How is Texas sales tax applied to selling, renting, installing, or servicing water softeners and reverse osmosis units — and does it matter whether the units are plumbed into a building or whether the customer just pays for a water-conditioning service?

Subject

Water Softener/Conditioning Systems And Reverse Osmosis Units — Sale, Rental, Installation, And Service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9311109L

Plain-English Summary

A company that sells and installs water softeners and reverse osmosis units asked the Comptroller how sales tax applies to "a variety of situations" it runs into. Rather than giving one answer, the letter sets out a framework built on three variables and then works through the resulting scenarios:

1. Does title to the equipment pass to the customer? If yes, it's a sale. If the company keeps title, it is either renting the equipment or providing a water-conditioning service — and each has different tax consequences. (Note: under a lump-sum new-construction or residential repair/remodel contract, no technical "sale" of the equipment occurs to the end customer because the contractor is treated as the consumer of the equipment — but title still passes to the contractor's customer once the contract is complete.)
2. How is the unit attached? If it's plumbed into the building, it becomes an improvement to realty. If it isn't plumbed in, it stays tangible personal property. If the equipment is being rented under an operating lease, it remains tangible personal property regardless of how it's plumbed.
3. What kind of job is it? New nonresidential construction, new residential construction, residential repair/remodeling, or nonresidential repair/remodeling — each is treated differently.

Applying those variables, the letter reaches the following conclusions:

• New nonresidential construction, new residential construction, or residential repair/remodel, where the unit becomes an improvement to realty: The company is acting as a contractor and may use either a lump-sum or separated contract. Under a lump-sum contract, the company may pay tax to its suppliers on the materials incorporated into the realty (or accrue tax on materials pulled from a valid tax-free inventory); installation labor is not taxable; and the company may not bill the customer tax on the lump-sum total. Under a separated contract, the company may buy the materials tax-free with a resale certificate but must collect and remit tax on the agreed contract price of the materials (which can't be less than the company's cost); installation labor remains non-taxable. (Citing Rule 3.291(b)(3) and (4).) This section does not apply to leased equipment.
• Nonresidential sale-and-installation where the unit becomes an improvement to realty: If the equipment is sold (not leased) and plumbed into an existing nonresidential building, that work is repair/remodeling under Rule 3.357, and the total charge for labor and materials — whether billed lump-sum or separated — is taxable. A resale certificate can still be used for the materials incorporated into realty, with tax shown as a separate invoice line or included in the price.
• Sale or lease of equipment that does NOT become an improvement to realty (not plumbed in): Tax is due on the total sales price, including installation charges. A resale certificate may be used on materials incorporated into realty; tax can be itemized or stated as included.
• Service/maintenance work: No tax on scheduled/periodic maintenance labor if the equipment is an improvement to realty (residential or nonresidential — doesn't matter), but tax is still due on materials used in that maintenance (citing Rule 3.357(a)(3) and (c)(2)). Repair/maintenance of equipment that remains tangible personal property is fully taxable (materials may be bought tax-free with a resale certificate). Repairs to equipment that is an improvement to nonresidential realty are taxable on the total charge (materials and labor), with a resale certificate available for materials. Labor to repair equipment that is an improvement to residential realty is not taxable; materials follow the lump-sum/separated rules described above.
• Equipment rental (operating lease) for water conditioning: Tax is due on the rental payments, and on any separate maintenance/repair charges. The company may buy the equipment and installation/repair materials tax-free with a resale certificate.
• Pure water-conditioning service (no sale or rental — company keeps control of the equipment and just charges for the service): The service charge itself is not taxable, and no tax is due on installation or maintenance billed as part of that service. Instead, the company itself owes tax on the equipment and all materials it consumes to provide the service.

The letter also notes that the sample invoice the company submitted (a separated billing) is an acceptable format for new nonresidential construction or residential installation, provided the stated material price is not less than what the company paid, per Rule 3.291(a)(1).

What This Means For You

If you sell, rent, install, or service water treatment equipment (or similar plumbed-in equipment) in Texas: Your tax treatment turns on three questions for every job — (1) Who ends up owning the equipment: does title pass (sale), stay with you but the customer controls it (rental/lease), or stay with you while you just perform a service? (2) Is the unit plumbed into the building (improvement to realty) or not (tangible personal property)? (3) Is the job new construction/residential remodel, or nonresidential repair/remodel of an existing building? Answering those three questions for each transaction tells you which of the scenarios in this letter applies.

If you use lump-sum contracts for new construction or residential work: You pay or accrue tax on your materials, don't charge your customer tax on the lump-sum total, and installation labor is untaxed.

If you use separated contracts for new construction or residential work: You can buy materials tax-free with a resale certificate but must charge and remit tax on the contract price of those materials (never less than your cost); labor stays untaxed.

If you're doing repair/remodel work on an existing nonresidential building (equipment plumbed in): the whole charge — materials and labor together — is taxable, though you can still use a resale certificate on the materials and pass the tax through to the customer.

If you're just providing a water-conditioning service and never relinquish control of the equipment: your service charge, installation, and maintenance are not taxable to the customer — but you owe tax yourself on the equipment and materials you use to deliver that service.

Note on scope: This letter is explicitly based on the facts as presented by the requester ("If there are any additional or different facts, the opinion may change") and does not specify whether the underlying jobs are residential or nonresidential in every scenario — it instead lays out parallel rules for both.

Q&A

Q: We sell and install a water softener that gets plumbed into a customer's pipes as part of new home construction. How is that taxed?
A: As a contractor, you can choose a lump-sum or separated contract. Under lump-sum, you pay/accrue tax on your materials and don't bill the customer tax on the total; labor is untaxed. Under separated, you buy materials tax-free with a resale certificate but must collect and remit tax on the agreed materials price (not less than your cost); labor is still untaxed. See Rule 3.291(b)(3) and (4).

Q: We plumb a reverse osmosis unit into an existing commercial building (not new construction). Is that taxable differently?
A: Yes. Because the unit is sold and plumbed into an existing nonresidential building, this is repair/remodeling under Rule 3.357, and the entire charge for labor and materials is taxable, regardless of whether you bill lump-sum or separated.

Q: We sell a countertop reverse osmosis unit that is never plumbed into the building — the customer just hooks it up. How is that taxed?
A: Since it doesn't become an improvement to real property, tax is due on the total sales price, including any installation charge.

Q: We rent water softeners to customers under an operating lease. Do we charge tax on the rental payments?
A: Yes, tax is due on the rental payments, and on any separately billed maintenance or repair charges. You can buy the equipment and installation/repair materials tax-free with a resale certificate.

Q: We never sell or rent the equipment — we just charge customers a fee for a water-conditioning service and keep the equipment ourselves. Is that fee taxable?
A: No. If you retain control of the equipment and charge solely for the service, the charge is not taxable, and neither is installation or maintenance billed as part of it. However, you are required to pay tax yourself on the equipment and all materials consumed in providing the service.

Q: Is routine, scheduled maintenance on a plumbed-in unit taxable?
A: The labor is not taxable if the equipment is an improvement to realty (residential or nonresidential), but tax is still due on the materials used in that maintenance work, per Rule 3.357(a)(3) and (c)(2).

Q: What about a repair to a plumbed-in unit that's part of a residence versus a nonresidential building?
A: For residential real property, labor to repair the equipment is not taxable (materials follow the lump-sum/separated contract rules). For nonresidential real property, the total charge — both materials and labor — is taxable, though a resale certificate can still be used on the materials.

Original ruling text

November 22,1993

Dear **:

Thank you for your letter of October 16,1993. Your letter was addressed to
Louis Kienitz. I have been asked to review and respond to your letter.

As I understand it, your company is in the business of selling and installing
water softeners and reverse osmosis units. You question the taxability of a
variety of situations. Each situation is discussed below.

First a general discussion of the variables that affect taxability is in order.
These variables include title passage of the equipment, the method of attaching
the equipment to the realty, and the differences between selling the equipment,
renting the equipment, and retaining the equipment to provide a service.

If title to the equipment is passed to your customer, a sale has occurred.
(Technically, a sale of equipment does not occur under a lump-sum contract for
new construction or residential repair/remodeling because the contractor is
considered the consumer of the equipment purchased. However, title is passed to
the contractor's customer at the completion of the contract.) If your company
retains title to the equipment, a sale has not occurred. Rather, your company
is either (1) renting the equipment or (2) providing a water conditioning
service. The tax consequence is different for each situation.

Also important is the method of attachment. If the unit is plumbed into the
realty, the unit becomes an improvement to realty. If the unit is not plumbed
into realty, the unit is tangible personal property. If you are renting the
equipment under the terms of an operating lease, the equipment remains tangible
personal property regardless of how it is plumbed.

Your letter does not specify the type of job for which your questions are
intended. The following are situations you may encounter in either residential
or nonresidential jobs:

New nonresidential construction residential construction or residential
repair/remodeling sales and installation of equipment becoming an improvement
to realty.

Your company is a contractor and may choose either a lump-sum or separated
contract when installing the equipment as part of the new construction of a
nonresidential building or new construction or remodeling of a residence.

If you choose a lump-sum contract, you may pay tax on the materials
incorporated into the realty to your suppliers or you may accrue tax on
materials removed from a valid tax-free inventory. The labor for installation
is not taxable. You may not bill your customer for tax on the lump-sum total.

If you choose a separated contract, you may issue a resale certificate to
purchase tax free the materials incorporated into the realty. You must collect
and remit tax on the agreed contract price of the materials which may not be
less than your cost. Again, the labor for installation is not taxable. Please
refer to Subsections (b)(3) and (4) of Rule 3.291 for further guidelines on
lump-sum and separated contracts.

This section is not applicable to leased equipment.

Nonresidential sales and installation of equipment becoming an improvement to
realty.

If the equipment sold (not leased) is plumbed into an existing nonresidential
building, the work is repair and/or remodeling as defined in Rule 3.357. As
such, the total charge for labor and materials, whether billed lump-sum or
separated, is taxable. You may issue a resale certificate in lieu of tax on the
materials incorporated into the realty. You may show a separate line for tax on
your invoice or you may include a statement that tax is included in the charge.

Sales and installation of equipment that does not become an improvement to real
property.

If the equipment sold or leased is not plumbed in a manner to become an
improvement to real property, tax is due on the total sales price including
installation charges. You may issue a resale certificate to suppliers in lieu
of tax on materials incorporated into the realty. You may show a separate line
for tax on your invoice or you may include a statement that tax is included in
the total charge.

Service work:

No tax is due on scheduled and periodic maintenance labor if the equipment is
an improvement to realty. However, tax is due on all materials used to perform
the maintenance. Please refer to Rule 3.357 Subsections (a)(3) and (c)(2).
Whether the real property is residential or nonresidential does not matter.

Tax is due on repair or maintenance work to equipment that remains tangible
personal property. You may issue a resale certificate to purchase the materials
tax free. You may include a separate line on your invoice for the tax due or
may add a statement that tax is included in the amount charged.

Tax is due on the total charge (materials and labor) for repairs to equipment
that becomes an improvement to nonresidential real property. You may issue a
resale certificate to purchase the materials tax free. You may include a
separate line on your invoice for the tax due or may add a statement that tax
is included in the amount charged.

Tax is not due on labor to repair equipment that becomes an improvement to
residential real property. Materials are taxed in accordance with the type of
conk act written for the job - lump-sum or separated. (see above guidelines)

If your company is simply renting equipment for water conditioning, tax is due
on the equipment rental payments. Separate charges for maintenance or repairs
would also be taxable. You may issue a resale certificate to purchase the
equipment and the materials used in installation or repairs tax free. You may
include a separate line on your invoice for the tax due or may add a statement
that tax is included in the amount charged.

If your company does not rent equipment but charges solely for a water
conditioning service, (i.e. does not sell or relinquish control of the
equipment to the customer) the charge is not taxable. No tax is due on either
installation or maintenance. Your company is required to pay tax on the
equipment and all materials consumed to provide the service.

The sample invoice sent with your second letter is an example of a separated
billing. This is acceptable for a new nonresidential construction or
residential installation. Please note, the agreed contract price of materials
cannot be less than the price you paid for these materials. Please refer to
Section (a)(1) of Rule 3.291.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

If you have any questions or need additional information, you may call toll
free 1-800-531-5441, ext. 50037. The regular Austin number is 512-475-0037. You
also may write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division