How does Kansas tax a residential security company's monitoring fees, equipment, add-ons, installation, and repairs?

Plain-English summary

A California-headquartered company provides residential security systems and monitoring for "a stated lump sum monthly fee." Title to the system stays with the company; customers get the right to use it only while monitoring continues. Add-ons (smoke detectors, panic buttons, extra motion detectors) are "sold outright to the customer," and the company expects to run patrol cars in Kansas in the future. It asked how Kansas sales tax applies. (A companion ruling, P-1998-117, addresses the same company's commercial systems.)

The provider is the consumer of its equipment. Kansas treats service providers "as the consumer of all the equipment and other property that they purchase for use in providing the service" — citing 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) — "regardless of whether the service itself is taxed or is not taxed." So the company pays sales tax on property bought from Kansas vendors, and Kansas use tax on the cost of equipment acquired out of state and used in Kansas, with a credit for tax properly paid to another state (K.S.A. 79-3705).

Monitoring and patrol services are not taxed. "Kansas only taxes services that are enumerated in K.S.A. 79-3603." Because security monitoring is not enumerated, it is not taxable, and the company "should not charge sales tax for monitoring services that are billed as line items." Patrol services likewise are not taxed — so the company "must pay tax when it purchases patrol cars, and other property and taxable services" used to provide that service.

Add-ons are taxable sales. "Customer charges for sales of the add-ons must be taxed" because ownership of the add-ons transfers to the customer.

Tax base and installation/repair. The use-tax base for the security system is "the cost of the parts … and the cost of any assembly services performed by third parties," because use tax applies to the "consideration paid by the taxpayer." Installation by the company at the residence is not taxed (an integral part of the non-taxable monitoring service). Repairs the company performs on its own property, and repairs it bills to customers, are not taxed (Kansas exempts residential remodeling and repair) — but a repair becomes "taxable to [the company] if … performed by third parties who remove the equipment from the resident[ce] to repair."

Bottom line: the monitoring service is non-taxable, so the company pays the tax on its own equipment rather than charging customers on the service. The one clearly taxable customer charge is the outright sale of add-on devices; installation and residential repairs are not taxed to the customer, though third-party off-site repairs are taxable to the company.

What this means for you

A non-enumerated service shifts the tax to the provider's inputs

Kansas taxes only listed services. Security monitoring is not listed, so the provider does not tax the monitoring fee — instead it is the final consumer of the equipment and property it uses and pays sales or use tax on those purchases.

Sales versus use tax on equipment

Equipment bought from Kansas vendors is taxed at purchase; equipment bought out of state and used in Kansas owes Kansas use tax on its cost, reduced by a credit for tax properly paid to another state.

Selling add-ons outright is taxable

When the customer actually buys and owns a device — here, the add-on detectors and buttons — that is a taxable retail sale, distinct from the non-taxable monitoring service.

Installation and residential repairs are generally not taxed — with a catch

Installation tied to the monitoring service, and residential repairs, are not taxed to the customer. But if a third party removes the equipment from the residence to repair it, that repair is taxable to the provider.

Common questions

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

Who pays tax on the equipment?
The provider. As the consumer of its equipment, it pays sales tax to Kansas vendors and use tax on out-of-state equipment used in Kansas (with a credit for tax paid elsewhere) under K.S.A. 79-3705.

Are the add-on devices taxable?
Yes. Add-ons sold outright to the customer are taxable sales because ownership transfers to the customer.

Is installation or repair taxable?
Installation and residential repairs are not taxed to the customer. However, a third-party repair that removes the equipment from the residence becomes taxable to the provider.

Citations and references

• K.S.A. 79-3603 — Kansas taxes only the services enumerated in this statute; security monitoring and patrol services are not enumerated, so they are not taxable.
• K.S.A. 79-3705 — use tax on out-of-state equipment used in Kansas, subject to a credit for sales or use 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) — establish that a service provider is the consumer of the equipment and property it uses to provide its service, whether or not the service is taxed.
• The use-tax base is the "consideration paid by the taxpayer" (the ruling cites this as "K.S.A. 79-79-3703"); residential remodeling and repair services are described as exempt in prose.
• 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-1998-118

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 2, 1998

XXXXX
XXXXX
XXXXX
XXXXX

RE: Your letter of
December 15, 1997

Dear Mr. 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. It offers two basic types of residential security systems. These basic systems can be enhanced with various add-ons, such as smoke detectors, panic buttons, and additional motion detectors. XXXX monitors the systems from its California communications center. The XXXX security systems automatically alerts the center when an anomaly is detected. Center operators, who monitors these signals continuously, take the action that is appropriate to the alarm being generated. XXXX anticipates that they will begin operating patrol cars in Kansas at some time in the future.

XXXX provides residential customers with the security system and monitoring services for a stated lump sum monthly fee. Title to the system remains with XXXX. Customers obtain the right to use the system only for the period during which the monitoring services are being provided. The add-on items are sold outright to the customer. You ask how Kansas sales tax applies to these various services and charges.

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 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. 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.

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. Accordingly, XXXX should not charge sales tax for monitoring services that are billed as line items on customer billings. The patrol services are not subject to Kansas tax. Accordingly, XXXX must pay tax when it purchases patrol cars, and other property and taxable services for use in providing this service. Customer charges for sales of the add-ons must be taxed. These transactions are taxable sales since ownership to the add-ons transfers to the customer.

Under the circumstances described in your letter, the tax base for the security system is the sum of the cost of the parts that are used in the security system and the cost of any assembly services performed by third parties. This is because Kansas use tax is imposed on the “consideration paid by the taxpayer” for the property that is subject to use tax. K.S.A. 79-79-3703. Installation services performed by XXXX at the customer residences are not subject to Kansas sales tax since installation would be considered to be an integral part of the non-taxable security monitoring service. For repairs by XXXX that are not billed to a customer, there would be no tax since XXXX would be repairing its own property. For repairs by XXXX that are billed to a customer, there would be no tax because Kansas now exempts residential remodeling and repair services. Please note that the repair services would become taxable to XXXX if they were performed by third parties who remove the equipment from the resident to repair.

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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