October 19, 2023
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter on behalf of ***** (the “Taxpayer”) in which you request a ruling on the sales tax implications of sales of security systems, cabling, and audio visual entertainment equipment. I apologize for the delay in responding.
FACTS
The Taxpayer sells, installs, services, and monitors security alarm systems, camera systems, smart home systems, and low voltage structured cabling. The Taxpayer requests guidance regarding the application of the Virginia retail sales and use tax to various transactions. The Taxpayer’s scenarios will be addressed separately below.
RULING
Installation of Tangible Personal Property into Real Property Generally
Virginia Code § 58.1-610 A provides that:
Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax to the extent required by this chapter.
Virginia Code § 58.1-610 D states that “tangible personal property incorporated in real property construction which loses its identity as tangible personal property shall be deemed to be tangible personal property used or consumed within the meaning of this section.” Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A provides, in pertinent part, that “[t]angible personal property incorporated in real property construction which loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor.”
Virginia Code § 58.1-603 imposes retail sales tax on “every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth…” “Retail sale” is defined, in part, in Virginia Code § 58.1-602 as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services under this chapter…”
The distinctions between real and tangible personal property have been addressed by the Virginia Supreme Court in Danville Holding Corp. v. Clement, 178 Va. 223 (1941) and confirmed in subsequent cases, such as Transcontinental Gas Pipe Line Corp. v. Prince William County, 210 Va. 550 (1970). Both cases provide a three-part test to determine if tangible personal property loses its identity and becomes real property upon installation. The three general tests are as follows: (1) annexation of the chattel to the realty, actual or constructive; (2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) the intention of the owner of the chattel to make it a permanent addition to the freehold. The intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture.
Title 23 VAC 10-210-410 B provides that a using and consuming contractor may also engage in the business of selling tangible personal property to customers and other contractors. In such cases, the Taxpayer is required to register with the Department and collect and remit the sales tax on the sales price of the property it sells at retail. If the sale and installation of tangible personal property does not meet all three of the tests set out in Danville Holding, the transactions are considered the sale of tangible personal property.
Scenario 1
The Taxpayer sells a security system and structured cabling package that includes the sale and installation of wireless security devices, hardwired security devices, network cabling, and TV/cable/satellite cabling to a homebuilder while the house is under construction. The sale and installation of the listed items are invoiced to homebuilders who will go on to sell the completed home to a homeowner. The monitoring of the alarm system would then be contracted directly with the homeowner independent from the homebuilder.
Because the Taxpayer sells its systems to homebuilders instead of homeowners, it would be considered to be engaged in the sale of nonmonitored security systems. Under Title 23 VAC 10-210-230 B, dealers engaged in the sale or lease and installation of nonmonitored burglar, security, or fire alarm systems are treated as making retail sales and are required to collect tax on the total charge for system components.
Title 23 VAC 10-210-230 B also states that separately stated installation charges would not be subject to the tax. However, all items used by the dealer in installing a system, i.e. wiring, nails, screws and other items which remain a part of the real property, are taxable to the dealer. The Department’s long-standing policy has been to treat wiring that remains a part of the building as an installation supply. See Public Document (P.D.) 90-210 (11/28/1990), P.D. 92-29 (4/20/1992), P.D. 95-106 (5/8/1995), P.D. 03-87 (11/12/2003) and P.D. 10-89 (6/4/2010). For items consumed during installation, the dealer should pay the tax at the time of purchase or, if the tax was not paid, accrue and remit the tax.
In some cases, the security and fire systems become part of the real property to which they are affixed. P.D. 21-76 (5/25/2021) provides an example of a system that was considered to be incorporated into real property. In this public document, the Department ruled that, when an integrated life safety system was installed in such a way that it became permanently affixed to the realty, the dealer is considered to be the end user and consumer of the property and must pay or accrue the use tax. When installing a wired security system into a building, the Taxpayer will need to evaluate whether (1) the system is annexed to the real property, (2) it is essential to the purpose for which the building is used or occupied, and (3) it is the intention of the party making the annexation for it to become part of the real property. Regarding the Taxpayer’s installation into a house, the homebuilder would be the party that would designate the intent of the annexation.
Scenario 2
The Taxpayer sells and installs wireless security devices. Such devices are installed in a home. The sale and installation is invoiced to homebuilders who will go on to sell the completed home to a homeowner. The monitoring of the alarm system would then be contracted directly with the homeowner independent from the homebuilder.
Like Scenario One, Scenario Two involves the sale of non-monitored security systems to homebuilders. As indicated above, dealers of non-monitored security systems are treated as making retail sales and must collect tax on the total charge for system components.
Unlike Scenario One, the security system involved is wireless. The wireless security system fails part one of the Virginia Supreme Court’s three-part test, “annexation of the chattel to the realty, actual or constructive,” as the system is not wired into the building but rather placed or fastened to the real property in some manner not arising to “annexation.” As such, the wireless security devices are different from the integrated life systems described in P.D.21-76. In that ruling, the Department found, in part, that the integrated life system satisfied part one of the three-part test because the systems were “fully integrated into telephone lines and are hard wired into the subject building in such a way that they become part of its electrical network.” While possible, the Department finds it doubtful that a wireless system would become part of realty and would be treated as a retail sale of tangible personal property subject to sales tax.
Scenario 3
The Taxpayer sells and installs home audio visual entertainment equipment consisting of receivers, amplifiers, speakers, and speaker wiring. Such equipment is installed inside the walls of a home. The sale and installation are invoiced to the homebuilder.
Generally, sales of audio visual equipment are not sales of tangible personal property affixed to real property. In P.D. 09-117 (7/31/2009), the Department ruled that the sale of audio visual systems, even when bracketed to the walls of real property, were retail sales of tangible personal property subject to the tax, partly because the audio visual equipment was easily removable and relocatable. In such activities, the Taxpayer will need to evaluate whether the installation of a audio visual entertainment equipment into a building is annexed to the real property, essential to the purpose for which the building is used or occupied, and if it is the intention of the party making the annexation for it to become affixed to the real property. Regarding the Taxpayer’s installation into a house, the homebuilder would be the party that would designate the intent of the annexation.
I hope this responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia section and regulations cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at (804) *****.
Sincerely,
Craig M. Burns
Tax Commissioner