November 9, 2021
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to your client ***** (the “Taxpayer”), for the period July 2014 to June 2017. I apologize for the delay in responding to your appeal matter.
FACTS
The Taxpayer provides security monitoring services for both residential and commercial customers. In addition to the basic service, the Taxpayer offers an optional system (the “System”) with a range of additional features, such as the ability to view security camera video remotely, activate the security system, lock and unlock doors, and turn lights off and on. System equipment is supplied by the Taxpayer and operated over the Taxpayer’s network using the Taxpayer’s proprietary software and web portal. Customers are billed periodic bundled charges to use the System, including any additional equipment and all related services depending on the features selected. The System is not available unless the customer also purchases or already has the Taxpayer’s basic monitoring service.
As a result of the Department’s audit, the auditor concluded that the charge to the Taxpayer’s customer for the System, which includes all equipment and related services, constitutes the sale of a nonmonitored system. The auditor relied primarily on the distinction between monitored and nonmonitored systems as described in Title 23 of the Virginia Administrative Code (VAC) 10-210-230 and as applied in certain prior determinations of the Department, particularly Public Document (P.D.) 16-93 (5/20/2016). The auditor assessed the sales tax on such charges. The Taxpayer appealed, contending that the System was a monitored system or alternatively that the System’s true object was a service.
DETERMINATION
Consistent with Title 23 VAC 10-210-230, the Tax Commissioner has determined that sales of security systems constitute retail sales of tangible personal property if the customers monitor the systems. See PD 13-108 (6/19/2013). Should the seller, however, monitor the system on a part-time but regular basis, it is considered to be providing a monitored service. See id. In accordance with the regulation, the true object of a monitored security system constitutes the provision of a service, the charge for which is exempt. Likewise, the true object of a non-monitored system constitutes the sale of tangible personal property, a taxable transaction. See P.D. 16-49 (4/11/2016) and P.D. 16-93 (5/20/2016).
Because the Department’s regulation regarding security systems does not contemplate online networks, mobile devices, and software-enabled control using computers, it cannot be relied upon to address the many functions available using the System at issue. While the true object test addressed in Title 23 VAC 10-210-4040 D of the services regulation provides the underlying distinction between monitored and non-monitored systems as explained above, the services regulation also applies the true object test when both the services and property are critical elements when provided in a mixed transaction. Therefore, in this case, I believe the Department’s services regulation provides the appropriate guidance.
Title 23 VAC 10-210-4040 D addresses mixed transactions and provides the following:
In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the “true object” of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property it produces, then the entire charge, including the charge for any services provided, is taxable.
The regulation goes on to state that:
In instances where both the services rendered and the property transferred are critical elements of a transaction, the degree of customization, uniqueness or specific services provided in connection with the product shall be considered in determining its appropriate tax status.
The System allows customers to perform off-site video monitoring of their premises and to control or automate certain functions remotely, such as enabling the security system, locking doors, adjusting temperature controls, controlling appliances and turning on lights. The Taxpayer offers a number of video functions with the System, including the ability to record video, store short video clips locally using a software application provided by the Taxpayer (the “mobile application”), store video in the Taxpayer’s cloud storage, view live or event-driven video on the mobile application or the Taxpayer’s website, and receive text or email alerts from the System for certain triggering events. Customers are only able to perform such activities by using the System’s hardware, software and network together, and paid a periodic bundled charge for the equipment and all associated services.
In my opinion, the equipment provided is a critical element to the transaction because the customers need such for the System to function. Likewise, the services are critical because the equipment cannot function without the Taxpayer’s software applications and access to the Taxpayer’s network. After carefully reviewing the information provided by the audit staff and the Taxpayer, in addition to the Department’s research into how the System operates, it appears that the software applications, web portal and network allows the customer to customize the user experience with the System. Therefore, the true object of the Taxpayer’s customers is the ability to remotely control and automate their premises, and in the case of video, obtain information in the form of video data. With the System, customers can perform these tasks whenever and wherever access to the internet is available. Therefore, the Taxpayer is deemed to provide a nontaxable service when it sells the System equipment and associated services to customers.
This case is distinguishable from the facts of P.D. 16-49 and P.D. 16-93 in that the taxpayers in those cases had limited ongoing connections to the tangible equipment once it was installed. In P.D. 16-49, the taxpayer merely monitored the equipment to make sure it was functioning properly and issued administrative reports. Similarly, in P.D. 16-93, the taxpayer monitored the system remotely only to ensure proper functioning.
Accordingly, the audit will be revised by the audit staff to remove the sales transactions at issue. The Taxpayer will receive a revised audit report and sent a revised bill for any remaining liability. The bill should be paid within 60 days from the date of this letter to avoid the accrual additional interest charges.
The regulations and public documents cited are available on-line in the Laws, Rules and Decisions section of the Department’s website located at www.tax.virginia.gov. If you have any questions regarding this determination, please contact ***** of the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2122.M