How does Kansas sales tax apply to the equipment, installation, and monitoring sold by a security alarm business?

Plain-English summary

A security alarm company sells and installs residential and business alarm systems. Its customers sign a 24-month installment contract and pay a set amount per month for the equipment, its installation, and the monitoring service. The company asked how Kansas sales tax applies. The Department explained that alarm monitoring is not a taxable service, and that how the equipment is taxed depends on the way the company bills its customers.

Two general principles frame the answer:

• Only enumerated services are taxed. "Kansas only taxes services that are enumerated in K.S.A. 79-3603. Since security monitoring services are not enumerated in K.S.A. 79-3603, they are not subject to Kansas sales tax."
• A service provider is the consumer of its equipment. "In Kansas, service providers are generally viewed as the consumer of all the equipment and other property that they purchase for use in providing the service" (Southwestern Bell Tel. Co. v. State Commissioner of Revenue, 168 Kan. 227 (1949)). This holds "regardless of whether the service itself is taxed or is not taxed or whether tangible personal property is placed with the consumer" (In re Appeal of AT & T Technologies, Inc., 242 Kan. 554 (1988)).

Because of that, the tax outcome is "normally controlled by the terms in the contract":

• Separate line-item equipment rental. If the company bills a line-item rental charge for the equipment and a separate charge for monitoring, it "could claim a resale exemption when they buy equipment and charge sales tax on the line item charge for equipment rental." The monitoring charge is not taxed.
• Install-and-remove model. If the company installs a system and removes it when the customer stops paying for monitoring, it "should pay tax on its purchases and not charge tax on the customer billings, since these services are not taxed."

Applying this to the requester, who bills customers a lump sum for monitoring, installation, and equipment and then sells the contract to a third party (a monitoring company): "Since the customer billing is in a lump sum, you may treat your business as being the final consumer of the equipment and pay tax on the purchase price." Those tax costs are then recouped when the contracts are sold to the third-party monitor. "There would be no tax on the billing to the customer since it would be viewed as the providing of a non-taxable monitoring service." The Department cautioned that the result "would be different if you bill customers line item charges for the equipment, installation, and monitoring service."

What this means for you

Alarm and monitoring companies

Security monitoring is not an enumerated taxable service in Kansas, so you do not charge sales tax on the monitoring itself. The question is how you handle the equipment.

If you bill a lump sum

Treat your business as the final consumer of the equipment: pay sales tax when you buy it, and do not charge the customer sales tax on the bundled monthly bill (it is a nontaxable monitoring service).

If you bill a separate equipment-rental line

You can buy that equipment for resale (no tax at purchase) and instead charge sales tax on the line-item equipment-rental charge. The separate monitoring charge remains untaxed.

Structure drives the tax

The same alarm business can have different tax outcomes depending on its contract. Decide up front whether equipment is bundled into the service or separately rented, because that choice determines where the tax falls.

Common questions

Q: Is security alarm monitoring taxable in Kansas?
A: No. Monitoring is not one of the services enumerated in K.S.A. 79-3603, so the monitoring service is not subject to sales tax.

Q: If I bundle equipment, installation, and monitoring into one monthly charge, who pays the tax?
A: You do, as the final consumer of the equipment — you pay sales tax when you buy it and charge the customer no sales tax on the bundled bill.

Q: How can I instead collect tax from the customer on the equipment?
A: Bill a separate line-item rental charge for the equipment. Then you can buy it for resale and charge sales tax on that equipment-rental line, while the monitoring line stays untaxed.

Citations and references

• K.S.A. 79-3603 — enumerates the services subject to Kansas sales tax; because security monitoring is not listed, it is not taxable.
• Southwestern Bell Tel. Co. v. State Commissioner of Revenue, 168 Kan. 227, 212 P.2d 363 (1949) — a service provider is generally the consumer of the equipment it buys to provide its service.
• In re Appeal of AT & T Technologies, Inc., 242 Kan. 554, 749 P.2d 1033 (1988) — that consumer rule applies whether or not the service is taxed and even when property is placed with the customer.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-1999-20

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

January 24, 2000

XXXX
XXXX
XXXX

RE: Your letter of November 30, 1999

Dear XXX:

I have been asked to answer your letter that we received last month. In it you ask how Kansas sales tax should be applied to your security alarm business.

ABC SECURITY sells and installs residential and business security alarm systems. At the time of sale, the customer signs a 24 month installment contract and agrees to pay a specific amount per month in exchange for the equipment, its installation, and the monitoring service. You ask how Kansas sales tax applies to these services and charges.

Kansas sales taxation of security system providers is complicated because of the variety of ways that the equipment and monitoring services are sold and billed. In some instances, title to the equipment remains with the security system provider and the provider will retake possession when the customer no longer buys the monitoring services from them. At other times, charges for the monitoring service and the equipment are bundled together. At the end of the period, the customer may or may not gain ownership of the equipment. Sometimes a customer pays a monthly bill for the equipment and may contract with any monitoring service that is available. There are a variety of other ways the equipment and services are provides.

In Kansas, service providers are generally viewed as the consumer of all the equipment and other property that they purchase for use in providing the service. Southwestern Bell Tel. Co. v. State Commissioner of Revenue, 168 Kan. 227, 212 P.2d 363 (1949). This general rule applies regardless of whether the service itself is taxed or is not taxed or whether tangible personal property is placed with the consumer for use as part of the service. See In re Appeal of AT & T Technologies, Inc., 242 Kan. 554, 749 P.2d 1033 (1988). Kansas only taxes services that are enumerated in K.S.A. 79-3603. Since security monitoring services are not enumerated in K.S.A. 79-3603, they are not subject to Kansas sales tax.

How security systems are taxed in Kansas is normally controlled by the terms in the contract for providing the security system and monitoring services. Some companies bill customers a line item rental change for the equipment and a line item charge for the monitoring service. In this case, the company could claim a resale exemption when they buy equipment and charge sales tax on the line item charge for equipment rental. The monitoring services would not be subject to tax. Many companies install a system, and then remove it when the customer no longer pays for its monitoring services. In these cases, the company should pay tax on its purchases and not charge tax on the customer billings, since these services are not taxed. In addition to these practices, there are others contractual arrangements that security companies use. The different approaches can result in different taxing consequences.

In your case, it appears that you are billing customers a lump sum for the monitoring service, installation, and equipment. You then sell this contract to a third party, VVV Monitoring. Since the customer billing is in a lump sum, you may treat your business as being the final consumer of the equipment and pay tax on the purchase price. These tax costs can then be recouped when you sell these contracts to VVV Monitoring. There would be no tax on the billing to the customer since it would be viewed as the providing of a non-taxable monitoring service. Please note that the tax consequences would be different if you bill customers line item charges for the equipment, installation, and monitoring service.

I hope that I have adequately answered your letter. If not, please call me and we can discuss any additional questions that you have.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 02/15/2000 Date Modified: 10/10/2001

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