Are remote maintenance and alarm-code changes taxable when customers monitor the video-security systems themselves?

Subject

Any services provided in securing the tangible personal property are taxable, regardless of the fact that services provided may be separately stated or not

Plain-English summary

A company sold, installed, and maintained video-security systems for Virginia commercial customers. It remotely checked system function and changed alarm codes, but the customers themselves reviewed camera images to detect theft.

Virginia therefore classified the systems as non-monitored. A system is monitored for this rule only when the same person furnishes, installs, and monitors it; customer monitoring does not qualify.

Non-monitored systems are taxable sales of tangible personal property. Under the true-object test, the customers' object was to obtain the security equipment, so the related remote maintenance and recoding services were taxable even if separately stated.

Citations and references

• 23 VAC 10-210-230.
• 23 VAC 10-210-4040 A and D.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-93

Original ruling text

May 20, 2016

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of your client (the “Taxpayer”), in which you request a ruling on the application of the retail sales and use tax to services provided in connection with the sale of security systems. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer sells, installs, and maintains video security systems for commercial customers located in Virginia. The Taxpayer has physical locations in both Virginia and *. Based on the information provided, the systems installed are video security systems in which the customers can review the digital images captured on the system's cameras. The Taxpayer monitors the security system to ensure proper functioning and frequently modifies alarm codes remotely from the service center located in ***. The Taxpayer requests clarification regarding the application of the Virginia retail sales and use tax to its monitoring services and the charges for alarm code changes.

RULING

Title 23 of the Virginia Administrative Code (VAC) 10-210-230 (A) defines “monitored systems” as “burglar, security and alarm systems which are furnished, installed and monitored under contract with the person furnishing and installing such system.” The regulation also provides that:

Charges for monitored systems constitute charges for a service which is not subject to the tax. The person selling/leasing and installing the monitored system is deemed to be the consumer of all property used in providing the service and must pay the tax on such property at the time of purchase.

The regulation further states that systems that are monitored by persons other than the seller and installer, i.e. , systems monitored by the customer or systems that are connected directly to the police or fire department, are not considered to be monitored systems as the term is used in this regulation. Title 23 VAC 10-210-230 B addresses the Virginia retail sales and use tax application to “non-monitored” systems and provides that:

Persons engaged in the sale or lease and installation of burglar, security or fire alarm systems are engaged in making retail sales, the total charge for which is subject to the tax. Separately stated installation charges are not subject to the tax. Persons engaged in retail sales or leases must register as a dealer and collect and pay the tax with respect to such transactions. All items used by a dealer in installing such a system, for example wiring which remains part of the building, nails and similar items, are taxable to the dealer at the time of purchase.

In order to determine the application of the sales and use tax to the maintenance services and alarm recoding services provided remotely by the Taxpayer, it must first be determined if the systems installed by the Taxpayer are monitored or non-monitored systems as considered in Title 23 VAC 10-210-230. Based on the information provided by the Taxpayer, the systems at issue consist of cameras and video surveillance equipment. This equipment provides digital images that allow the Taxpayer's customer, i.e. retail stores, to review the images in order to detect store theft and shoplifting. While the Taxpayer provides remote maintenance on the system from its out-of-state location, the actual monitoring of the system is performed by the retailer, thus classifying the system sold by the Taxpayer to Virginia customer as a non-monitored system, a transaction deemed the sale of tangible personal property.

Title 23 VAC 10-210-4040 A provides that:

Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.

Transactions involving both the sale of tangible personal property and the provisions of services generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. As explained in subsection D of this section, the “true object” test is used to determine the taxability of these transactions.

Title 23 VAC 10-210-4040 D addresses the "true object" test and states the following:

In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the “true object” of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any service provided, is taxable . (Emphasis added).

As provided in the Department's regulations, if the true object of the transaction is to secure the tangible personal property, any services provided in securing the tangible personal property are taxable, regardless of the fact that services provided may be separately stated or not. Based on the information provided by the Taxpayer, the true object of the transaction between the Taxpayer and its Virginia customer is the provision of a non-monitored security system, a taxable sale of tangible personal property. In accordance with Title 23 VAC 10-210-4040 D, the services provided by the Taxpayer, i.e. , off-site maintenance and recoding services, qualify as services in connection with the sale of tangible personal property and are subject to the sales tax.

This ruling is based on the facts set forth above as presented to this office. Any changes in the facts or the introduction of new facts may lead to a different result.

The regulation sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6044911635.P