How did Utah tax water-conditioning equipment sales and leases, repair parts, extended warranties, and a proposed monthly water-service fee?

Plain-English summary

Utah Private Letter Ruling 92-039 addressed water-conditioning equipment sales, leases, repairs, warranties, and a proposed effort to charge a monthly “water service fee” instead of rent.

The Commission approved the requester's first five statements of industry practice, clarified warranty and repair-part treatment, and rejected the proposed service-fee theory.

Approved industry practices

The requester's first five stated practices were:

1. A separately charged equipment-installation amount was exempt under Rule R865-19-78S.
2. The equipment sales price or rental charge was taxable unless a specific exemption applied.
3. Chemicals, salt, and similar supplies sold to the customer were taxable.
4. A normal lease's total monthly charge, including factored-in interest, was taxable; an installment lease purchase could use Rule R865-19-32S treatment.
5. Customer charges for repairs to attached equipment were taxable under Rule R865-19-78S.

The Commission said those five statements were correct.

Leased softeners and included maintenance

A leased or rented water softener remained tangible personal property even when attached.

When the lessor maintained it at no extra charge under a warranty included in the rent:

• Tax applied to the total rental charge.
• The rental charge included the cost of repair parts.
• The lessor's cost of those repair parts was not taxable.

Separately sold extended warranties

The result depended on the equipment's classification.

Warranty on leased equipment

A separately charged extended warranty sold to the lessee was taxable because the leased softener remained tangible personal property.

When the warranty charge was taxable, the cost of covered repair parts was not taxable.

Warranty on sold and installed equipment

A separately charged extended warranty on a softener sold and installed by the seller was not taxable because the installed softener was treated as real property.

When the warranty was not taxable, the cost of repair parts was taxable.

Proposed water-service fee

The requester proposed replacing rent with a monthly service fee and treating the provider as the consumer of equipment, repair parts, chemicals, and supplies.

The Commission rejected that theory.

The customer had use or control of the equipment, and the primary activity was equipment use.

Changing the contract's label to a water-service fee therefore did not avoid tax on the customer charge.

Holding

Under the stated facts:

• The first five described industry practices were correct.
• An attached leased softener remained tangible personal property.
• The total rental charge was taxable.
• Parts used under maintenance included in taxable rent were not taxable to the lessor.
• An extended warranty on leased equipment was taxable.
• Repair parts covered by that taxable warranty were not taxable.
• An extended warranty on a sold-and-installed real-property softener was nontaxable.
• Repair parts under that nontaxable warranty were taxable.
• Relabeling rent as a water-service fee did not make the customer charge nontaxable.

What this means for you

Water-treatment lessors

Attachment alone did not turn leased equipment into real property under this ruling. Track taxable rent and whether maintenance is included or separately sold.

Warranty and repair providers

The historical treatment of repair parts changed depending on whether the warranty charge itself was taxable.

Contract drafters and accountants

A service label did not control when the customer used or controlled the equipment and equipment use was the primary activity.

Common questions

Q: Did an attached leased water softener become real property?

A: No. It remained tangible personal property.

Q: Was the total rental charge taxable?

A: Yes.

Q: Was an extended warranty on leased equipment taxable?

A: Yes.

Q: Was an extended warranty on a sold-and-installed softener taxable?

A: No, because the ruling treated that softener as real property.

Q: Could the lessor avoid rental tax by charging a water-service fee?

A: No.

Key source language

• Leased classification: “A leased or rented water softener, even if attached, would be considered tangible personal property.”
• Rental tax: “Tax would be due on the total lease/rental charge.”
• Warranty distinction: “If the extended warranty is subject to tax, then the cost of the repair parts would not be taxable.”
• Service-fee rejection: “The primary activity is the use of the equipment.”

Citations and references

• Utah Admin. Rule R865-19-32S
• Utah Admin. Rule R865-19-78S

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 92-039
• Scope note: the Commission accepted the first five practices as the requester stated them and separately corrected the proposed treatment of included warranties, extended warranties, repair parts, and the service-fee alternative.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response
October 29, 1992

October
29, 1992

XXXXX

Re:
Water Softener Sales & Leases

Dear
XXXXX:

Your
request for an advisory opinion that the "industry practice" of taxing the sale or lease of water conditioning equipment is correct and your request that an alternative procedure to tax the provider of a water conditioning service as the final consumer has been referred to the Auditing Division for their analysis. It is the division staff recommendation that:

1. The first five items in your statement of
   facts outlining industry practice for taxing water softeners are correct.

2.
A leased or rented water softener, even if attached, would be considered tangible personal property. The cost of parts used to repair a leased water softener at no extra charge (warranty included in the rental price) would not be taxable. Tax would be due on the total lease/rental charge which would include the cost of the repair parts.

3.
If an extended warranty is sold to a lessee for a separate charge, tax would be due on the charge for the extended warranty, since a leased water softener would be considered tangible personal property. If an extended warranty is sold on a water softener that is sold and installed by the seller, tax would not be due on the extended warranty since the water softener would be considered real property. If the extended warranty is subject to tax, then the cost of the repair parts would not be taxable. If the extended warranty is not subject to tax, the cost of the repair parts would be taxable.

4.
The theory that a lessor of a water softener or conditioning system could charge a water service fee which would not be taxable is rejected. The customer is the one who would have use or control of the equipment. The primary activity is the use of the equipment.

If
you do not agree with this determination, you may appeal to the Tax Commission for a formal hearing. The results of that hearing would constitute a declaratory judgment and be appealable to the Utah State Supreme Court. A Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are attached.

To
arrange for Americans with Disabilities Act accommodations, please contact the Tax Commission at (801) 530-6920, (801) 530-6077 or TDD (801) 530-6269 allowing three working days notice.

For
the Commission

Joe
B. Pacheco

Commissioner

Mr.
Joe Pacheco, Commissioner

Utah
State Tax Commission

Heber
M. Wells Building

160
East 300 South

Salt
Lake City, Utah 84134

RE:
Advisory Opinion Request - Application of sales tax to water conditioning services, warranty agreements and certain service contracts

Dear
Commissioner Pacheco:

In
order to clarify certain questions pertaining to water conditioning services, we are requesting the following two opinions.

Statement
of Facts - Many companies custom design, engineer and fabricate various types of water conditioning systems in addition to providing standard or stock equipment for water softening or treatment. In most cases, the value of the equipment needed to soften, treat and condition the water is substantial. The industry practice seems to be fairly consistent in that:

A
separate charge to install the equipment is considered exempt under Rule R865-19-78S (i.e., labor to attach equipment to realty is not taxable).

The
sales price or rental/lease charges are subject to tax unless there is some specific exemption.

After
installation, the customer purchases chemicals, salt, etc. and places them into units as needed. Purchase of such supplies from vendor of "conditioning equipment" is taxable.

If
the customer elects to rent or lease rather than purchase, an interest charge is factored into the monthly "rental" amount as provided by a rental/lease contract. Unless such lease is an installment lease purchase (i.e., tax may be paid on purchase price per Rule 32S), Utah sales tax is due on the total monthly charge.

Any
necessary charges to the customer for repairs to the equipment while it is so attached, is subject to tax under provisions of Rule 78S.

If
the lease/rental agreement requires the lessor to maintain the equipment at no extra charge (i.e., a warranty is included in rental price) and the equipment is "permanently" attached to realty, tax is due from the lessor on the cost of repair parts used.

If
an extended warranty is sold to the purchaser or lessor for a separate charge, tax would not be applied since "softener/treatment" equipment is attached to realty. However, any parts/supplies used for repairs would be subject to tax on the repairman's cost.

Advisory
Opinion Request - Based on the foregoing information, it is respectfully requested that the Commission find correct the policies as stated.

Statement
of Facts - It has been suggested that companies which design and fabricate specialized water treatment equipment could save their rental customers a substantial amount of tax by making a few contractual changes in their "lease" agreement. The proposal is to charge customers a monthly "water service fee" rather than a rental or lease charge. The "service contract" would require the owner (i.e., the lessor) to install the necessary "filtration/KvD" equipment, service the equipment as needed and be available for consultation. Under this service contract it is suggested that:

The
charge for service would not be taxable since there is not a sale, rental, repair or cleaning of tangible personal property.

Material
costs to manufacture the filtration equipment would be taxable to the owner (i.e., vendor that produces the equipment to provide water treatment service).

Other
costs to the vendor incurred in maintaining the filtration equipment and providing water treatment services (e.g., repair parts, needed chemicals, other supplies) would be taxable to the vendor as goods consumed.

Under
this proposed arrangement, the Tax Commission would realize the immediate benefit of tax up front at the time of manufacture of the equipment. The "service provider" would be considered the consumer of repair parts, supplies, etc. used in the maintenance of the equipment. The long-term result of changing from a lease/rental contract to a water treatment service contract would be a substantial savings to the vendor's customers.

Advisory
Opinion Request - Based on the foregoing information, it is respectfully requested the Commission agree that contractual agreements for a "water service" need not have sales or use tax added to the monthly "fee" and conversely applied only to the cost of equipment and supplies used.

If
you or your staff need additional information please advise; otherwise, we hope to receive an early reply.

Thank
you.

Respectfully,

XXXXX