Was a burglar-alarm installation a real-property improvement when the security company retained title until payment?

Subject

Burglar Alarm Systems

Plain-English summary

The full price of the burglar-alarm equipment and installation was taxable because the security company retained title until the customer paid in full. Florida normally treated permanently affixed burglar and fire alarm systems as real-property improvements, making the contractor the consumer of materials. The retained-title clause changed that characterization by keeping the installed property capable of vendor ownership and repossession.

The contract was not a specially itemized class (2)(d) real-property contract because the materials and their prices were not agreed and itemized before work. That point did not save the transaction: retained title independently made it a sale and installation of tangible personal property, so the customer owed tax on the total equipment and installation charge.

The $50 recurring monthly monitoring charge was also taxable. Florida specifically taxed burglar protection services, including alarm monitoring and maintenance.

What this means for you

Alarm-system tax treatment can turn on who owns the equipment after installation. A contract that calls the work a real-property installation but lets the vendor retain title until payment may produce sales tax on the entire customer price rather than tax only on the contractor's materials.

Common questions

Q: Are permanently affixed burglar alarms generally real-property improvements? The ruling said yes, absent an exception such as a lease or retained-title provision.

Q: Did later invoices itemizing installed components make this a class (2)(d) contract? No. The items and agreed prices were not specifically described before the work was performed.

Q: Was monitoring taxed separately? Yes. The recurring monitoring and maintenance services were taxable burglar-protection services.

Citations and references

• Fla. Admin. Code r. 12A-1.051(2), (16) — itemized real-property contracts and alarm-system improvements
• Fla. Stat. § 212.06 — fixture definition discussed for retained-title property
• Fla. Stat. § 212.05(1)(j); Fla. Admin. Code r. 12A-1.0092 — burglar protection, monitoring, and maintenance
• Sears, Roebuck & Co. v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2d Cir. Ct. 1994)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-053

Original ruling text

SUMMARY

Issue: Whether contracts for the installation of security systems represent improvements to real property (installation of fixtures) or sales of tangible personal property. The contract under review does not constitute a class "(2)(d)" contract. However, a retained title provision does exist. This would result in the contract being characterized as the sale and installation of tangible personal property. The total amounts charged to Taxpayer for the equipment and installation would be subject to tax. Additionally, Section 212.05(1)(j), F.S., imposes a tax on detective, burglar protection, and other protection services, included within these taxable services are burglar alarm monitoring and maintenance,

Jul 14, 1998

Re: Technical Assistance Advisement 98A-053 Sales Tax; Burglar Alarm Systems Rule 12A-1.051, F.A.C. XXX ("Taxpayer") XXX ("Security Company")

Dear :

This is in response to your letter of February 9, 1998, requesting the issuance of a Technical Assistance Advisement, pursuant to Section 213.22, F.S., and Chapter 12-11, F.A.C., regarding the taxation of burglar alarms systems installed in your Florida stores. Your letter provides the following pertinent facts:

In 1997 [the Taxpayer] executed a National Account Master Agreement (Exhibit A) with [Security Company] of XXX to install and monitor burglar alarms systems (affixed to real property) in stores operated by its subsidiaries including Taxpayer. Section 13 of the Agreement provides that until

payment in full is made by subscriber for the System, title to the system shall remain in the [Security Company]. Addendum A to the Agreement includes the following:

• Schedule of equipment and/or services
• Total price including installation
• Total monthly recurring service price
• Note: Pricing may adjust up or down depending on
  requirements and number of devices used.
• Remark 1: To the above prices will be added the
  appropriate taxes as applicable to the municipalities involved.
• Remark 2: The above pricing is for standard
  installations. Situations involving union jurisdictioned disputes and/or requiring adherence to special codes or requirements will be billed in accordance with specifics affecting these special cases.

After completing the installation of the burglar alarm system at each store, [Security Company] bills Taxpayer for the price of all the equipment installed, in most cases higher than the standard installation price. At Taxpayer's request, [Security Company] provides a list of the equipment (including the price of each component) that was installed when submitting an invoice for payment. Taxpayer needs the listing to verify that the amount billed is reasonable and in accordance with the Agreement. The invoices do not include any Florida sales tax. It is our understanding from talking to [Security Company's] Tax Department that [Security Company] has paid Florida sales/use tax on the materials and equipment used in the installation.

You further state:

[Taxpayer] has a National Account Master Agreement with
[Security Company] for standard installations, but there was never any written contract which itemizes the price of each and every separate item used in fulfilling the contract between [Security Company] and taxpayer or any of
[Taxpayer's] subsidiaries in advance of the work performed.

[Security Company] cannot tell what materials will be needed for the proper installation at each store and that was the reason why the Agreement provides for billing in accordance with the requirements of installation. The Agreement cannot be construed as a class (2)(d) contract.

Discussion

The initial issue is whether contracts for the installation of security systems represent improvements to real property (installation of fixtures) or sales of tangible personal property. Rule 12A-1.051(16), F.A.C., provides the following guidance:

(16) Materials purchased for use in the performance of lump sum, cost plus, fixed fee or guaranteed price contracts for the improvement of real property are taxable to all contractors, including but not limited to the following contractors...:
...
Burglar and fire alarm system...

By way of the above rule quotation, we already have in existence established administrative law on the sales and use tax treatment of permanently affixed burglar and fire alarm systems. Such systems are treated as improvements to real property for sales and use tax purposes. The exception to the above holding would be when the system is leased or there is a retained title provision relating to the items being installed. Florida law recognizes contracts having retained title clauses and covering items to be used in improving real property as being sales of tangible personal property. (See Standard Motor Finance Co., Inc. v. Central Farmers' Trust, 157 So. 520 (Fla. 1934); Commercial Finance Co. v. Brooksville Hotel Co., 123 So. 814 (Fla. 1929); First Federal Savings and Loan Assoc. Of Okaloosa Cty. v. Stovall, 289 So.2d 32 (Fla. 1st DCA 1974); Maas Brothers, Inc. v. Guaranty Federal Savings and Loan Association, 157 So.2d 528 (Fla. 2d DCA 1963).) In such situations, the entire contract price is subject to sales tax as the sale and installation of tangible personal property.(FN 1)

In contracts where no retained title provisions exist, we would look to Rule 12A-1.051(2)(e), F.A.C., for further guidance. The rule provides that the contractor is the ultimate consumer of materials and supplies it uses to perform a lump sum, cost plus, fixed fee, guaranteed price or any other kind of contract except an itemized contract as described in paragraph (2)(d) of the rule ("class (2)(d) contract"). This paragraph reads as follows:

(d) Contracts in which the contractor or subcontractor repairs, alters, improves or constructs real property and wherein he agrees to sell specifically described and itemized materials and supplies at an agreed price or at the regular retail price and to complete the work either for an additional agreed price or on the basis of time consumed.

The issue of what constitutes a class (2)(d) contract was discussed in the case of Sears, Roebuck & Company v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2nd Cir. Ct. 1994). The court in Sears interpreted paragraph (2)(d) of Rule 12A-1.051, F.A.C., relative to contracts wherein Sears agreed to furnish and install appliances which became fixtures of real property, such as hot water heaters and built-in ovens, ranges, and dishwashers. A receipt was issued to the customer up front which listed the appliance by name and included a cost for the appliance and a separate cost for the installation. Sears would than engage an independent contractor to perform the installation. The independent installer would always supply some additional items of tangible personal property necessary to complete the installation. Such items were never listed on the sales receipt, since Sears had no knowledge of what specific materials would be used by the installer to complete the installation, but were simply later billed as a flat sum by the installer. Sears contended that it was not performing class (2)(d) contracts since its receipt did not specifically itemize and describe the unknown materials furnished by the independent installer. Given these facts, the court agreed with Sears and ruled that Sears had not performed (2)(d) contracts.

Accordingly, Sears was correct in not charging tax to the

customer on the appliances or the installation and was, further, correct in having paid tax on its cost price of purchasing the appliances from the manufacturer.

Determination

With regard to the transactions under review, the Department agrees that the contract does not constitute a class "(2)(d)" contract. However, a retained title provision does exist. This would result in the contract being characterized as the sale and installation of tangible personal property. The total amounts charged to Taxpayer for the equipment and installation would be subject to tax. Additionally, Section 212.05(1)(j), F.S. imposes a tax on detective, burglar protection, and other protection services. Included within these taxable services are burglar alarm monitoring and maintenance. See Rule 12A-1.0092, F.A.C. The National Account Master Agreement also includes a
$50.00 monthly recurring charge for monitoring. This monthly charge will also be subject to tax.

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 and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or the response.

Sincerely,

Jonathan E. Swift
Tax Law Specialist
Technical Assistance and Dispute Resolution

Control #32981
cc: Debra L. McAllister

FOOTNOTE 1 Note: Effective July 1, 1998, the Legislature added a definition of "fixture" to Section 212.06, F.S., for the purpose of determining when there is an improvement to real property. This definition recognizes the existing case law pertaining to fixtures. The addition of this definition in the statute may serve as a means of clarifying legislative intent and of adopting existing construction of the term. The definition provides that a "fixture" is an accessory to land or a structure, which retains its character as an accessory when installed, and which is permanently attached to realty. In the case of an item under a retained title provision, it would appear that the item would not be "permanently" attached to the realty, and therefore not a "fixture," as the item would need to be capable of being readily removed from the realty and repossessed by the vendor upon nonpayment by the purchaser. Machinery and equipment are specifically excluded from the definition of "fixture." See Ch.98-141, s. 5, Laws of Florida.

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