you for your recent letter. According to your facts:

Company installs a reverse osmosis water unit in convenience stores. The
convenience store sells the water for i.e. 30 cents a gallon to customers
(non-taxable sale for sales tax). In return for installing and maintaining the
equipment the company receives 50% of the sales proceeds, solely based upon the
amount of water sold.

Whether Company is required to collect tax from a convenience store for
installing and maintaining the reverse osmosis water unit depends on the
circumstances and the type of contract or agreement between Company and a
store.

If Company sells and installs equipment that becomes a permanent part of an
existing nonresidential building, Company is remodeling real property. The
total charge to the customer is taxable. Scheduled, periodic maintenance of the
equipment (as described in Rule 3.357 (a](3] and [c][2], Real Property Repair
and Remodeling) would not be taxable, but repair or remodeling of the equipment
would be taxable. Company would be required to hold a sales tax permit and
could issue a resale certificate to purchase, tax free, the materials that are
incorporated into the customer's real property.

If Company sells and installs equipment that does not become a permanent part
of existing real property, then the total charge is taxable as sale and
installation of tangible personal property. In this situation, maintenance,
repair, remodeling, and restoration of the equipment would be taxable. (Rule
3.292, Repair, Remodeling, Maintenance, and Restoration of Tangible Personal
Property). Company would be required to obtain a sales tax permit and could
issue a resale certificate to purchase the equipment tax free.

If the agreement provides that Company is simply renting reverse osmosis
equipment to a convenience store, then company is required to collect tax on
the rental charges.

Charges for maintenance, repair, remodeling, and restoration of the equipment
would also be taxable. The equipment would remain tangible personal property
regardless of the manner in which it is affixed, because an operating lease of
equipment contemplates that the lessor intends to reclaim and remove the
equipment upon the expiration of the lease. Under an operating lease, the
agreement would provide that Company would relinquish operation and control of
the equipment to the lessee. Company would be required to obtain a sales tax
permit and could issue a resale certificate to purchase the equipment tax free.
(Rule 3.294, Rental and Lease of Taxable Items).

However, if the agreement clearly provides that Company neither sells the
equipment, nor relinquishes control or operation of the equipment, to a store,
then Company is providing a nontaxable service. In this situation, Company
would not be required to collect tax on installation or maintenance. Company
would be required to pay tax on the reverse osmosis equipment in this
situation. Company would not be required to hold a sales tax permit if this is
the only activity in which it is engaged.

This opinion is based on the facts presented. Different facts, though similar,
might lead to different answers. If you have further questions, feel free to
write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration