Continental Water Conditioning Co. of the Bay Area, Inc. v. State Board of Equalization

Opinion

STRANKMAN, J. By its complaint, appellant Continental Water Conditioning Company of the Bay Area, Inc. (Continental), a California corporation, sought the refund of a sales tax which it paid under protest to respondent State Board of Equalization (Board). Continental appeals from the judgment entered in favor of Board following trial. We affirm.

I

Facts

We adopt in essential part the facts set forth by Board in its respondent’s brief which we find are supported by the record. Continental is in the business of selling and servicing water purification tanks. Continental’s customers are industries and hospitals. The tanks contain resins which remove impurities from water by a “deionization,” or ion exchange process. After repeated use the resins in the tanks become depleted and are no longer usable to remove the impurities. It is then necessary to “regenerate” the resins by flushing them with chemicals. The flushing process is performed at Continental’s plants by trained operators. Typically, Continental removes the depleted tanks from its customers and replaces them with similar tanks which have been regenerated. The customer is charged for each replacement.

[785]The charges for replacing depleted tanks with regenerated tanks (regeneration charges) are separate from the charges Continental’s customers pay either to purchase a tank or to lease one on a monthly basis. Continental paid sales tax on the sales of its tanks to its customers and on the lease payments. It did not pay any sales tax, however, on the regeneration charges.

During an audit, the Board discovered that Continental had not paid any sales tax on the regeneration charges. The Board accordingly issued an assessment against Continental in the amount of $88,264.46 on these charges. Continental paid the amount of the assessment and then, after exhausting its administrative remedies, brought this action.

II

Issue

The sole issue on appeal is whether the regeneration charges are subject to the sales and use tax under Revenue and Taxation Code section 6001 et seq.1 The Board contends that the replacement of depleted tanks with regenerated tanks constitutes a taxable “sale” as defined under section 6006. Continental contends that the transaction is predominantly one for services and therefore not taxable as a sale.