Were custom, wired-in security and alarm system installations Florida real-property contracts or sales of tangible property?

Subject

Security Systems

Plain-English summary

The custom security and alarm systems were improvements to real property, not retail sales of tangible personal property. Their components were screwed into doors and walls, connected by concealed or direct structural wiring, and designed for each particular residence, business, or institution.

The installer was therefore the taxable consumer of the components and materials. It had to pay tax when buying them and did not charge sales tax on the installed system. That treatment did not change when the customer held a consumer's certificate of exemption. Monthly monitoring charges were not decided.

What this means for you

Florida looks at the installed system as a whole. Customization, structural wiring, secure attachment, expected permanence, and construction-trade regulation all supported real-property treatment here; freestanding plug-in equipment could produce a different result.

Common questions

Q: Did the installer buy components for resale? No; it paid tax as the consumer.

Q: Did the installer charge sales tax on the lump-sum installation? No.

Q: Did the customer's exemption certificate change the result? No.

Citations and references

• Fla. Stat. §§ 212.05(1) and 212.06(1) and (14) — contractor tax and real-property classification
• Fla. Admin. Code r. 12A-1.051(2) and (17)(m) — fixtures, real-property contracts, and electrical systems
• Fla. Stat. ch. 489 and §§ 489.505, 489.516, and 489.537 — alarm-system contractor regulation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-009

Original ruling text

SUMMARY

QUESTION: Are contracts who install security and alarm
systems contracts for real property improvements or sales
of tangible personal property?

ANSWER - Based on Facts Below: Contracts who furnish and
install security and alarm systems are contracts for real
property in cases where the systems involve custom design,
structural wiring, and direct-wired components that are
screwed in place.

Jan 30, 2001

Re: Technical Assistance Advisement 01A-009
Sales and Use Tax -- Security Systems
Sections 212.05, 212.06, F.S.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated December 20, 2000, in which you asked for a
technical assistance advisement concerning the taxation of the
security and fire alarm systems sold and installed by XXX
("Taxpayer").

Facts

Taxpayer sells and installs security and fire alarm systems.
The security systems may include closed circuit television
systems and access control systems as well as detection and
alarm systems. Security systems include control panels, audioactivated microphones, motion detectors, door contacts, and
related items. These are held in place with screws. Taxpayer
also installs wiring for those devices. The wiring ordinarily
penetrates the walls and is concealed behind walls or in ceiling
spaces. Closed circuit television systems are similar, except
that the devices that are wired into the overall system include

cameras, monitors, recorders, and related items. In the case of
access control systems, installation is similar but the primary
parts are access control panels, card readers, and electronic
door locks. Fire alarm systems also involve components that are
attached with screws and wired directly into a structural wiring
system. Taxpayer sells the systems at issue without retaining
title of any kind. Taxpayer's customers include homeowners,
businesses, nonprofit organizations, and governmental entities.

Taxpayer sends representatives to a prospective customer's
location to assess the premises and the customer's needs. A
system design is drawn up based on those needs and the specifics
of the location (e.g., number and location of doors and windows,
room configuration). Based on the nature and number of
components needed for the proposed system, a price is set in a
quotation. If the customer accepts, a contract is signed.
Taxpayer agrees to sell, install, and service the proposed
system. Sale and installation is set at one lump sum price with
no itemization of components and labor. (Monitoring services
are also provided for a monthly charge. Taxation of those
charges is not at issue.)

Requested Advisement

Taxpayer requests advice on the following issues:

1. Whether sale and installation of an alarm system is
   performance of a real property contract or a sale of
   tangible personal property.

2. Whether Taxpayer should pay tax on its purchases of
   components and materials installed as part of the
   system or charge sales tax to its customers.

3. Whether the taxation of the sale and installation of a
   system is different if the customer holds a consumer's
   certificate of exemption.

Taxpayer's Position

Taxpayer believes, consistent with the Department's position in

a recent audit of Taxpayer's sales and use tax compliance, that
installation of a system in which title is transferred is a real
property improvement. Taxpayer should therefore pay tax on its
purchases of components of the system and charge no tax to its
customers.

Applicable Law, Discussion, and Analysis

If Taxpayer's installed systems are tangible personal property,
Taxpayer should purchase components using a resale certificate
and charge tax to customers on the full sales price unless the
customer presents a valid exemption certificate. If the systems
Taxpayer installs are real property improvements, Taxpayer
should pay tax on its cost of components and materials but
collect no tax from its customers. See ss. 212.05(1),
212.06(1), F.S.; Rule 12A-1.051, F.A.C. The fact that a
customer is exempt from Florida sales and use taxes on purchases
of tangible personal property is irrelevant when the customer is
purchasing real rather than tangible property and the Taxpayer
is the taxable consumer of the tangible personal property used
to perform the real property contract.

Statutory guidance on the classification of property as real
property or tangible personal property is found in section
212.06(14), F.S., which reads as follows:

(14) For the purpose of determining whether a person is
improving real property, the term:

(a) "Real property" means the land and improvements thereto
and fixtures and is synonymous with the terms "realty" and
"real estate."

(b) "Fixtures" means items that are an accessory to a
building, other structure, or land and that do not lose
their identity as accessories when installed but that do
become permanently attached to realty.... For an item to
be considered a fixture, it is not necessary that the owner
of the item also own the real property to which it is
attached.

(c) "Improvements to real property" includes the activities
of building, erecting, constructing, altering, improving,
repairing, or maintaining real property.

Rule 12A-1.051, F.A.C., was revised after enactment of section
212.06(14), F.S., to reflect the statutory guidance and assist
in applying it. In relevant part, the rule reads as follows:

12A-1.051 Sales to or by Contractors Who Repair, Alter,
Improve and Construct Real Property.
...
(2) Definitions. For purposes of this rule, the following
terms have the following meanings:
...
(c)1. "Fixture" means an item that is an accessory to a
building, other structure, or to land, that retains its
separate identity upon installation, but that is
permanently attached to the realty. Fixtures include such
items as wired lighting, kitchen or bathroom sinks,
furnaces, central air conditioning units, elevators or
escalators, or built-in cabinets, counters, or lockers.

2. In order for an item to be considered a fixture, it is
   not necessary that the owner of the item also own the real
   property to which the item is attached. A retained title
   provision in a sales contract or in an agreement that is
   designated as a lease but is in substance a conditional
   sales contract is not determinative of whether the item
   involved is or is not a fixture. Similarly, the fact that a
   lessee or licensee of real property rather than the
   lessor/owner enters into a contract for an item to be
   permanently attached to the real property does not prevent
   that item from being classified as a fixture.

3. The determination whether an item is a fixture depends
   upon review of all the facts and circumstances of each
   situation. Among the relevant factors that determine
   whether a particular item is a fixture are the following:

a. The method of attachment. Items that are screwed or
bolted in place, buried underground, installed behind

walls, or joined directly to a structure's plumbing or
wiring systems are likely to be classified as fixtures.
Attachment in such a manner that removal is impossible
without causing substantial damage to the underlying realty
indicates that an item is a fixture.

b. Intent of the property holder in having the item
attached. If the property holder who causes an item to be
attached to realty intends that the item will remain in
place for an extended or indefinite period of time, that
item is more likely to be a fixture. That intent may be
determined by reviewing all of the property holder's
actions in regard to the item, including how the item is
treated for purposes of ad valorem and income tax purposes.
For example, if a property owner reports the value of the
item for purposes of ad valorem taxation of the realty and
depreciates the item for tax and financial accounting
purposes as real property, that indicates an intent that
the property is permanently attached as a fixture.

c. Real property law. If an interest in an item arises upon
acquiring title to the land or building, the item is more
likely to be considered a fixture. For example, if the
seller of real property would be expected to leave an item
behind when vacating the premises for a new owner without
the contract specifically requiring that it be left, that
item is likely to be classified as a fixture.

d. Customization. If items are custom designed or custom
assembled to be attached in a particular space, they are
more likely to be classified as fixtures. Customization
indicates intent that the items are to remain in place
following installation.

e. Permits and licensing. If installation of an item
requires a construction permit or licensing of the
contractor under statutes or regulations governing the
building trades, that item is more likely to be regarded as
a fixture.

f. Legal agreements. The terms of any purchase agreement,

deed, lease, or other legal document pertaining
specifically to an item may be relevant in determining
whether that item is a fixture of real property.

The foregoing list of factors relevant to determining
whether an item is a fixture is intended to be illustrative
only. Additional factors may exist in any particular case,
and the weight to be given to the factors will also vary in
each case.
...
(h)1. "Real property contract" means an agreement, oral or
written, whether on a lump sum, time and materials, cost
plus, guaranteed price, or any other basis, to:
...
c. Furnish and install tangible personal property that
becomes a part of or is directly wired or plumbed into the
central heating system, central air conditioning system,
electrical system, plumbing system, or other structural
system that requires installation of wires, ducts,
conduits, pipes, vents, or similar components that are
embedded in or securely affixed to the land or a structure
thereon.
...
(17) Specific activities classified as real property
contracts.

Contractors who are engaged in the following activities are
generally considered to be real property contractors,
although any particular job may be determined not to
involve an improvement to real property:
...
(m) Electrical system installation and repairs, including
structural wiring and cabling, meter boxes, switches,
receptacles, wall plates, and similar items;
...
The determination whether any particular job involves a
contract for an improvement to real property will be based
on the criteria set forth in paragraphs (c), (d), (e), (g),
(h), (i), and (j) of subsection (2).
...

Taxpayer's system components are generally screwed in place, an
indication of permanent attachment under the guidance of the
rule. Wiring placed behind walls or in ceiling spaces is also
permanently in place because it is not removable without going
through the walls or ceilings themselves. Whether it is low
voltage wiring or standard wiring is immaterial if the wiring is
run behind walls and other structural surfaces. In addition,
the rule indicates that items that are wired directly, as
opposed to being simply plugged in, are generally considered to
be permanently attached. Many of the components of Taxpayer's
systems are directly wired, as well as being screwed to walls,
doors, or other structural elements.

Taxpayer's records as reviewed in the prior audit indicate that
Taxpayer installed systems in residences, commercial buildings,
or institutional facilities for owners who intended to acquire a
permanent improvement to real property. This determination must
be made by looking at the system as a functioning unit involving
structural wiring and directly wired components held in place by
screws. The owners do not purchase separate components that can
be individually analyzed for status as tangible personal
property or real property. They purchase an integral system to
protect a specific location against intrusion, fire, or other
dangers. The systems do not involve freestanding components
that plug into standard outlets and can be rearranged by simply
picking them up and moving them. The pricing of the contracts
also indicates that property owners who acquire installed
systems from Taxpayer are making a major investment to obtain a
custom designed and installed system tailored to protect a
particular piece of real property. The custom design nature of
the systems in itself supports the conclusion that the property
owners that have Taxpayer's systems installed intend for the
systems to remain in place as part of the property. The systems
are designed to fit the specific property in which they are
installed and the owner's use of that property. System
components are selected and installed to fit the owner's
specific needs for security, access control or fire protection
at that location. The systems become part of the customer's
primary residence or part of a business or institutional
facility.

Another factor that is relevant to the determination is whether
an activity is regulated as a construction or building trade.
Chapter 489, F.S., and rules issued thereunder govern licensing
or certification and regulation of alarm system contractors.
See, e.g., sections 489.505(1), (2), (21), (22), (23), (24),
489.516, 489.537, F.S.; Rules 61G6-5.001, 61G6-6.015, F.A.C.
These provisions treat alarm system contractors as a specialized
form of electrical contracting, which is viewed as a
construction trade. Rule 12A-1.051(17)(m), F.A.C., notes that
electrical contractors are generally considered to be performing
real property work. While inclusion under these statutes and
regulations is not a controlling factor, it does support
classification of Taxpayer's systems as real property contracts.

Another factor indicating real property status is that the
systems add to the value of the real property as realty. Unlike
furniture or appliances that simply plug in without being
screwed in place and wired directly, their removal would
diminish the value of the realty as such. A home or business
location with an operating wired-in security system appropriate
to its use as a residence or business is worth more than a home
or business with screw holes in the doors and walls and holes
with wires hanging out where system components used to be.

A layman's test for telling the difference between a real
property fixture and an item of tangible personal property would
be whether a purchaser of the real property where the item is
located would expect the item to be included in the purchase
price without special negotiation. If a buyer wants a piece of
personalty such as furniture or draperies included in the price
of real property, that must be specified in the sales contract
to overcome the presumption that personalty will be removed.
Typically, real property fixtures are presumed to be part of the
realty without such negotiation. Unless the seller specifically
excludes a real property fixture (e.g., a ceiling fan and light
or a built-in kitchen cabinet), it goes with the building. In
this case, a buyer would expect the screwed and wired-in
components of the system designed for that specific property to
remain behind. Furthermore, it is also likely that a property
owner who is willing to spend thousands of dollars to have a
system custom designed and installed through screws and direct

wiring to fit a specific location is not thinking in terms of
detaching the various components to make them try to work
elsewhere. That property owner will intend to leave the system
behind when the real property is sold as one of the functional
systems of the property.

Consideration of all the facts and circumstances and the
applicable statute and regulation results in a conclusion that a
security, alarm, or access control system as described in this
advisement is a fixture of or improvement to real property.

Advisements

Based on the foregoing discussion and analysis, Taxpayer is
advised as follows:

1. Sale and installation of an alarm system is
   performance of a real property contract.

2. Taxpayer should pay tax on its purchases of components
   and materials installed as part of the system and
   charge no sales tax to its customers.

3. The taxation of the sale and installation of a system
   is the same regardless of whether or not the customer
   holds a consumer's certificate of exemption.

Closing Statement

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice, as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes, or judicial interpretations of the
statutes or rules upon which this advice is based, may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response, your request and

related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of section 213.22, F.S. Confidential information
must be deleted before public disclosure. In an effort to
protect confidentiality, we request you provide the undersigned
with an edited copy of your request for Technical Assistance
Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Linda W. Bridges
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-9412

LWB/
Control #: 43457