Is a monthly standby retainer fee paid to a security firm (to be available if needed, billed separately for hours actually worked) subject to Texas sales tax?

Plain-English summary

A security service firm's customer runs a disaster-recovery business for downed airplanes, and hires the firm to secure the crash area when a plane goes down. The customer pays a monthly retainer just to keep the firm on standby; if the firm's services are actually used, it separately bills hourly, and the monthly fee is not applied against those hours worked. The firm asked whether the monthly retainer is taxable.

The Comptroller explained that the monthly retainer fee is the sale of an intangible and is not taxable in months when the firm isn't actually called on to perform taxable security services. However, the fee becomes taxable as part of the sales price of the taxable security services in months when the retainer effectively functions as a discounted or special pricing arrangement for services performed that month. If the retainer is purely for standby availability and the firm bills its normal rate schedule separately for any services actually performed, the retainer remains exempt even during months when services are performed.

What this means for you

Security firms and other service businesses using retainer agreements

Structure standby/retainer arrangements so the retainer fee is clearly separate from -- and not a discount against -- billing for services actually performed. If your normal rate schedule is billed in full whenever services are used, the standby fee itself stays a non-taxable sale of an intangible even in months when you do perform services.

Accountants and tax professionals

The taxability turns on whether the retainer functions as pure standby compensation or as a pricing mechanism that reduces the effective charge for services performed -- watch how retainer credits interact with actual service billing when advising clients on similar contracts.

Common questions

Q: Is a monthly retainer fee paid just to keep a security firm on standby taxable?
A: No, per this letter, when the firm isn't called to perform taxable services that month -- it's treated as the sale of an intangible.

Q: What if the retainer discounts or offsets the bill for services actually performed?
A: Then the fee becomes taxable as part of the sales price of the taxable security services for that month, per this letter.

Q: Does billing the normal rate schedule separately protect the retainer's exempt status?
A: Yes -- per this letter, if the retainer is solely for standby and the normal rate is billed for any services performed, the retainer stays exempt even in months services are performed.

Citations and references

Statutes:

• Texas Board of Private Investigators and Private Security Agencies Act § 2(4)(C), Article 4413(bb) (definition of "guard company")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9702246L

Original ruling text

February 14, 1997

Dear **:

Thank you for your letter dated February 6, 1997, concerning the taxability of
monthly retainer fees.

You have a customer whose business is disaster recovery for downed airplanes.
This customer has hired your firm to secure the area when there is a downed
plane. They are paying you a monthly retainer fee just to be on standby. If
they actually use your services, you will bill them for the hours worked. The
monthly fee would not be applied towards services actually performed.

Is the monthly retainer fee subject to tax?

Response. Section 2(4)(C) of the Texas Board of Private Investigators and
Private Security Agencies Act (Article 4413(bb) states that a "guard company"
includes "the control, regulation, or direction of the flow or movements of the
public, whether by vehicle or otherwise, only to the extent and for the time
directly and specifically required to assure the protection of property."
(emphasis added)

The monthly retainer fee is the sale of an intangible and is not subject to tax
when your firm is not called upon to perform taxable security services. The
fee is subject to tax as part of the sales price of taxable security services
for months when taxable security services are performed for the retaining firm
when the fee allows for a reduced or special pricing arrangement for services.
If the fee is solely for standby or retainer services and your normal rate
schedule is billed for any taxable services performed, the fee will be exempt
even in periods where taxable services are performed.

This opinion is based on the facts presented. Different facts though similar,
may result in different answers.

If you have any questions or need more information, you may call me toll free
at 1-800-531-5441, ext. 5-0613. The direct line is 512/475-0613. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,
Kevin Koller
Tax Policy Division