Document Number
13-108
Tax Type
Retail Sales and Use Tax
Description
Application of tax to integrated security systems sold to institutions that self-monitor their security systems.
Topic
Clarification
Tangible Personal Property
Taxability of Persons and Transactions
Date Issued
06-19-2013


June 19, 2013



Re: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This is in response to your letter in which you request a ruling on the application of the retail sales and use tax to security systems sold by ***** (the "Taxpayer"). I apologize for the delay in responding to your request.

FACTS


The Taxpayer designs, sells, installs, and services integrated security systems. On occasion, the Taxpayer will remotely monitor such systems. The Taxpayer transacts only with commercial customers, such as utilities, hospitals, federal contractors, federal government agencies, and financial and other large institutions.

The majority of the Taxpayer's customers purchase self-monitoring security systems, i.e., such customers program and manage the security systems on a 24/7 basis. The remainder of the customers purchases security systems that are monitored by the customers during normal business hours and then remotely monitored by the Taxpayer either on an after-hour basis or as a backup to the customers' internal monitoring.

The Taxpayer was recently audited and presents several questions seeking clarification on the application of the sales and use tax to integrated security systems that it sells to institutions that self-monitor their security systems.

RULING


The application of the tax to the Taxpayer's security systems is set out in Title 23 of the Virginia Administrative Code (VAC) 10-210-230, which states the Department's long­standing policy on the sale of monitored and non-monitored burglar, security, and fire alarm systems. In addition, section D of Title 23 VAC 10-210-4040 provides guidance on the true object test that is applied to mixed transactions, i.e., transactions that involve both the sale of tangible personal property and the provision of services.

Question 1

If the customer self-monitors their system 24/7, is the sale considered tangible personal property or services?

Title 23 VAC 10-210-230 B provides that the sale or lease and installation of non-monitored burglar, security or fire alarm systems (i.e., systems that are not monitored by the person selling and installing such systems) constitute the retail sale of tangible personal property. The Taxpayer must charge and collect the sales tax based on the sales price charged (except for separately stated installation charges) unless the Taxpayer receives from the customer a valid exemption certificate that exempts the entire charge from the tax.

Question 2

This question assumes that a sale is made on a tangible personal property basis. If a customer self-monitors their system on a 24/7 basis, but decides at a later date, subsequent to the system installation, to have their system remotely monitored by the Taxpayer, how does the Taxpayer treat the sale if it is the same or different contract?

The Department previously addressed a similar issue when it issued Public Document (P.D.) 86-125 (7/11/86), which sets out the following:
    • The primary question . . . is how the tax would apply in the event that a customer, subsequent to installation, decides that he wants to switch from a non-monitored system to a monitored one, or vice-versa. In particular, you were concerned whether your business would be required to refund the tax paid by a customer who switches to a monitored system and collect the tax from one who switches to a non-monitored system. The answer to your question is "no." The sales tax is levied upon the sale of tangible personal property; therefore, a change of mind by a purchaser after the sale and installation of an alarm system would have no impact for sales tax purposes.

In the event a customer requests monitoring services from the Taxpayer on a date after the date of the sale of a security equipment system, the Taxpayer does not become liable for the use tax on equipment previously furnished and sold in a retail sale transaction. With respect to initial transactions for the taxable lease or rental of equipment (i.e., no monitoring services), sales tax should still be charged and collected on the gross proceeds received from such leases or rentals even in the event the customer decides at a later date to request monitoring services from the Taxpayer. Because the true object of the subsequent transaction is for exempt services, the Taxpayer is only liable for the tax on any additional equipment, supplies and materials that it may furnish and use in connection with the provision of its services. Also see P.D. 96-4 (1/16/96) and P.D. 05-121 (7/20/05).

Question 3

If the customer self-monitors their system during normal business hours but uses the Taxpayer's remote services after hours, is the sale of the system considered a service or sale of tangible personal property? If considered a service, does this apply to the entire value of the system or only the value of the alarm transmission device?

Pursuant to Title 23 VAC 10-210-230 A, monitored systems are defined as "burglar, security and fire alarm systems which are furnished, installed and monitored under contract with the person furnishing and installing such systems." When the Taxpayer contracts to monitor the entire security system on a part-time but regular basis, it is still providing a monitored system as defined in Title 23 VAC 10-210-230 A. As such, charges for the monitored system are not taxable. The Taxpayer, however, is liable for the tax on the cost price of all equipment, materials and supplies used in providing its monitoring services. In such instances, the invoice should indicate that the security system is monitored.

It is my understanding from the Department's auditor that the Taxpayer also contracts to monitor only a portion of a security system. For instance, the Taxpayer may monitor only the fire alarm portion of a fire and burglar alarm system. To the extent that the Taxpayer contracts to regularly monitor a portion of a security system, it is engaged in the provision of a service and is liable for the tax on all tangible personal property that it furnishes and monitors for that portion of the security system. As for the portion of the security system that is not monitored by the Taxpayer, the sale of equipment by the Taxpayer for such non-monitored portion should be separately stated and treated as the retail sale of tangible personal property in which the sales tax is charged and collected on the sales price of such non-monitored property, unless a valid and fully completed exemption certificate is furnished by the customer. See Title 23 VAC 10-210-280.

Question 4

If the sale is treated as a service versus tangible personal property, is the non-installation labor component taxable and if so, to the customer or the provider of the non-installation labor component (i.e., the Taxpayer)?

If the true object of the transaction is a service (i.e., a monitored system); then the non-installation labor component is not taxable to the customer. When the true object of the transaction is for the sale of tangible personal property (e.g., no monitored services are provided), the non-installation labor component is generally taxable to the customer regardless of whether, or not separately charged on the invoice. See Title 23 VAC 10-210­4040 B 1. On the other hand, certain labor components are statutorily exempt from the sales and use tax. For instance, installation labor that is separately stated on the invoice may be exempted from the tax based on the statutory exemption set out in Va. Code § 58.1-609.5 2. Also see Title 23 VAC 10-210-4040 C 3.

Question 5

If the customer has a Virginia tax exemption certificate, is it exempt from all sales tax charges, including the engineering and project management labor components?

The exemption certificate must be appropriate for the type of customer and indicate the selected exemption that is applicable to the customer. Legitimate use of the exemption certificate is vital. Furthermore, the exemption certificate must be valid and completed in every respect, dated and signed by the customer's representative. The Taxpayer is required to abide by the regulatory provisions set out in Title 23 VAC 10-210-280 regarding certificates, of exemption. When a valid and complete exemption certificate is presented by a customer and the customer has certified to the Taxpayer that the selected exemption applies to the customer's purchases of tangible personal property, then the Taxpayer may exempt the entire charge from the retail sales tax.

CONCLUSION


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, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this ruling, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,



Craig M. Burns
Tax Commissioner



AR/1-5269497450.R

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46