How did PLR 97-5 tax commercial security monitoring when equipment was sold or separately rented, and how were installation and repairs treated?

Plain-English summary

South Carolina Private Letter Ruling 97-5 addressed commercial security systems that included remote video, alarm, and two-way audio monitoring. It separated the monitoring service from the customer's purchase or separately billed use of equipment.

Monitoring charges were not taxable communications charges because they were not charges for access to or use of a communications system. That conclusion applied whether the customer bought the equipment or used provider-owned equipment.

The equipment treatment depended on the contract. When title passed to the customer, the equipment sale was taxable. When the provider retained title and separately billed a periodic amount for use of the system, that charge was a taxable transfer of possession, license to use, or rental. The separate monitoring charge remained nontaxable.

Reasonable installation labor was not taxable when separately stated from the equipment price and supported by the provider's books and records. Repair treatment varied with whether the equipment was sold or rented, whether identifiable substantial parts passed to the customer, whether parts were separately charged, and whether a qualifying no-charge warranty replacement applied.

Common questions

Q: Was remote video and alarm monitoring taxable as communications service? No. The ruling said the monitoring charge was not for customer access to or use of a communications system.

Q: Was provider-owned equipment automatically treated as part of the nontaxable service? No. Here the bill separately charged for equipment use, so the ruling treated that amount as a taxable rental.

Q: Were installation charges taxable? Not when reasonable, separately stated from the equipment price, and supported by the records.

Q: How were no-charge repair parts on rented equipment treated? Identifiable, substantial parts could be treated as resold through the taxable equipment rental. Incidental or consumed materials remained taxable to the provider.

Q: Can another security company rely on PLR 97-5? No. The ruling limits reliance to its recipient and specific transactions and says it has no precedential value.

Citations and references

• S.C. Code Ann. §§ 12-36-910 and 12-36-1310 (sales, use, and communications tax)
• S.C. Code Ann. §§ 12-36-60, 12-36-100, and 12-36-110 (tangible personal property, sales, retail sales, and withdrawals)
• S.C. Regulations 117-174.192 and 117-174.204 (repair materials and installation charges)
• SC Technical Advice Memorandum #95-1 (similar monitoring issue distinguished by the ruling)

Subject

Security System

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR97-5.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC Private Letter Ruling #97-5
(TAX)

TO:

XYZ, Inc.

SUBJECT:

Security System
(Sales and Use Tax)

DATE:

September 18, 1997

REFERENCE: S. C. Code Ann. Section 12-36-910 (Supp. 1996)
S. C. Code Ann. Section 12-36-1310 (Supp. 1996)
S. C. Code Ann. Section 12-36-60 (Supp. 1996)
S. C. Code Ann. Section 12-36-110 (Supp. 1996)
S. C. Code Ann. Section 12-36-100 (Supp. 1996)
AUTHORITY: S. C. Code Ann. Section 12-4-320 (Supp. 1996)
SC Revenue Procedure #94-1
SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Ruling may only be relied upon by the person to whom
it is issued and only for the transaction or transactions to which it
relates. A Private Letter Ruling has no precedential value.

Questions:

1. Are the monthly fees paid by a customer to XYZ, Inc. (“XYZ”) for equipment and for
   electronically monitoring the customer's business for the purpose of burglary and fire
   protection subject to the sales and use taxes?
2. Are charges by XYZ to install the equipment subject to the sales and use taxes?
3. Are charges by XYZ to repair the equipment subject to the sales and use taxes?

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Conclusions:

1. EQUIPMENT AND MONITORING
   XYZ SELLS THE EQUIPMENT: The sale by XYZ of the equipment is subject to the
   sales and use tax; however, the periodic charges by XYZ for the monitoring service are
   not for the access to, or use of, a communication system and are therefore not subject to
   the tax under Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3).
   XYZ RETAINS TITLE TO THE EQUIPMENT: The periodic charges by XYZ for
   the use of the equipment constitute sales of tangible personal property (transfers of
   possession, licenses to use, or rentals or other forms of agreement) that are subject to the
   sales and use tax. The separate periodic charges for the monitoring service are not for the
   access to, or use of, a communication system and are therefore not subject to the tax
   under Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3).

2. INSTALLATION CHARGES
   Charges by XYZ to install the equipment are not subject to the sales and use taxes
   provided such charges are separately stated from the sales price of the property on the
   bills to customers and provided that XYZ’s books and records of account show the
   reasonableness of such labor in relation to the sales price of the property.

3. REPAIR CHARGES
   Repair charges are addressed in Regulation 117-174.192. Based on this regulation, the
   following outlines the application of the tax to repairs made by XYZ.
   XYZ SELLS THE EQUIPMENT
   With respect to security equipment sold to customers, the tax applies as follows:

4. If XYZ charges customers for repair materials that pass to the customer, that do not
   lose their identity, and that are a substantial part of the repair job, then these charges
   are subject to the tax. However, installation charges by XYZ with respect to these
   repair materials are not subject to the tax provided these charges are separately stated
   from the sales price of the property on billing to the customer and are reasonable.
5. If XYZ never charges customers for repair materials that pass to the customer, that do
   not lose their identity, and that are a substantial part of the repair job, then the tax is
   due at the time these materials are sold to or purchased by XYZ.

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3. If XYZ charges some customers for repair materials that pass to the customer, that do
not lose their identity, and that are a substantial part of the repair job and does not
charge other customers, then XYZ may purchase all such material at wholesale and
the tax is due at the time it charges the customer for the repair material or at the time it
withdraws such material from inventory for the “no charge” repair. However, tax is
not due on the withdrawal of the material for the “no charge” repair if XYZ is
replacing a defective part under a written warranty contract provided the warranty
contract was (at the time of the original purchase of the defective property) given
without charge, the tax was paid on the sale of the defective part or on the sale of the
property of which the defective part was a component, and the warrantee is not
charged for any labor or materials (See Code Section 12-36-110.).

4. If XYZ uses repair materials that (a) do not pass to the customer or (b) that pass to the
   customer but lose their identity or are only incidental to the repair job, then the tax is
   due at the time these materials are sold to or purchased by XYZ.
   XYZ RETAINS TITLE TO THE EQUIPMENT
   With respect to security equipment rented to customers the tax applies as follows:
5. If XYZ charges customers for repair materials that pass to the customer, that do not
   lose their identity, and that are a substantial part of the repair job, then these charges
   are subject to the tax. However, installation charges by XYZ with respect to these
   repair materials are not subject to the tax provided these charges are separately stated
   from the sales price of the property on billing to the customer and are reasonable.
6. If XYZ does not charge customers for repair materials that pass to the customer, that
   do not lose their identity, and that are a substantial part of the repair job, then XYZ
   may purchase such materials at wholesale. Such materials are considered to be resold
   by XYZ to the customer as part of the monthly rental for the equipment (Tax is due on
   the monthly rental charge for the equipment.).
7. If XYZ charges some customers for repair materials that pass to the customer, that do
   not lose their identity, and that are a substantial part of the repair job and does not
   charge other customers, then XYZ may purchase all such material at wholesale and
   the tax is due at the time it sells the repair material to the customer. Repair material for
   which XYZ does not charge customers and that pass to the customer, that do not lose
   their identity, and that are a substantial part of the repair job are considered to be
   resold by XYZ to the customer as part of the monthly rental for the equipment (see
   item 3 above). Tax is due on the monthly rental charge for the equipment.

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4. If XYZ uses repair materials that (a) do not pass to the customer or (b) that pass to
the customer but lose their identity or are only incidental to the repair job, then the tax
is due at the time these materials are sold to or purchased by XYZ.
Facts:
XYZ provides security services and monitoring services to commercial customers. The
security system generally consists of a video transmitter, closed circuit television
(“CCTV”) cameras, sensors, motion detectors, an alarm, control panel, keypad and
electrical wiring.
The security system will be connected to a remote visual command center. XYZ provides
remote video monitoring services from its Visual Command Center located outside the
state.
The basic remote interactive video system involves CCTV cameras installed at remote
locations. A video transmitter is integrated with the CCTV system which has the ability
to dial-up the remote Visual Command Center. This dial-up function will be activated
either by the Visual Command Center or by an alarm triggered at the site.
Remote interactive video not only provides the communication of video to outside
locations but simultaneous two-way audio as well.
XYZ will provide commercial customers with both security system and monitoring
services for a stated fee. The system will be either sold to customers or provided for
specified period of time (service contracts).
Under the term of a service contract, title to the security system remains with XYZ.
Service contracts are anticipated to be from three to five years, and the customer will have
the option of renewing indefinitely. At the end of the service contract, the system will be
returned to XYZ. Monitoring services will be for an expected contract term of three to
five years. Service contract customers will only obtain the right to use the system for the
period during which the monitoring services are being provided.
Service contract customers will be billed on a monthly, quarterly, or semiannual basis.
Each billing will include separately stated charges for the use of the system and a
monitoring service.
The question has arisen as to whether the monthly fees charged by XYZ are subject to the
State sales and use taxes.

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Discussion:

EQUIPMENT AND MONITORING
This matter is similar to one addressed by the department in SC Technical Advice
Memorandum #95-1. However, XYZ is distinguishable in that a specific charge is
assessed the customer each payment period for use of the equipment under contracts in
which XYZ retains title of the equipment. Based on these facts, the department will
provide guidance for the following scenarios:

1. XYZ sells the equipment and provides the monitoring service, and
2. XYZ retains title to the equipment and the billing to the customer includes separately
   stated charges for the use of the system and a monitoring service.
   XYZ SELLS THE EQUIPMENT
   There are two transactions involved in this example. The customer is first seeking
   monitoring services for security purposes. After the customer has decided to purchase the
   monitoring services, he must then determine if it is better to purchase the equipment or
   use XYZ’s equipment.
   With respect to the monitoring services, we must determine if the periodic charges for the
   monitoring services are subject to the sales and use tax.
   The "sale or use of [communications] is subject to tax under [Chapter 36]" pursuant to
   Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3), which impose the tax on the:
   gross proceeds accruing or proceeding from the charges for the ways or means for the
   transmission of the voice or messages, including the charges for use of equipment
   furnished by the seller or supplier of the ways or means for the transmission of the
   voice or messages; . . .
   In reviewing various communication issues in the past, the Department has concluded that
   charges for the ways or means of communication must be charges for access to, or use of,
   a communication system, whether this charge is based on a fee per specific time period or
   per transmission.
   Since the periodic charges by XYZ are not for access to, or use of, a communication
   system, such charges are not subject to the tax under Code Sections 12-36-910(B)(3) and
   12-36-1310(B)(3).

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With respect to the second transaction, the purchase of the equipment, Code Section
12-36-910(A) is applicable and reads:
A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every
person engaged or continuing within this State in the business of selling tangible
personal property at retail. (Emphasis added.)
Code Section 12-36-1310(A) imposes a use tax and reads:
A use tax is imposed on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this
State, at the rate of five percent of the sales price of the property, regardless of
whether the retailer is or is not engaged in business in this State. (Emphasis added.)
Code Section 12-36-60 defines the term "tangible personal property" to mean:
personal property which may be seen, weighed, measured, felt, touched, or which is in
any other manner perceptible to the senses. It also includes services and intangibles,
including communications, laundry and related services, furnishing of
accommodations and sales of electricity, the sale or use of which is subject to tax
under this chapter and does not include stocks, notes, bonds, mortgages, or other
evidences of debt. (Emphasis added.)
Therefore, for the 5% sales or use taxes to apply, there must be a retail sale or retail
purchase of tangible personal property.
Code Section 12-36-110 defines the terms "sale at retail" and “retail sale,” in part, as
follows:
Sale at retail and retail sale mean all sales of tangible personal property except those
defined as wholesale sales. The quantity or sales price of goods sold is immaterial in
determining if a sale is at retail.
Therefore, the sale by XYZ of the equipment is subject to the sales and use tax.
XYZ RETAINS TITLE TO THE EQUIPMENT
In this example, XYZ charges the customer two fees on each bill - one for the monitoring
service and one for use of the equipment.
The statutory provisions cited above also apply to this example. In other words, there are
also two transactions involved. The customer is first seeking monitoring services for
security purposes. After the customer has decided to purchase the monitoring services, he
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must then determine if it is better to purchase the equipment or use XYZ’s equipment.
As stated above, since the periodic charges by XYZ are not for the access to, or use of, a
communication system, such charges are not subject to the tax under Code Sections 1236-910(B)(3) and 12-36-1310(B)(3).
Now we must consider the periodic charge for use of the equipment. This is a sale under
South Carolina law. Code Section 12-36-100 reads:
“Sale” and “purchase” mean any transfer, exchange, or barter, conditional or
otherwise, of tangible personal property for a consideration including:
(1) a transaction in which possession of tangible personal property is transferred but
the seller retains title as security for payment, including installment and credit
sales;
(2) a rental, lease, or other form of agreement;
(3) a license to use or consume: and
(4) a transfer of title or possession, or both.
Based on this definition and the previously cited statutory provisions, the charge for the
use of the equipment constitutes a transfer of possession, a license to use, or a rental or
other form of agreement that is subject to the sales and use tax. As stated earlier, the
separate charge for the monitoring service is not subject to the sales and use tax.

INSTALLATION CHARGES
Regulation 117-174.204 addresses the issue of installation charges. The regulation states:
Not subject to the sales or use tax are charges for installation incident to the sale of
tangible personal property when such charges are separately stated from the sales
price of the property on billing to customers and provided the seller’s books and
records of account show the reasonableness of such labor in relation to the sales price
of the property.
Based on the above, an installation charge by XYZ is not subject to the tax with respect to
equipment sold (see Code Section 12-36-100) provided the charge is separately stated
from the sales price of the property on billing to the customer and it is reasonable.

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REPAIR CHARGES
Repair charges are addressed in Regulation 117-174.192 which reads:
Materials used in repairing, for tax purposes, fall into the following classes:
(a) Materials which pass to the repairman’s customers and which do not lose their
identity when used by the repairman and which are a substantial part of their
repair job (such as auto repair parts, radio tubes, and condensers) are sold at
retail by the repairman. He must report sales tax on such sales, including tax on
the service incidental thereto. He may, however, if making separate agreements
to sell the repair parts and to perform labor and service required, remit tax only
upon the price of the parts if his records and his invoices clearly show a
separation of the amounts received from sales of parts and from the rendering of
services.
(b) Materials which pass to the repairman’s customers but which lose their identity
when used by the repairman or which are inconsequential in amount; such as
paint, solder,
and tack; are considered to have been used or consumed by the repairman and
are taxable at the time of sale to him.
(c) Materials which are used or consumed by the repairman and which do not pass
on to his customers are supplies and taxable when sold to the repairman.
(d) Materials which fall in class (b) or (c) are purchased at wholesale for use by a
repairman who, in addition to using such materials as a repairman, sells the same
kind of materials for use by others. These materials become subject to the sales
tax upon their withdrawals for use by the repairman. Note, however, that a
repairman is not considered a vendor unless he carries a stock of goods and sells
outright therefrom a substantial amount. If the repairman makes only isolated
sales or “accommodation” sales, he is not to be licensed as a seller under the
sales tax law, in which case his supplier is liable for the tax.
In all instances materials are taxable when sold to repairmen for use in making repairs
where such materials lose their identity as a result of such use. For instance, solder
used in welding, paint used in automobile refinishing, thread used in mending clothes,
cloth used in reupholstering. In all instances where the shape or composition of the
repair material is materially changed, such altered or changed material is considered to
have been used or consumed by the repairman, and, for that reason, subject to tax
when sold to him. No tax on this material is to be collected by the repairman from his
customer.

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In instances where repair materials and repair parts are passed to the repairman’s
customers without change, except necessary and customary minor adjustments, such
parts or materials may be purchased at wholesale by the repairman licensed under the
Sales Tax Law. The repairman is then liable for sales tax on such sales of materials
and parts to his customers.
Based on this regulation, the following outlines the application of the tax to repairs made
by XYZ.

XYZ SELLS THE EQUIPMENT
With respect to security equipment sold to customers, the tax applies as follows:

1. If XYZ charges customers for repair materials that pass to the customer, that do not
   lose their identity, and that are a substantial part of the repair job, then these charges
   are subject to the tax. However, installation charges by XYZ with respect to these
   repair materials are not subject to the tax provided these charges are separately stated
   from the sales price of the property on billing to the customer and are reasonable.
2. If XYZ does not charge customers for repair materials that pass to the customer, that
   do not lose their identity, and that are a substantial part of the repair job, then the tax is
   due at the time these materials are sold to or purchased by XYZ.
3. If XYZ charges some customers for repair materials that pass to the customer, that do
   not lose their identity, and that are a substantial part of the repair job and does not
   charge other customers, then XYZ may purchase all such material at wholesale and
   remit the tax at the time it charges the customer for the repair material or at the time it
   withdraws such material from inventory for the “no charge” repair. However, tax is
   not due on the withdrawal of the material for the “no charge” repair if XYZ is
   replacing a defective part under a written warranty contract provided the warranty
   contract was (at the time of the original purchase of the defective property) given
   without charge, the tax was paid on the sale of the defective part or on the sale of the
   property of which the defective part was a component, and the warrantee is not
   charged for any labor or materials.
4. If XYZ uses repair materials that (a) do not pass to the customer or (b) that pass to the
   customer but lose their identity or are only incidental to the repair job, then the tax is
   due at the time these materials are sold to or purchased by XYZ.

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XYZ RETAINS TITLE TO THE EQUIPMENT
With respect to security equipment rented to customers the tax applies as follows:

1. If XYZ charges customers for repair materials that pass to the customer, that do not
   lose their identity, and that are a substantial part of the repair job, then these charges
   are subject to the tax. However, installation charges by XYZ with respect to these
   repair materials are not subject to the tax provided these charges are separately stated
   from the sales price of the property on billing to the customer and are reasonable.
2. If XYZ does not charge customers for repair materials that pass to the customer, that
   do not lose their identity, and that are a substantial part of the repair job, then XYZ
   may purchase such materials at wholesale. Such materials are considered to be resold
   by XYZ to the customer as part of the monthly rental for the equipment.
3. If XYZ charges some customers for repair materials that pass to the customer, that do
   not lose their identity, and that are a substantial part of the repair job and does not
   charge other customers, then XYZ may purchase all such material at wholesale and
   remit the tax at the time it sells the repair material to the customer. Repair material for
   which XYZ does not charge customers and that pass to the customer, that do not lose
   their identity, and that are a substantial part of the repair job are considered to be
   resold by XYZ to the customer as part of the monthly rental for the equipment (see
   item 3 above).
4. If XYZ uses repair materials that (a) do not pass to the customer or (b) that pass to the
   customer but lose their identity or are only incidental to the repair job, then the tax is
   due at the time these materials are sold to or purchased by XYZ.

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