KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Dealer inquiring about sales tax
October 13, 2020
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Dealer inquiring about sales tax
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Ken
Thanks for the value your sharing of knowledge has provided to the industry and more specifically, me.
I am sure your information on Licensing laws by State and Audio - Video Statutes by State, States requiring Monitoring License and Renewal Requirements and cancellation requirements by State has saved me dozens if not hundreds of hours and thousands of dollars if not more. And that is just me - think of how many tens or hundreds of thousands these simple lists might have saved the industry over the years.
With that generosity in mind I will now offer you another opportunity to save me and my peers hours of aggravating struggle and perhaps a boatload of money. To be specific :
Do you have any knowledge of which states charge sales tax on monitoring services? Not all states do and for many decades my state did not charge sales tax and then they figured out it was a little treasure chest for them.
I do expect that I can get that information from one of the central stations but calling them is not as much fun as speaking with you on this forum.
Please sign me as:
Jersey Jerry
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Response
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I don’t have information for all the state sales tax laws and regulations; they are quite diverse and complex. Your personal accountant is your best option if you don’t want to take the time to contact every taxing authority. The Standard Form Agreements provide that the subscriber pays the sales tax, if due. Be sure to find out if you have to collect and remit sales tax; I assure you it’s not voluntary or discretionary.
I did reach out to a central station and got this response:
“I really do not have an answer on this. From the wholesale central stations perspective the dealers are resellers and we are not collecting sales tax. As far as I know monitoring is a taxable service to the end user. I know for sure it is in NY and NJ but since we do not do end user monitoring I cannot say for sure. I think the dealer should consult his accountant for that answer in his state(s).”
Good advice. I checked with Mitch Reitman and he responded:
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Ken,
As you know we get this type of question several times a month, and many times from your readers. The answer is that it isn’t that simple. Sales and use tax code isn’t always cut and dry, some states tax monitoring, others don’t, some follow the construction rules for the taxability of installations, some don’t. Sometimes the law is fairly clear, Texas, for example, taxes “Any services for which licensing is required pursuant to Section 1702 of the Texas Occupations Code.” As Alarm Company owners in Texas are aware, Section 1702 regulates Burglar Alarm Companies and most CCTV and Systems Integration companies, but not Fire Alarm Companies.
Once you have located the statutory law it is also important to consider the case law. These are the decisions coming out of the Courts and Administrative Hearings. For example, we had a client who was going to install and monitor systems in a neighboring state and asked us if monitoring would subject to sales tax. We have a very expensive 50 state tax research service that allowed us to determine that monitoring is not taxable in that state but that installation and service are. Because we are experienced at this stuff we looked at the case law, and found a case in which a company was installing a “free” system that consisted of an alarm panel, thermostat controls, cameras, and a DVR. The system was zero down and $85 per month for 72 months. The company was audited and the auditor determined that the entire $85 couldn’t be monitoring because the customer wasn’t paying anything for the equipment. The Security Company appealed and the Administrative Judge found that a portion of the “monitoring” was actually an installment sale of equipment and subject to sales tax. The company appealed to the State Supreme Court and lost.
This is not the typical business model for our readers, but don’t stop reading yet, it gets scary, right in time for Halloween. Our client sold commercial and residential burglar and fire systems at or above cost so there were no free systems. Typically our advice would have been not to be concerned and to just not charge tax on monitoring and be done with it. That is, until we read all of the details of the Case. The State determined that the Company paid the its central station about $5.50 on the average for monitoring, so it decided that a 100% markup would be fair, and “allowed” the alarm company to treat $11 of the $85 “monitoring” charge as true monitoring and allocated the other $74 monthly to an installment sale of equipment. The Court agreed (probably because the alarm company was so egregiously wrong) that this was a fair allocation and stuck the alarm company for tax on the $74 times a few thousand accounts, times 72 months. Our client charges more on the order of $40 for monitoring and we didn’t want the State claiming that only $11 of this wasn’t taxable.
The solution was to get a Private Ruling from the State. Our client now has this ruling and is free to treat his entire monitoring amount as a non-taxable sale.
Every state has their own rules regarding taxability. It is important that your tax professionals not only understand the State Tax Code, but also that they understand the nature of the service being provided. A few years back one of Ken’s readers asked if monitoring was taxable in Indiana. Ken forwarded the email to me and I checked the Indiana Sales Tax Code and found that Indiana taxes the “transmission of data from one point to another.” The Code Section didn’t address simply transmitting or receiving data (which is what is happening with an alarm panel and a central station receiver), and, in fact, Indiana doesn’t tax an answering service (they do the same thing as a central station – answer telephone calls, except that station receiver is talking to a digital dialer). I called the Indiana Technical Professional Hotline and spoke to an attorney there. He called me back and said that they had taken a vote and were split 10 -10 as to whether or not monitoring was taxable. I wrote four page Request for a Technical Opinion in which I described what monitoring was, what their Code Section addressed, and why I didn’t believe that it was taxable. They issued a Technical Ruling that it was, in fact, not taxable. I posted it on your blog and started getting calls from CPA’s all over Indiana telling me that their clients had been charging tax on monitoring for years. Their problem was that, while they understood the Tax Code, they didn’t understand the Security Industry. This is why it is important to deal with professionals like Ken’s firm who not only understand the law they also understand what their clients do.
If you are considering doing business in another state, or if you aren’t sure what is or isn’t taxable in your current state call us. We will get the facts about what you do and how you do it, and bill for it and either give you an opinion, obtain a ruling, or suggest another way to treat it.
Mitch Reitman
Reitman Consulting Group
817-698-9999
http://www.reitman.us
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com
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