More on sales tax in KY / sending x employee 1099 for unreturned equipment /Contract Sale January 6, 2024

KEN KIRSCHENBAUM, ESQ
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More on sales tax in KY / sending x employee 1099 for unreturned equipment /Contract Sale
January 6, 2024

More on sales tax in KY

Ken,

          Last July you sent me an email from one of your readers advising that “Monitoring would be taxable in Kentucky starting September 1.” You asked me to look into this.
          The whole exercise is a great example of the confusion that surrounds sales and use tax in the alarm industry.
          The first thing that I did was to consult, the Kentucky Sales Tax Code, specifically:
          KENTUCKY REVISED STATUTES, TITLE XI REVENUE AND TAXATION, CHAPTER 139 SALES AND USE TAXES, Sales Tax, section 139.200 “Imposition of Sales Tax.”

          I did find that as of January 1, 2023, (not September 1) that “a tax is hereby imposed upon all retailers at the rate of six percent (6%) of the gross receipts derived from several new sources, including Residential and nonresidential security system monitoring services” (Code Section 139.200(2)(ab).
          Notice that it doesn’t mention Fire Alarm monitoring.
          When a provision of Tax Code is vague, we typically request a Technical Ruling from the State, so I did in this case. I prepared a lengthy explanation of what monitoring is, how security system monitoring differs from fire monitoring, and why fire monitoring didn’t appear to be taxable.
          In September an attorney from the Kentucky Department of Revenue called. We had a nice conversation. My take on their position is that companies that install “free” security systems were actually selling them by disguising an installment sale as monitoring ( I don’t necessarily disagree and this is something that especially residential companies should be aware of). He wanted to know if monitoring of a fire system was “required” as a condition of purchasing a system. I explained that substantially all fire systems are billed to the customer at a mark up and that the “free” model doesn’t work for these systems. I also explained that fire monitoring is more sophisticated and that it isn’t unusual for fire alarm monitoring to be $50 per month or more. He said that he would get the response out in a week. It has now been fifteen weeks. We have chatted a few times and he completed his response and it has been “under review” since September.
          So what is the answer?  We don’t know yet, but I do have an idea of where the State is coming from. I will update you when I do hear, but I expect that, so long as the fire alarm monitoring doesn’t look like an installment sale of an alarm system, it won’t be taxable. How would I advise a client to treat this? Stay tuned. I am fairly confident that this will come down to a question of the way that you contract with a customer, and how the monitoring is billed.
Mitch Reitman
817 698 9999 x 101
Reitman Consulting Group
Fort Worth, TX
http://www.reitman.us
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sending x employee 1099 for unreturned equipment from article on April 8, 2013 [articles are posted on K&K website at https://www.kirschenbaumesq.com/page/alarm-articles
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Ken
          In response to this article:
https://www.kirschenbaumesq.com/article/getting-equipment-back-from-ex-employee-april-8-2013
          I understand that one should not attempt to withhold wages. Would it be an option to issue a 1099 in the value of the unreturned equipment?
Thanks,
Teresa
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Response
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          I asked Mitch Reitman to respond to this tax question and here is his response:

Ken,
          Here is my response to the reader who wants to send a 1099 to a former employee who failed to return equipment. I will stay away from the legal side of this issue, but, as far as sending a 1099, 1099 forms are issued to third parties that a company pays for goods or services. Employees do not get 1099s. Employees get W-2s.
          If a company is legally entitled to be paid for the tools (first, get the legal question answered), then the employee’s failure to return them could result in income to the employee. If so, then I suppose that you could report the value of the tools in Box 14 “Other.” The tools aren’t compensation, so they aren’t subject to FICA, Medicare, or withholding.
          I would, however, advise against this. The value of the tools are deductible by the company as a casualty loss, regardless of whether or not your try to ding the employee so reporting their value on the W-2 is not going to result in a benefit to the business. It is most probably going to come off as vindictive, and (this isn’t a legal opinion, just an observation as a business owner) is just going to make a bad situation worse. Any employer’s greatest concern in an employee termination situation is that the employee will enlist the aid of the numerous resources (Employment Commission, Union, Employment Attorneys, social media, etc…) to take it out on you as an employer.
          Unless there are hundreds of thousands of dollars at stake, let it go and pat yourself on the back for taking the high road.
Mitch Reitman
817 698 9999 x 101
Reitman Consulting Group
Fort Worth, TX
http://www.reitman.us
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Receiving check from someone other than your customer

Ken,
We signed an agreement with a company under one name;
received a payment but check is from a different company.
          Any issue or anything we should do or note?
Jeff

Response

          I repeatedly and consistently counsel that you should do no work without a contract.  It should be obvious that the contract needs to be signed by the party for whom you are doing the work.
          While your question seems common and easy enough it actually raised a few interesting legal issues, none of which you want to have to deal with.
          Let’s start with the collection side.  You’ve been collecting payment from ABC Corp or from John Doe for your services [anything from sale, installation or after install services].  Your contract is with XYZ Corp or with John Smith.  One day you get a letter from a Bankruptcy Trustee for ABC Corp or from John Doe who wants to know why you’ve been getting money.  When you produce your contract it’s not going to be with ABC Corp or from John Doe, and the Bankruptcy Trustee is going to demand the money back.
          How about the liability angle?  ABC Corp or John Doe pay you.  Then there is a loss; ABC Corp or from John Doe or their attorney or insurance company seeking subrogation demand damages.  You produce the contract and smugly point out the protective provisions.  They however call your attention to the fact that neither ABC Corp or from John Doe signed the contract; they are not bound by the contract.
          You next comment is that since they didn’t sign the contract they aren’t the customer, contract says “no third party beneficiaries” and you owed them no duty.  Their response is, “well we paid you all these months for service and you accepted the payment and did the work, and we don’t know anything about a contract because we never signed one”.
          In either the collection or defense scenario you are the one facing the uphill battle.  You will have to prove that the paying party received adequate consideration for its payments and you will have to prove that the contract with its protective provisions binds the non-signing parties.
          It would be much easier to insist that the party paying you is the party who signed the contract or assumed the contract with your consent.  The K&K Assignment and Assumption form is recently added to the forms available at www.alarmcontracts.com.
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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