Rulings of the Tax Commissioner
Document Number: 00-67
Tax Type:Retail Sales and Use Tax
Brief Description:Miscellaneous service enterprises; Repair and installation; Monitored security systems
Topics:Taxability of Persons and Transactions
Date Issued:05/04/2000
May 4, 2000

Re: 58.1-1821 Application: Retail Sales and Use Tax


Dear ****

This will reply to your letter in which you seek correction of a retail sales and use tax audit assessment issued to your client, ***** (the "Taxpayer"), for the period April 1994 through December 1996. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is in the business of selling, installing, monitoring, and maintaining electronic security systems in large commercial office buildings. The Taxpayer also sells non-monitored security systems; however, this aspect of its business is minimal. The Taxpayer conducts business in Virginia and other states. Some states in which the Taxpayer conducts business may tax monitored systems as a retail sale, while others may treat the service provided by the Taxpayer as a taxable service.

Historically, the Taxpayer has purchased all its inventory tax exempt and applied the tax in accordance with the tax application of the jurisdiction where the system is being installed. The Taxpayer was audited by the department and assessed tax on inventory on hand in accordance with Title 23 Virginia Administrative (VAC) 10-210-230. The Taxpayer believes that the audit assessment results in double taxation when another jurisdiction taxes monitored security systems in a manner different than Virginia.

In addition to correction of the audit assessment, the Taxpayer also requests authorization from the Tax Commissioner to use a direct payment permit for all purchases.

DETERMINATION

Generally

Title 23 VAC 10-210-230, copy enclosed, defines "monitored systems" as "burglar, security and fire alarm systems which are furnished, installed and monitored under contract with the person furnishing and installing such systems." This regulation further provides the following:

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.

As provided in your letter and the auditor's comments, the Taxpayer is accruing the Virginia use tax on all tangible personal property consumed in the installation of monitored security systems in Virginia. The issue of double taxation arises when tangible personal property is withdrawn from a taxable inventory in Virginia, and installed in another taxing jurisdiction which treats the installation of monitored security systems differently from Virginia. Your letter provides two different scenarios in which a tax treatment different from Virginia's is applicable. I will address each of these situations separately below.

Monitored Systems Treated as a Taxable Sale

In situations where a jurisdiction treats the sale of a monitored security system as a taxable retail sale, there is a valid argument that the equipment in question is being double taxed. The Taxpayer is unable to determine at the time of purchase the jurisdiction in which the equipment will be placed. In this situation, the Taxpayer is holding tangible personal property for resale and generally should be able to purchase such equipment under a resale exemption certificate.

My staff has confirmed that monitored security systems that the Taxpayer furnishes to certain customers located outside Virginia represent taxable sales of tangible personal property. That is, the Taxpayer must charge and collect sales tax on charges for the monitored security system furnished to certain out-of-state customers. Therefore, the monitored security system that is placed in service outside Virginia may be purchased by the Taxpayer exempt of the tax for resale. None of that equipment is subject to Virginia sales and use tax as long as it remains in the Taxpayer's resale inventory.

Accordingly, the assessed equipment which was withdrawn from the Taxpayer's Virginia facility and sold, leased, or rented to out-of-state customers and treated as a retail sale in that state (and that state's tax was properly collected on the sale transaction) will be removed from the assessment.

Please note that the Virginia tax will apply to any equipment used by the Taxpayer to provide its services in Virginia, even if that same equipment was initially leased or rented to an out-of-state customer. In such instances, the tax will apply to either the cost price of the equipment or the current market value of the equipment as addressed in Code of Virginia 58.1-604. For the future, if the Taxpayer does not know at the time of purchase which equipment will be used in Virginia or sold at retail in another state, it may make all purchases exempt of the tax for resale. When equipment is withdrawn from inventory for use in Virginia or in another state that treats monitored security systems as a service, the Taxpayer must remit the applicable tax.

It should be noted further that the resale exemption applies only to that equipment that may actually be sold, leased, or rented at retail to customers outside Virginia. The Taxpayer must pay the tax on all purchases of tools, equipment and supplies used and consumed in installing its security systems. Therefore, the Taxpayer may not use a resale exemption certificate when making purchases of such items if these items are stored in Virginia.

Monitored Systems Treated as a Taxable Service

As provided above, Virginia treats the provision of a monitored security system as a nontaxable service, and the installer must pay tax on all tangible personal property incorporated into a monitored system. Based on the information provided, some jurisdictions in which the Taxpayer installs monitored systems treat the transaction as a taxable service. The Taxpayer believes that if it is required to pay the tax at the time of purchase on all equipment used in monitored security systems, and charge the tax on the service it is providing in certain jurisdictions, the result is double taxation.

Code of Virginia 58.1-604 imposes the tax on the use or consumption of tangible personal property in Virginia. Code of Virginia 58.1-602 defines "use" as the exercise of any right or power over property which is incidental to the ownership of such property, with the exception of the sale at retail of the property in the regular course of business. Title 23 VAC 10-210-6030 provides that "[t]he use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased. Emphasis added.

The Taxpayer was assessed tax on purchases of tangible personal property that were stored at the Virginia location prior to delivery outside Virginia for use in providing security services in other states. For purposes of the Code, the term "use" is not limited to placing an item into service within Virginia, but also encompasses any act of ownership. At the point the Taxpayer takes possession of property in Virginia for storage prior to delivery outside Virginia, it exercises a right or power, incident to ownership, over such property. This exercise of first use in Virginia subjects the Taxpayer's purchases to the Virginia use tax. The fact that a taxing jurisdiction other than Virginia taxes services differently from Virginia does not constitute double taxation. The taxing of property first used in Virginia and the taxing of the service itself are two separate and distinct transactions.

Accordingly, equipment which is withdrawn from inventory and furnished to Virginia customers or customers in other states as part of the Taxpayer's security monitoring services is taxable and will remain in the assessment.

Direct Pay Permit

Based on the availability of the resale exemption certificate for future purchases of equipment as outlined above, I find that it is not necessary to authorize the Taxpayer to use a direct pay permit.

Summary

An auditor from the department will contact the Taxpayer as soon as possible to review the audit assessment in accordance with this determination. Based on that review, a revised audit report and bill will be issued as warranted. If you should have any questions regarding this letter, please contact ****, Office of Tax Policy, at ****.

Sincerely,



Danny M. Payne
Tax Commissioner