SALT Report 2714 -The Virginia Department of Taxation issued a letter ruling regarding a Taxpayer’s sales of integrated security systems. The Taxpayer, in this case, only sells these systems to commercial customers, such as utilities, hospitals, federal contractors, federal government agencies, and financial institutions.
Most of the Taxpayer’s customers purchase the security systems to self-monitor and manage the security of their business 24 hours a day. The remaining customers purchase the security systems to self-monitor their business during normal business hours and have the Taxpayer remotely monitor the business after-hours.
The Taxpayer was recently audited and requested clarification regarding the application of sales and use tax to its sales of security systems to institutions that self-monitor their security systems.
In its response, the Commissioner referred to Title 23 VAC 10-210-230(B) which states that the sale or lease and installation of burglar, security, or fire alarm systems, that are not monitored by the person selling and installing the systems, is a retail sale of tangible personal property.
Therefore, if the customer self-monitors its security system 24 hours a day, the Taxpayer must charge and collect sales tax based on the total sales price, unless the Taxpayer receives an exemption certificate from its customer. In this situation, tax would not apply to separately stated installation charges.
The Taxpayer also questioned if there would be a tax liability if a customer who initially self monitored their security system, decides at a later date to have the Taxpayer monitor the security system. The Commissioner stated that in the event that a customer requests monitoring services after the initial sale of the security system, the Taxpayer would not be liable for use tax on the equipment previously sold in a retail sale transaction pursuant to PD 86-125.
In situations where the transaction is for the taxable lease or rental of equipment without monitoring services, sales tax should be charged and collected on the gross proceeds received from the lease or rental, even if the customer decides at a later date to request monitoring services. The Commissioner stated that in this scenario, the true object of the subsequent transaction would be for exempt services, and the Taxpayer would only be liable for the tax on any additional equipment, supplies, or materials that it uses to provide these services.
If the Taxpayer enters into a contract to monitor the security system on a part-time basis, it is still providing a monitored system as defined in Title 23 VAC 10-210-230(A). Therefore, charges for the monitored system would not be taxable. To verify that these charges are exempt the Taxpayer should clearly indicate on its invoice that the security system is monitored. The Taxpayer would only be liable for tax on the equipment, materials, or supplies used to provide the part-time monitoring services.
If the Taxpayer enters into a contract to regularly monitor a portion of the security system, for example the fire alarm portion of a fire and burglar alarm system, the Taxpayer would be engaged in the provision of a service and would be liable for tax on any tangible personal property it provides and uses to monitor that portion of the security system.
The portion of the security system that is not monitored by the Taxpayer should be separately stated and treated as a retail sale of tangible personal property. The Taxpayer should charge and collect sales tax on the sales price of the non-monitored property unless the customer provides an exemption certificate.
Finally, the Commissioner stated that if the true object of a transaction is a service, such as a monitored system, the non-installation labor portion would not be taxable to the customer. If the true object of the transaction is for the sale of tangible personal property, such as a non-monitored service, the non-installation labor portion would be taxable to the customer regardless of whether or not separately charged on the invoice.
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