Which charges were taxable when a company fabricated and leased alarm systems, billed monthly rent, and offered monitoring separately?

Plain-English summary

A CPA firm's October 1, 1990 letter asked about client alarm charges and quoted four enclosures. An earlier July 31 letter supplied more facts. Neither letter nor any enclosure is reproduced.

The proposal quoted $230.00 initial equipment/installation and an estimated $14.50 monthly lease. Actual billing allegedly showed $206.04 equipment, $12.87 sales tax, and $11.09 labor, totaling $230.00. The third enclosure was a quarterly lease bill and the fourth an optional monitoring bill, but their amounts/text are absent. The source does not reconcile the already labeled sales tax with its use-tax conclusion.

The July letter reportedly said the system was assembled and installed at the lessor's site; counsel called its meaning unclear. He assumed the client did not lease the system in substantially the same form because it performed substantial fabrication. A customer could terminate anytime, after which the system was removed from the premises.

Cited 330.1920 did not fit. Fresh 1966 backup shows service-company model: local/central alarm provider responded after every alarm, on-premises equipment had low value compared with service charge, installation involved little fabrication, company could alter/control equipment and customer could not. Provider then consumed tax-paid equipment and customer payments were service fees.

This client apparently substantially fabricated the system, had unclear alteration rights and did not usually respond after alarms. Counsel therefore found a tangible-property lease rather than a service; because it was not the same form and had no purchase-price tax, it was a continuing sale taxable on rentals payable.

Installation was excluded under sections 6011(c)(3)/6012(c)(3), but the initial labor was not divided between true installation and taxable fabrication. The cited 330.3320 backup is not merely a rule sentence: it is a broader exposition/fair-exhibit petition involving a $195,355 understated measure, installation/fabrication allocation and reaudit. It supports the distinction but supplies no alarm allocation.

The monthly charge was rent: nonpayment ended the lease and triggered removal. All required lease payments, including equipment/fabrication and quarterly charges, entered taxable rentals. Separately billed monitoring was optional and not required to lease, so it was excluded.

The source cites section 6006(g)(5) and visibly prints 6010(3)(5). This page does not silently rewrite the second citation because the official source supplies no correction.

No proposal, enclosure, system, parts/acquisition tax, assembly/fabrication, installation allocation, customer lease, bill, monitoring election/performance, payment, removal, return, audit, assessment, claim, appeal or later outcome appears. Live 330.2830 publishes conclusion but omits exact prices, source ambiguity/assumptions, malformed citation and supporting-source limits.

What this means for you

Separate equipment/fabrication from true installation and optional monitoring. Preserve proposal, itemized work records, lease, acquisition tax, who controls/changes system, response duties, billing and customer monitoring choice. Calling service optional only works if lease is genuinely available without it.

Common questions

Was the entire initial labor charge exempt?

No. Installation was excluded, fabrication was taxable, and records did not allocate them.

Which initial amounts were quoted?

Proposal: $230 equipment/installation. Billing: $206.04 equipment, $12.87 labeled sales tax and $11.09 labor, totaling $230.

Was monthly alarm rent taxable?

Yes. Payment kept lease alive, and equipment was removed when payment stopped.

Why was monitoring excluded?

It was separate and optional, not required to obtain the lease.

When might an alarm arrangement be a service instead?

Cited 330.1920 used low equipment value/fabrication, provider control and after-every-alarm response. Current facts differed or were unclear.

Did the source determine the installation/fabrication split?

No. It expressly says unclear and supplies no work or billing records.

Which section 6010 citation is grounded?

The PDF prints 6010(3)(5); no official source here resolves that form.

Citations and references

• Section 6006(g)(5) and printed 6010(3)(5) — continuing-sale framework with unresolved source form
• Sections 6011(c)(3), 6012(c)(3) — installation exclusion
• Regulation 1660(c)(1) — required lease payments in rentals
• Annotation 330.1920/1966 backup — service-model contrast
• Annotation 330.3320/1970 backup — exhibit fabrication/installation allocation; broader petition
• October 1/July 31 letters, four enclosures and all transaction records — absent
• Live Annotation 330.2830 — result without source/evidence limits

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2830
• Original supporting opinion: 330.2830 PDF
• Cited backup opinions: 330.1920 PDF and 330.3320 PDF

Original ruling text

330.2830

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

November 15, 1990
Mr. D--- E. W--S--- & Company
Certified Public Accountants
XXXX West --- Street
P.O. Box XXX
---, California XXXXX
Dear Mr. W---:
Your letter dated October 1, 1990 has been referred to us for response. Your client constructs and leases security alarm systems. You ask how sales tax applies to its charges. You describe the transaction as follows: “(1) A proposal is prepared showing the equipment to be installed. The estimated cost of the equipment as well as the labor charge is quoted. An estimated monthly lease fee is also quoted. As you can see on page one of the enclosures, this proposal shows a quote of $230.00 as the initial charge for the equipment and installation labor and a quote for the monthly lease of $14.50. “(2) When the proposal is accepted, a billing is issued after installation is completed. The second page of the enclosures is an actual billing for the above proposal. The equipment charge was $206.04 upon which sales tax was charged of $12.87. The labor charge was $11.09 for a total balance due of $230.00. “(3) Finally, a quarterly billing for the alarm lease is sent. The third enclosure is a copy of such a billing. Sales tax is not charged on this amount. “(4) The customer may also desire to have the system monitored. This is billed separately as is shown by the fourth enclosure. Again, sales tax is not charged.” In a letter dated July 31, 1990, you state that the alarm system is assembled and installed at the lessor’s site. It is not clear what you mean by being installed at the lessor’s site. Nevertheless, I assume that you do not lease the system in substantially the same form as you acquire it. You also state that the lessee may terminate the lease at any time. If it does so, the alarm system is removed from the lessee’s premises.

Mr. D--- E. W---

-2-

November 15, 1990
330.2830

We have previously considered application of tax to a person providing burglar alarm services. Business Taxes Law Guide Annotation 330.1920 (5/26/66) does not appear to apply to your specific facts, but I quote it below for your general information: “Contracts for the installation and service of burglar alarms may be regarded as service agreements rather than leases of tangible personal property in those cases in which: the value of the equipment on the customer’s premises is low in comparison to the total charge; the installation of the burglar alarm company does not constitute substantial fabrication labor; the company has the right to change or alter the equipment as it deems necessary to provide proper alarms; and the company goes to the customer’s premises after each alarm. The burglar alarm company will be regarded as the consumer of all property it uses or installs under those contracts.” A company providing burglar alarm services in the manner discussed in this annotation would not be regarded as leasing the system, but would be regarded as providing service and consuming the property it uses to provide that service. That would mean that it would pay sales tax reimbursement to its vendor or pay use tax measured by its purchase price of the subject equipment. Your client does not provide burglar alarm services as discussed in the annotation. As mentioned above, your client apparently does not lease the property in substantially the same form as acquired, that is, your client apparently performs substantial fabrication labor setting up the system. It is not clear whether your client has the right to change or alter the equipment as it deems necessary. Your client apparently does not go to the customer’s premises after each alarm, at least not for the usual alarm contract. A lease of tangible personal property is a sale and is subject to use tax measured by rentals payable unless the lessor leases the property in substantially the same form as acquired and pays sales tax reimbursement or use tax measured by purchase price. (Rev. & Tax. Code §§ 6006(g)(5), 6010(3)(5).) Since your client apparently does not lease the property in substantially the same form as acquired or pay tax measured by purchase price, its leases are sales and are subject to use tax measured by rentals payable. You ask the amount of the rentals payable. The taxable rentals payable do not include the charge for installing the system. (Rev. & Tax. Code §§ 6011(c)(3), 6012(c)(3).) However, it is not clear whether your client’s charge for installation also includes the cost of fabrication. A charge for fabrication is included in the measure of taxable rentals payable (BTLG Annot. 330.3320 (4/16/70)), as are all other payments required by the lease. (Reg. 1660(c)(1).) As stated in your July 31, 1990 letter, the monthly charge is a charge for the lease of the alarm system. When the lessee ceases paying that monthly charge, the lease terminates and the property is removed. We conclude that this monthly charge is a charge for lease of the system and is part of your client’s taxable rentals payable. On the other hand, we understand that monitoring the system is optional and not required in order to lease the system. As an optional charge for

Mr. D--- E. W---

-3-

November 15, 1990
330.2830

additional service, we conclude that this charge is not required by the lease and is not part of your client’s taxable rentals payable. In summary, all of your client’s charges are subject to use tax which you client must collect from the lessee and pay to the state except charges for installation and charges for optional monitoring. If you have further questions, feel free to write again. Very truly yours,

David H. Levine
Senior Tax Counsel

DHL:wk
2580C