Can a company that monitors house arrest units buy its telephone lines tax-free for resale, since the phone service is resold as part of its monitoring service?

Subject

House Arrest Units — Electronic Monitoring Of Person As A Condition Of Probation/Parole — Nontaxable Service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1292D01

Plain-English Summary

The taxpayer's company monitors house arrest units for the State of Texas — that is, it provides electronic monitoring of a person as a condition of probation, parole, mandatory supervision, or release on bail. The company's largest expense in providing this service is telecommunications (telephone lines), and it asked whether it could buy those telephone lines tax-free using a resale certificate, since the phone service is an integral part of what it resells to the state.

The Comptroller explained that Rule 3.333 defines a "security service" as one requiring a license under the Private Investigators and Private Security Agencies Act, but the Texas Civil Statutes (Article 4413(20bb)) specifically exclude electronic monitoring of a person as a condition of probation, parole, mandatory supervision, or release on bail from that taxable category. In other words, house arrest monitoring of this kind is a nontaxable service.

Sales tax law allows a company to buy a taxable service tax-free with a resale certificate only when that service is resold as an integral part of a taxable service the company provides. Here, although the telephone service was indeed an integral part of what the company provided, what the company provided (house arrest monitoring) was itself nontaxable. Because the end service isn't taxable, the resale exemption doesn't apply — the company must pay sales tax on the telephone service it purchases to run its monitoring operation.

What This Means For You

If you provide house arrest / electronic monitoring services as a condition of probation, parole, mandatory supervision, or bail: Your monitoring service itself is nontaxable under this ruling, but that also means you cannot use a resale certificate to buy the telephone lines or other taxable inputs you use to deliver it. You pay sales tax on those inputs just like any other purchaser.

If you provide a different kind of security or monitoring service: Check whether your specific service falls within the taxable "security service" definition in Rule 3.333, or within a statutory exclusion like the one for court-ordered electronic monitoring. That classification determines whether you owe tax on your service to your customer and whether you can buy your taxable inputs tax-free for resale.

General principle illustrated here: A resale certificate only works when the item or service purchased is resold as part of a taxable service. If the service you ultimately provide is nontaxable, you generally must pay tax on the taxable components you buy to produce it, even if those components are "integral" to your service.

Q&A

Q: Can the company buy its telephone lines tax-free for resale?
A: No. Because electronic monitoring of a person as a condition of probation, parole, mandatory supervision, or release on bail is a nontaxable service, the company cannot issue a resale certificate for the telephone lines — it must pay sales tax on that telephone service.

Q: Isn't the telephone service an integral part of the monitoring service being sold?
A: Yes, the ruling agrees the telephone service is an integral part of what the company provides. But the resale exemption for services requires that the resold service be integral to a taxable service, and house arrest monitoring is nontaxable, so the exemption does not apply.

Q: Why is house arrest electronic monitoring not treated as a taxable security service?
A: Rule 3.333 defines a taxable security service as one requiring a license under the Private Investigators and Private Security Agencies Act, but the Texas Civil Statutes (Article 4413(20bb)) specifically exclude electronic monitoring of a person as a condition of probation, parole, mandatory supervision, or release on bail from that taxable category.

Citations

• 34 Tex. Admin. Code Rule 3.333 (Security Services — definition of taxable security service)
• Tex. Civ. Stat. Art. 4413(20bb) (exclusion for electronic monitoring of a person as a condition of probation, parole, mandatory supervision, or release on bail)

Original ruling text

March 16, 1994

Dear ****:

Katy Courrages of our Office has asked that I
respond to your recent fax transmittal. Thank you for
providing the additional information I requested
on March 16, 1994. You've ask for an opinion regarding sales
tax as it applies to certain services provided by COMPANY.

FACTS: COMPANY is in the business of monitoring house arrest
units for the state of Texas. The largest expense in
providing this service is the telecommunication service
(telephone lines).

QUESTION: Can the telephone lines be purchased tax free for
resale?

RESPONSE: Rule 3.333 section (a) provides that a security
service means any service for which a license is required
under the Private Investigators and Private Security
Agencies Act.

A copy of the Texas Civil Statutes, Article 4413(20bb)
relevant to the exclusion for electronic monitoring of a
person as a condition of probation, parole, mandatory
supervision, or release on bail is enclosed for your
reference. Rule 3.333, Security Services is also enclosed.

The sales tax law allows a resale certificate to be issued
for taxable services that are resold as an integral part of
a taxable service. The (telecommunications) telephone
service appears to be an integral part of the service you
provide; however, the service you provide is a nontaxable
service. This means the service is excluded from taxation.
As the provider of a nontaxable service, COMPANY is required to
pay sales tax on the telephone service used to provide the
nontaxable service.

This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. If
you have any questions or need more information, please
write or call me toll free at 1-800-531-5441, extension
50330, or 512-475-0330.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9403169L