Could an alarm-system lessor exclude finance and monitoring portions from a required $9.95 monthly charge when the contract did not separately state them?

Plain-English summary

Live Annotation 330.3555 says the taxpayer leased a security system to apartment-building owners. The supporting memorandum says a letter from redacted D--- M--- Properties reported a 126-month (10.5-year) agreement with a redacted security corporation at $9.95 monthly, asserted to include finance charges and alarm monitoring.

The internal January 10, 1994 request, properties letter, contract and invoices are absent. Staff counsel said the reviewed contract and invoices mentioned no finance charges. The contract did not separately state monitoring, and the service was not optional.

An absent Exhibit C, titled “Per Unit Contract Buy-Out Schedule,” appeared to permit purchase at specified times while excluding communication and monitoring equipment. The taxpayer wanted to pay sales tax only on the alarm-system lease portion, not asserted finance or monitoring amounts. No allocation or transaction records appear.

The requester cited Annotation 330.1920, under which some burglar-alarm installation and service contracts could be services rather than tangible-property leases. Counsel found that classification outside the issue because the taxpayer collected tax on rental payments, presumptively agreeing it leased tangible personal property. Under a service classification, the alarm company instead would be the property's consumer.

Regulation 1660(c)(1)(E) and (F) included required lease payments in taxable rent. It excluded late charges and interest caused by untimely rental payment, along with separately stated optional insurance, maintenance or warranty. Monitoring was mandatory, not separately stated and treated as maintenance; claimed ordinary finance charges were not delinquency interest. Counsel therefore taxed the entire $9.95.

The live annotation matches the entire-charge result. The PDF is labeled confidential and attorney-client privileged, but the agency publishes it as the supporting opinion. No payment, tax, audit, implementation or later outcome is shown.

Common questions

Was ordinary financing inside the monthly price excluded?

No.

Was mandatory monitoring excluded?

No.

Did the contract or invoices identify a finance charge?

No according to counsel's review. The underlying documents are not included in the published PDF.

What interest could be excluded?

Interest incurred for failure to pay rent timely.

Why did Annotation 330.1920 not decide the case?

That annotation addressed whether an integrated alarm arrangement was a service rather than a lease. Here the taxpayer already collected tax on rental payments, so counsel presumed lease treatment and addressed only the taxable amount.

What did the buyout schedule cover?

Counsel said Exhibit C appeared to allow purchase of the alarm system at specified times while excluding communication and monitoring equipment. The exhibit itself is absent.

Does the memorandum establish how the charge was allocated or what happened later?

No. It publishes the entire-charge conclusion but no allocation, payment, return, audit or later outcome.

Citations and references

• Regulation 1660(c)(1)(E) and (F) — required payments, late charges and delinquency interest, and separately stated optional insurance, maintenance or warranty
• Annotation 330.1920 — conditional alarm service-versus-lease classification distinguished
• Live Annotation 330.3555 — apartment-building system and entire $9.95 result dated February 28, 1994
• January 10 request, attached properties letter, contract, invoices and Exhibit C — reviewed or described but absent
• Allocation, payment, collected-tax, audit, implementation and later-outcome records — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3555
• Original supporting opinion: 330.3555 PDF

Original ruling text

State of California

Board of Equalization
Telephone: 324-2608
Legal Division MIC: 85

Memorandum
330.3555
CONFIDENTIAL
ATTORNEY-CLIENT PRIVILEGE

To

:

Mr. Dennis Fox, Supervisor (MIC:40
Audit Evaluation & Planning

From

:

Rachel M. Aragon
Staff Counsel

Subject:

Date:

February 28, 1994

Lease of Installed Security System
D--- M--- Properties

This is in response to your memorandum dated January 10, 1994, to Mr. Gary Jugum. You ask how tax applies to alarm systems. You attached a letter from D--- M--- Properties which states they have a 126 months (10.5 years) lease agreement with N--- M--- S--- Corporation. The letter further states that the lease, including finance charges and monitoring alarm services, is payable at the rate of $9.95 per month. Upon reviewing the contract and copies of the invoices, which you attached to your memorandum, we find no mention of finance charges in either. The contract does not separately state any charges for the monitoring alarm services and those services are not optional. "Exhibit C" of the agreement is entitled "Per Unit Contract Buy-Out Schedule" and appears to be an option to purchase the alarm system at specified times during the contract term (excluding communication and monitoring equipment). The taxpayer thinks it should only pay sales tax on the amount attributable to the lease of the alarm system and not to the finance charges or for charges for the monitoring services. You refer to Annotation 330.1920, which explains when contracts for the installation and service of burglar alarms may be regarded as service agreements instead of leases of tangible personal property. If this were a service contract, rather than a lease, the alarm company would be considered the consumer of the property and as such would not be collecting tax on the rental payments. Since the taxpayer is collecting tax on the rental payments, the taxpayer presumably agrees that it is leasing tangible personal property. Thus, this annotation is not applicable. That is, the question here is not whether the taxpayer is leasing tangible personal property or providing a

Mr. Dennis Fox
D--- M--- Properties

-2-

February 28, 1994
330.3555

service, instead, the issue is the amount of the taxable rentals payable. Regulation 1660(c)(1)(E) & (F) states that the rentals subject to tax include any payments required by the lease. Excluded from the measure of tax are late charges and interest incurred for failing to pay the rentals timely and separately stated optional [insurance charges,] maintenance or warranty contracts. Since the services for monitoring the alarm (maintenance) are not optional or separately stated, the monitoring charges are includible in the measure of tax. The only finance charges which are excludable from the measure of tax are those which are incurred as a failure to make timely payments. Thus, the entire $9.95 is taxable.

RMA:ljt