For a commercial security company, when is a system a taxable sale versus a non-taxable monitored service, and how is each taxed?

Plain-English summary

The same California-headquartered security company addressed in the companion residential ruling, P-1998-118, also serves commercial customers, and asked how Kansas tax applies to its commercial systems and monitoring. The systems — cameras, sensors, motion detectors, alarm, control panel, keypad, wiring — are placed at a Kansas business and connected to a California command center that can adjust cameras and operate gates, locks, lights, and controls remotely. The company offers two contract types.

Contract 1 — outright sale plus monitoring. "The first contract involves the sale of tangible personal … and the providing of a monitoring service." The customer buys the system and pays a periodic monitoring fee. The Department ruled that "[c]ustomer charges … for the sale of the system and equipment are subject to Kansas sales or use tax," so the company "must collect tax on the full customer charge for the sale." Whether state-and-local sales tax or retailers' use tax applies depends on the nature of the company's Kansas operations. The monitoring fee is not taxed, because "security monitoring services are not enumerated in K.S.A. 79-3603."

Contract 2 — company retains title (service, not lease). Here the company keeps title and the customer pays a service-contract fee and a monitoring fee, separately stated. To tell an equipment lease from a service that uses equipment, "Kansas considers whether the person who benefits from the use of the equipment operates or controls it or whether that operation and control is left in the hands of the equipment provider." Because the company controls and operates the equipment from California, must maintain it, and the equipment can only be used with the company's monitoring, the contract is treated "as part of [the company's] security service rather than as a rental." Result: the company "must pay tax on the cost of the equipment that it uses in Kansas and should not charge tax on its customer billing for the service fee."

Provider is the consumer; tax base; installation and repair. As in the residential ruling, a service provider is the consumer of its equipment (Southwestern Bell, 168 Kan. 227; AT&T Technologies, 242 Kan. 554); out-of-state equipment used in Kansas owes use tax on cost, with a credit for tax paid elsewhere (K.S.A. 79-3705). The tax base for a system sold is "the total selling price charged to the customer," including shipping; for a system the company uses in its service, it is "the cost of the system to [the company]," including shipping. Installation is taxable when it accompanies a system sold to the customer, but not when provided to service-only customers (part of the non-taxable monitoring service); the company pays tax when it hires third-party installers. Repairs to the company's own property are not taxed, but "repair services by third parties that are billed to [the company] are fully taxable."

Bottom line: a security system sold outright to a commercial customer is a taxable sale (with the separate monitoring fee non-taxable), while a company-owned, company-controlled monitored system is treated as a non-taxable service on which the company itself bears the equipment tax. The operate-and-control test is what separates a taxable lease from a non-taxable monitored service.

What this means for you

The contract structure decides the tax

Selling the system to the customer is a taxable sale of tangible personal property. Keeping title and controlling the equipment as part of a monitored service turns the arrangement into a non-taxable service — with very different tax consequences.

Kansas uses an operate-and-control test for lease vs. service

When equipment accompanies a service, Kansas asks who operates and controls it. Provider control (here, remote operation from California, a maintenance duty, and use tied to the provider's monitoring) points to a service, not a taxable equipment lease.

Monitoring fees are not taxed

Because security monitoring is not enumerated in K.S.A. 79-3603, the periodic monitoring fee is not subject to Kansas sales or use tax under either contract.

Watch the tax base and third-party charges

For a sold system, tax the full selling price including shipping; for a system the company uses in its service, the company owes tax on its own cost including shipping. Installation tied to a sale is taxable, and third-party repair or installation charges billed to the company are taxable to the company.

Common questions

Is a commercial security system sale taxable in Kansas?
Yes. When the customer buys the system outright, the full customer charge for the sale is subject to Kansas sales or use tax; the separate monitoring fee is not taxed.

What if the company keeps title to the system?
Then Kansas treats it as part of the company's non-taxable security service — not an equipment lease — because the company operates and controls the equipment. The company pays tax on its equipment cost and does not tax the service fee.

Are monitoring fees ever taxable?
No. Security monitoring is not an enumerated service under K.S.A. 79-3603, so monitoring fees are not subject to Kansas sales tax.

How are installation and repair handled?
Installation is taxable when it accompanies a sold system, but not for service-only customers. Repairs to the company's own property are not taxed, while third-party repairs billed to the company are fully taxable.

Citations and references

• K.S.A. 79-3603 — Kansas taxes only enumerated services; security monitoring is not enumerated, so monitoring fees are not taxable, while the outright sale of a system is a taxable sale of tangible personal property.
• K.S.A. 79-3705 — use tax on out-of-state equipment used in Kansas, subject to a credit for tax properly paid to another state.
• Southwestern Bell Tel. Co. v. State Commissioner of Revenue, 168 Kan. 227 (1949) and In re Appeal of AT&T Technologies, Inc., 242 Kan. 554 (1988) — a service provider is the consumer of the equipment it uses to provide its service.
• The Department applied an operate-and-control test to distinguish a taxable equipment lease from a non-taxable monitored service, and set the tax base as the full selling price (for sold systems) or the company's cost (for systems used in the service), including shipping.
• K.A.R. 92-19-59 — authorizes Kansas private letter rulings; this ruling binds the Department only as to the requesting taxpayer and the facts presented.
• Issued September 2, 1998 by Thomas E. Hatten, Attorney, Policy & Research, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-117

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 2, 1998

XXXX
XXXX
XXXX
XXXX

RE: Your letter of
December 15, 1997

Dear XXXX:

I have been asked to answer your letter of December 15, 1997. In it you ask how Kansas sales tax should be applied to the security alarm and monitoring business of XXXX.

XXXX is headquartered in California and has offices in several other states. It provides security systems and monitoring systems to commercial customers. XXXX plans to begin doing business in Kansas and wants to know what its responsibilities are under the Kansas sales tax law.

XXXX purchases complete security systems from third parties. The systems normally consist of a micro-processor based video, closed circuit television cameras, sensors, motion detectors, an alarm, control panel, keypad and wiring. The security system will be placed in a commercial business in Kansas and connected to a visual command center located in California where monitoring services are provided. An integrated voice communication system allows the command center to communicate interactively with the customer’s security system. XXXX employees at the California center will be able to adjust the cameras, and operate motorized gates, electric door locks, lights, and environmental controls at the customer site in Kansas.

XXXX and their customers will contract for these systems and services in two ways. Under the first, the customer will buy the system from XXXX outright and pay XXXX a periodic monitoring fee. Under the second, XXXX retains title to the system and the customer pays XXXX periodic fees under a service contract and for monitoring services. The service contract fee and the monitoring fee will be separately stated on customer billings. Service customers only obtain the right to use the equipment during the period in which they receive monitoring services from XXXX.

I will discuss the tax implications of these two contracts in order. The first contract involves the sale of tangible personal and the providing of a monitoring service by XXXX. Customer charges by XXXX for the sale of the system and equipment are subject to Kansas sales or use tax. Accordingly, XXXX must collect tax on the full customer charge for the sale. Whether Kansas state and local retailers’ sales tax or Kansas retailers’ use tax applies will depend on the nature of XXXX’s Kansas operations.

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, monitoring fees are not subject to Kansas sales tax. Thus, the periodic billing for the monitoring services would not be subject to Kansas sales or use tax.

The second contract involves charges for the equipment and charges for the monitoring fee. To distinguish between an equipment lease and the providing of a service that involves the use of equipment, Kansas considers whether the person who benefits from the use of the equipment operates or controls it or whether that operation and control is left in the hands of the equipment provider. In XXXX’s case, XXXX’s control and operation of the equipment from California, their duty to maintain the equipment, and the contractual limitation that the equipment can only be used in conjunction with XXXX’s monitoring services, are factors that weigh in favor of treating these security system contracts as part of XXXX’s security service rather than as a rental the equipment. This determination means that XXXX must pay tax on the cost of the equipment that it uses in Kansas and should not charge tax on its customer billing for the service fee.

As I discussed in another letter to you, 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 provided to 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). These rules dictate that when XXXX purchases property from Kansas vendors, it must pay sales tax on the purchase amount. When XXXX uses equipment in Kansas that was acquired in other state, Kansas use tax is due on the cost of the equipment. The amount of use tax due Kansas is subject to a credit for sales or use tax that was properly paid to another state. K.S.A. 79-3705.

In Kansas, the tax base for a security system that XXXX sells is the total selling price charged to the customer. The selling price includes shipping costs. The tax base for the security system that XXXX uses in providing its service is the cost of the system to XXXX. This cost should also include any shipping charges.

Installation services performed by XXXX are taxable when the services are for systems that are sold to customers. These same XXXX services should not be taxed when they are provided to customers who are not buying equipment. Such services are viewed as part of the non-taxable security monitoring service. However, XXXX would be responsible for paying tax on the installation services when it hires third party installers. Similarly, on repairs by XXXX to its own property, there would be no tax. However, repair services by third parties that are billed to XXXX are fully taxable.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination. Please call me if you have any additional questions.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 09/29/1998 Date Modified: 10/10/2001

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