Were accelerated monitoring-service charges taxable when a burglar-alarm customer terminated the contract early?

Plain-English summary

A burglar-alarm company sold, installed, and monitored alarm systems. Its monitoring contract made all remaining amounts immediately due if a customer terminated service before the contract expired. Monitoring actually stopped after the customer's breach.

The Comptroller nevertheless said the accelerated amount was taxable. The customer had agreed in advance to receive the taxable service for a set period and to pay for that period even if the customer later stopped wanting the service.

The reporting period depended on the provider's accounting method. A cash-basis provider remitted tax in the period payment was received. An accrual-basis provider owed tax in the period the customer was billed.

What this means for you

Under this letter, stopping the actual monitoring did not turn the accelerated contract balance into a nontaxable payment. The charge remained payment for the agreed taxable service term, while the timing of tax followed cash or accrual accounting.

Common questions

Was the accelerated balance taxable after service stopped? Yes.

Why? The customer had agreed in advance to pay for the monitoring term even if it later chose not to receive the service.

When did a cash-basis provider remit the tax? In the period it received payment.

When did an accrual-basis provider owe the tax? In the period it billed the customer.

Did the letter say tax was always due immediately upon breach? No. It tied the period to when income was recorded under the provider's accounting method.

Citations and references

No statute or administrative rule was cited in the ruling text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9102L1078A01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

JOHN SHARP
Comptroller February 19, 1991

Dear *:

Thank you for your recent letter which is restated in part with responses
below.

Facts: Taxpayer is engaged in the business of selling, installing, and
monitoring burglar alarm systems. Taxpayer uses a service contract which
governs the monitoring service. This contract provides for all sums due
through the term of the contract to accelerate and become immediately due
should the client terminate service prior to expiration of the contract.
Actual monitoring service terminates upon breach by the client;
therefore, no taxable service is actually taking place.

Question: Should any of the accelerated portion be taxed?

Response: The accelerated portion is subject to tax. The customer agrees
in advance to take the service for a period of time and to pay for it even if
he later decides he no longer desires to receive it.

Question: Since collection of accelerated sums can be somewhat tenuous,
should tax be assessed at the time of breach or upon collection of accelerated
sums?

Response: Tax is due in the period that you record the income from the
taxable service. If you are on a cash basis of accounting, you should remit
tax for the period in which payment is received. If you are on an accrual
basis of accounting, the tax is due in the period in which the customer is
billed.

This opinion is based on the facts you presented. Other facts, though
similar, may yield different results.

If you have questions or need more information, please call our toll-free
number 1-800-531-5441. My direct number is 512- 463-4680 [FAX (512) 474-7643].
You may write to me in care of Tax Administration Division.

Sincerely,
Al Van Allen
Tax Administration Division.