Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 330.3095


330.3095 Waste Water Filtering System—Rental vs. Service. In determining whether providing a water filtration system is a lease of tangible personal property or the rendering of an exempt service, the decisive factor is the true object sought by the customer. The true object test was applied in Culligan Water Conditioning v. State Board of Equalization (1976) 17 C.3d 86. In its decision, the court said that the chief characteristic of a lease is the giving up of possession by the owner so that the customer uses and controls the rented property. In regard to water filtration systems, the customer controls the use of the system by determining when and how much water passes through the system. These factors also control how often the filtration elements or materials have to be replaced. The replacement activities were the only recognizable "services" provided in the contract. The court thus concluded that the true object was obtaining a properly generated and efficiently functioning water conditioning unit. These same principles that apply to water softening systems apply equally to a system for the removal of pollutants from waste water.

Therefore, the object of the contract is for use of the filtering system and not for the service the taxpayer provides by replacing the spent carbon. The customers seek tangible personal property and the taxpayer provides tangible personal property under a lease of tangible personal property to its customers. 10/6/93.