How did Utah tax water softeners sold with or without installation, rented before purchase, repaired, or sold under contracts allowing later removal?

Plain-English summary

Utah Private Letter Ruling 93-009 addressed a water-softener company that sold, installed, rented, and repaired units.

The Commission distinguished units that remained tangible personal property from installed units treated as real property.

That classification determined whether the company collected tax from the customer or instead paid tax as the consumer of materials.

Outright sales

Sale without installation

An outright sale of a water-conditioning unit to an end user without installation was a taxable sale of tangible personal property.

The company had to collect tax from the customer and show it separately on the sales document.

Sale with installation

When the company sold and installed a unit into real property, it was the consumer of the tangible personal property converted to realty.

It owed tax on its cost of the converted materials and should not separately state tax on the customer invoice.

The company could satisfy that liability by paying tax to its supplier. If it bought materials tax-free, it had to report and remit tax directly for the transaction period.

Rentals followed by purchase

The same treatment applied whether the customer bought within or after three months.

Before the purchase option

The company had to collect sales tax on periodic rental payments until the customer exercised a purchase option.

Until then, the unit was treated by intent, and probably by contract, as tangible personal property.

When the customer purchased

When the purchase option was exercised, the conditioner became real property and was treated as consumed by the company.

If prior rent was refunded or applied to the purchase, the sales tax attributable to that credit or refund also had to be credited or refunded to the customer.

The company then owed tax on the cost of materials that became realty.

Repairs

Charges for repairs after a unit's sale were exempt. The company was the consumer of repair materials and owed tax on their cost.

Charges for repairs while a unit was rented were also exempt. For repair-service purposes, Rule R865-19-78S treated tangible personal property attached to realty permanently or semipermanently as part of the realty.

The company again owed tax on the materials used in the repair.

Sale contracts allowing later removal

The proposed alternatives called the transaction a sale but allowed removal after three months, after three years, or without a time limit, with the customer owing fair rental value if the unit was removed.

If the contract was termed a sale and the parties intended the installed materials to become part of the realty, the company was the consumer and owed tax on material cost.

Later removal did not change that sales-or-use-tax result, regardless of the time frame.

Mixed resale and consumption purchases

The company acted as both:

• A retailer or lessor required to collect sales tax on tangible-personal-property transactions; and
• A consumer of materials converted to realty.

The response quoted Rule R865-19-23S for a purchaser unable to segregate resale items from its own consumption. Such a purchaser could buy everything tax-free, collect tax on taxable sales and rentals, and report tax when an item was instead consumed.

Holding

Under the stated facts:

• An uninstalled end-user sale was taxable.
• An installed sale becoming realty made the company taxable on material cost.
• Customer tax should not be separately stated on an installed real-property sale.
• Rental payments were taxable until the purchase option was exercised.
• Credited or refunded rent required a corresponding sales-tax credit or refund.
• At purchase, the company owed tax on materials becoming realty.
• Repair charges after sale or during rental were exempt.
• The company owed tax on repair materials.
• Later removal rights did not change a transaction intended as a real-property sale.

What this means for you

Water-treatment sellers and installers

Document whether a unit is sold uninstalled or installed as part of the realty. The distinction changes both the tax base and who remits the tax.

Equipment lessors

Track the exact date a purchase option is exercised and any rent credited or refunded. The ruling changed the unit's classification at that point.

Repair businesses

Separate exempt repair charges from the materials you consume, and verify the current treatment of both.

Common questions

Q: Was an uninstalled water softener taxable?

A: Yes, when sold to an end user.

Q: Did the installer collect tax from the customer on a unit becoming realty?

A: No. The installer owed tax on its material cost and should not separately state customer tax.

Q: Were rent payments taxable before purchase?

A: Yes, until the purchase option was exercised.

Q: What happened to tax on rent credited to the purchase?

A: The corresponding sales tax also had to be credited or refunded.

Q: Were repair charges taxable?

A: No under this ruling, but the company owed tax on repair materials.

Q: Did a right to remove the unit later prevent real-property treatment?

A: No, if the contract was a sale and the parties intended the materials to become part of the realty.

Key source language

• Uninstalled sale: “a taxable sale of tangible personal property.”
• Installed sale: “XXXXX is considered the consumer of the tangible personal property converted to realty.”
• Rental period: “Sales tax must be collected on the periodic rental payments up to the point where a purchase option is exercised.”
• Rent credit: “the sales tax applicable to such credit or refund should also be credited or refunded to the customer.”
• Repairs: “Charges for repairs to a unit after sale are exempt.”
• Removal rights: “Subsequent removal, regardless of time-frame, has no impact for sales or use tax purposes.”

Citations and references

• Utah Code Ann. § 59-12-103(1)(a), (k)
• Utah Code Ann. § 59-12-102(13)(b)(i)
• Utah Admin. Rule R865-19-20S
• Utah Admin. Rule R865-19-23S
• Utah Admin. Rule R865-19-32S
• Utah Admin. Rule R865-19-58S
• Utah Admin. Rule R865-19-78S

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 93-009
• Scope note: the response classified transactions by installation, rental status, purchase-option exercise, rent credits or refunds, repair timing, and contractual intent.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response
July 9, 1993

Request

March
11, 1993

Utah
State Tax Commission

Heber
M. Wells Building

160
East 300 South

Salt
Lake City, Utah 84114

Re: Advisory Opinion

Dear
Commissioners:

Please
be advised that this firm represents XXXXX d/b/a XXXXX.

We
have had the opportunity to discuss the XXXXX v. Utah State Tax Commission Case with XXXXX and he has suggested that we request an advisory opinion from you. My client is concerned that the same rules be applied to all water softener companies so that they may compete on a level playing field.

FACTS

XXXXX
has done business in Utah for many years and has collected and remitted sales tax during all of that time. XXXXX purchases materials from a vendor and assembles, customizes and attaches these materials to the particular plumbing of its customers homes. Installation on the premises of a customer is done either pursuant to a customer order rental agreement (Exhibit �A�) or a Retail Installment Contract and Security Agreement (Exhibit �B�). The Rental Agreement is used as part of a marketing strategy to place water softeners in homes. This strategy helps overcome the initial reaction of customers who do not like the initial feel of softened water. After using softened water for a time many customers determine that they like it and often purchase the water softener. The whole idea of renting or leasing a water softener is to convert the Rental Agreement into a sale. The Rental Agreement provides that XXXXX will apply the rental payments towards the purchase price of a water softener if the water softener is purchased within ninety (90) days of the date of the rental agreement.

Almost
without fail, XXXXX installs the water softeners, however in some rare cases a customer will purchase a water softener to be installed by themselves or a plumber which they hire. Once a water softener is installed it cannot be removed without special tools, usually by a qualified plumber.

ISSUES
PRESENTED

Please
address the amount of sales or use tax XXXXX should collect and when it accrues under each of the following conditions:

1. Outright sale of a water conditioning unit
   without installation.

2. Outright sale of a water conditioning unit
   with installation.

3. In a case where a customer rents and then
   purchases the unit within three (3) months:

I. Sales or use tax on interim rental payments;

ii. Sales or use tax upon ultimate sale of unit.

4. Rental then sale after three (3) months:

I. Sales or use tax on interim rental payments;

ii. Sales or use tax upon ultimate sale of unit.

5. Repairs to unit after sale.

6. Repairs to unit while it is being rented.

XXXXX
is also considering changing its documentation to provide for outright sale of the water conditioning unit with a satisfaction guarantee. In the event a customer decided they did not want to keep the unit they would only be obligated to pay XXXXX the fair rental value while the customer retained the unit. Under such documentation please address when and whether XXXXX would be required to collect sales or use tax under the following conditions:

7. Sale of the unit with a three (3) month
   right of the Buyer to have the unit removed with the Buyer only paying fair rental value for the time in which the unit was in the Buyer's possession;

8. Sale of the unit with a three (3) year right
   of the Buyer to have the unit removed with sole obligation of the Buyer to pay fair rental payments;

9. Sale of the unit with unlimited right of the
   Buyer to have the unit removed with XXXXX to receive payments equal to the fair rental value.

RELEVANT
LAW

The
Utah Sales and Use Tax Act provides in pertinent part:

(1) There is levy to tax on a purchaser for the
amount paid or charged for the following:

(a)
Retail Sales of tangible personal property made within the State;

.
. .

(k) Leases and rentals of tangible personal
property the property situs is in this State, if the Lessee took possession in this State, or if the property is stored, used or otherwise consumed in this State;

Utah
Code Annotated Section 59-12-103(1)(a)(k) (1978).

The
Tax Act, however, also defines, �tangible personal property� as not including,
�real estate or any interest therein or improvements thereon . . .�. Utah Code Annotated Section 59-12-102 (13)(b)(I) (1978).

In
XXXXX v. State Tax Commission, 201 Utah Adv. Ret. 49 (1992) the Tax Commission conceded that the sale of a water softener pursuant to a Sales and Installation Contract is considered a sale of real property, not tangible personal property. In its informal decision of XXXXX, the Tax Commission noted that, �[w] water softeners which are sold and installed become part of the realty . . .�. As stated in the Tax Act, the sale of water softeners, sold pursuant to sales and installation contracts, are sales of improvements to real estate, and not sales of tangible personal property subject to sales tax.

The
issue presented in the XXXXX case was, �Whether a lease agreement, prior to the sale of an improvement to real estate, changes the nature of the improvement so that it becomes taxable as the sale of tangible personal property under Section 59-12-103(1)(a).� Id. at 51.

The
Court of Appeals found that a lease agreement prior to a sale would not change the rational or policy behind exempting the sale of a water softener under either the Sales and Use Tax Act or the Tax Commission's owns rules.

The
Court of Appeals reasoned that, �XXXXX, like contractors in Utah Concrete, is a real estate contractor. The sale of materials by the vendor to XXXXX is taxable under Section 58. With the inseparable commingling of labor, materials and real estate, XXXXX converts these materials into real property. The tangible personal property in the form of materials is consumed to make the water softener. XXXXX is the final consumer. The Tax Commission has failed to show how the form of financing the sale has any bearing on the rational or policy of taxing the final consumer.�

CONCLUSION

I
have enclosed the full text of the XXXXX case for your convenience in issuing this advisory opinion. Hopefully, this decision will be helpful to you in answering these questions, however, the decision leaves many unanswered questions which we now request you to address.

Thank
you for your careful consideration of this matter.

Sincerely,

XXXXX

Enclosure

TO:XXXXX,
Director

FROM:
XXXXX, Secretary

DATE:
XXXXX

SUBJECT: Request for Advisory Opinion - No. 93-009DJ

Attached
is a request for an advisory opinion from XXXXX for XXXXX. Will you please review the request of XXXXX regarding taxation of water softener companies.

Thank
you.

XXXXX

Re:
Advisory Opinion - Sales Tax Applicability to Various Sales and Leases of Water Softeners

Dear
XXXXX:

Your
request (copy attached) for an advisory opinion as to how sales tax applies to your client's sales and/or leases of water softeners was referred to the Auditing Division for their analysis. The division's staff recommendations are as follows:

1. An outright sale of a water conditioning
   unit without installation is, if sold to an end user, a taxable sale of tangible personal property. Tax should be collected from the customer and must be shown as a separate item on the sales document.

2. In the case of an outright sale of a water
   conditioning unit including installation to the real property, XXXXX is considered the consumer of the tangible personal property converted to realty. As such, XXXXX is responsible for the tax on its cost of materials so converted. Tax should not be separately stated on any invoice or billing to the customer. XXXXX's tax liability may be extinguished by paying the tax to its material supplier; or if the materials have been purchased tax-free (as provided in Administrative Rule R865-19-23S, enclosed), XXXXX should report and remit the tax directly on its return covering the period of the transaction.

3.
and 4. In both cases of rentals with subsequent
purchases either within or after three months, the treatment is as follows:

I. Sales tax must be collected on the periodic
rental payments up to the point where a purchase option is exercised. Up to that point, we believe the water conditioner is, by intent (and probably contractually), tangible personal property. Rule R865-19-32S applies.

ii. At the time a purchase option is exercised,
the conditioner becomes real property and is deemed to be consumed by XXXXX. If the contract is such that any portion of the rental payments previously paid are refunded or applied against the purchase, then the sales tax applicable to such credit or refund should also be credited or refunded to the customer. As in the case of the conditioner sold and installed outright, tax becomes due from XXXXX on the cost of materials which have become realty at time of sale. See Rules R865-19-20S and R865-19-58S.

5. Charges for repairs to a unit after sale are
   exempt. Again, XXXXX is considered the
   consumer of any materials used and would owe the tax on the cost of such materials. Rule R865-19-58S applies.

6. Charges for repairs made to the unit while
   under rental are also exempt. Rule
   R865-19-78S applies for purposes of repair services, tangible personal property attached to realty in a permanent or semipermanent manners is treated as if it were part of the realty. Again, XXXXX is considered as the consumer of material used in performing the repair and owes tax on material costs of items so used.

7,
8 and 9. If the contracts for these
three alternatives are termed as a sale and intent is to have the materials treated as becoming part of the realty, then XXXXX is considered the consumer of materials installed and owes tax on the material costs thereof. Subsequent removal, regardless of time-frame, has no impact for sales or use tax purposes.

Since
the variety of transaction types results both in treatment of your client as a retailer and lessor of tangible personal property required to collect sales tax, and treatment as a consumer of material converted to realty, the provisions of Administrative Rule R865-19-23S should be noted. In part, the referenced rule indicates:

D.
If a purchaser is unable to segregate tangible personal property or services which he purchases for resale from tangible personal property or services which he purchases for his own consumption, everything should be purchased tax-free. He must then report and pay the tax on the cost of goods or services purchased tax free for resale but which are used or consumed.

If
your client's purchases are such that the quoted portion of the rule applies, then XXXXX should purchase tax-free, collect sales tax on the types of transactions considered to be sales or rentals of tangible personal property, and report the tax on items deemed consumed at the time it is determined which treatment applies under the above paragraphs.

For
the Commission,

Joe
B. Pacheco