89-333 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Security systems; Third party monitoring

Topic

Exemptions

Taxability of Persons and Transactions

Date Issued

11-21-1989

November 21, 1989

Re: Request for Ruling/Sales & Use Tax

Dear******************

This will reply to your letter dated August 21, 1989 in which you request clarification of my August 4, 1989 ruling letter regarding your business and the applicability of the retail sales and use tax to certain transactions.

FACTS

***********("Taxpayer") is involved in the sale, servicing and installation of burglar alarms, fire alarms and other security systems and devices. It contracts with a local company which it pays every month to provide monitoring services for its customers. Its customers are billed by and remit payments directly to the Taxpayer for the monitoring and other services. The Taxpayer requests clarification of an earlier ruling letter and additional information on the applicability of the sales and use tax to specific transactions.

RULING

First I will address your question of whether the fact that the Taxpayer does not actually monitor the security systems "in house" affects the taxability of its transactions.

Virginia Retail Sales and Use Tax Regulation 630-10-17.1 provides that the term "monitored systems" means:

- ...alarm systems which are furnished, installed and monitored under contract with the person furnishing and installing such systems. Systems which are monitored by a person other than the person who furnishes and installs such systems ... are not 'monitored systems' as the term is used in this regulation. (Emphasis added)

The department has previously ruled that alarm systems which a taxpayer sold/leased and installed yet were monitored by an unrelated company did not meet the definition of "monitored systems" provided above and thus were subject to tax. That situation, however, differs from the instant case in that the monitoring company in that case was unrelated to the company selling/leasing and installing alarm systems and it billed the customers directly.

In the instant case, however, although the Taxpayer does not actually provide monitoring services itself, it contracts with a local company to provide such services. Additionally, its customers contract with the Taxpayer for the provision of the monitoring services and as indicated in a conversation with the department's Tax Policy Division staff, its customers look only to the Taxpayer for any problems which may arise concerning their monitored systems.

Based on the foregoing, I find that security systems which the Taxpayer sells and installs and for which the Taxpayer is contractually bound to its customers to provide monitoring services, qualify for exemption from the tax as "monitored systems" under VR 630-10-17.1.

I will now address the other issues presented in your letter individually.

Case 1 - Customer A decides to purchase a system to secure his home and wants to think about the monitoring. You are correct in indicating that such is a taxable situation. The purpose of this transaction is to secure the security system. (see Virginia Retail Sales and Use Tax Regulation 630-10-17.1(A)(2), copy enclosed)

Case 2 - Customer B decides to buy a system and have it monitored. Again, you are correct in indicating that such is a nontaxable situation. The purpose of this transaction is to secure the monitoring services of the Taxpayer. (see VR 630-10-17.1(A)(1)(b))

Case 3 - Customer C decides to lease a monitored system with an option to purchase the system at the end of the lease. The monthly fee for the system includes a fee for monitoring. This transaction is not taxable even if at the expiration of the lease the customer decides to purchase the system. However, if, at the end of the lease, the customer decides to purchase the system without the monitoring services, it would be subject to tax.

In my previous ruling letter I indicated that fees for maintenance contracts should be taxed regardless of when the agreements were entered into; however, this is applicable only to certain maintenance contracts (e.g. parts and labor contracts and parts only contracts) for non-monitored systems. Charges added to the standard monthly fee for a monitored system will generally not be subject to the tax. Such charges include, among other things, monthly equipment maintenance fees, finance charges and security deposits. Thus, fees for maintenance contracts for monitored systems are not taxable, regardless of when such contracts are entered into.

Case 4 - Customer is charged a set monthly fee for a lease-to-purchase agreement for a monitored system. The fee includes a fee for a maintenance contract (parts and labor). In accordance with the foregoing, this transaction is nontaxable.

Taxability of hardware - A person selling/leasing and installing monitored systems is deemed to be the consumer of all property used in providing the service and must pay the tax on such property at the time of purchase.

A person selling/leasing and installing non-monitored systems is engaged in making retail sales, the total charge for which is subject to the tax. Separately stated installation charges, however, are not subject to tax. A person making such retail sales must register as a dealer with the department and collect and remit the tax with respect to its sales. All items used by a retailer of non-monitored systems in the installation of such systems, for example wiring which remains a part of the building, nails, and similar items, are taxable to such retailer at the time of purchase. (see VR 630-10-17.1(A)(1)(b) and 630-10-17.1(A)(2))

Record retention - Virginia Code §58.1-633 provides:

- [e]very dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sale, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.

VR 630-10-30, copy enclosed, provides that records should be preserved for three years and explains what information should be retained. Provided the other criteria in this regulation are met, the Taxpayer's records should indicate which items were purchased subject to the tax for its own use or consumption and those items which were purchased tax exempt for resale to the Taxpayer's customers.

I hope the foregoing has responded to your questions, but feel free to contact the department should you have other questions.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner