Is the sale of a security-monitoring customer contract from one alarm company to another subject to Texas sales tax?

Plain-English summary

Two Texas-headquartered security companies, both selling residential security systems, had customers under three-year monitoring contracts. Company A wanted to "sell" a batch of its customer contracts to Company B, who would then take over monitoring the customers and collecting the remaining monitoring fees. Company A would be fully released from its obligations to those customers and would receive no further payments from them. The customers whose contracts were being sold lived throughout the United States, though both companies and their monitoring centers were based in Texas.

Both companies already understood that the underlying monitoring service is a taxable service in Texas, and that tax was properly being charged to the customer's bill. The question here was narrower: is the sale of the contract itself, from Company A to Company B, also subject to sales tax?

The Comptroller held that it is not. The sale of a contract to perform a taxable service is treated as the sale of an intangible, and Texas does not tax the sale of intangibles. This confirmed informally what the taxpayer had already been told in a phone conversation with the Comptroller's office. The ruling is expressly limited to the facts presented, and notes the opinion could change if the facts were different.

What this means for you

Security and monitoring companies buying or selling customer contracts

If you are acquiring or divesting a book of monitoring (or similar service) contracts -- as opposed to selling the underlying taxable service itself -- the sale of the contract right is treated as an intangible and is not subject to Texas sales tax. This is true even though the service performed under the contract (here, security monitoring) remains a taxable service that must still carry sales tax on the customer's bill going forward.

Accountants and tax professionals

Distinguish clearly between (1) the taxable service billed to the end customer, which continues to bear sales tax regardless of who is performing it, and (2) the assignment/sale of the contract itself between businesses, which is a transfer of an intangible right and falls outside the sales tax base. Don't assume a bulk contract sale needs tax collected just because the service underlying those contracts is taxable.

Common questions

Q: If monitoring services are taxable, why isn't the sale of the monitoring contracts also taxed?
A: Because the object being sold between the two companies is the contract itself -- an intangible right to receive future payments and perform the service -- not the taxable service. Texas taxes the sale of the service to the end customer, not the sale of the contract right between businesses.

Q: Does it matter that the customers whose contracts were sold live outside Texas?
A: The ruling doesn't turn on customer location. Both companies were headquartered in Texas with Texas-based monitoring centers, and the ruling focuses on the character of the transaction (sale of an intangible) rather than where the underlying customers reside.

Q: Does Company B need to charge sales tax to the customers after taking over the contracts?
A: Yes -- the letter confirms both companies already knew monitoring fees are subject to Texas sales tax and that tax is properly included on the customer's bill; that obligation continues regardless of which company is now performing the service.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1173C11

Original ruling text

May 22, 1992

Dear ***:

Thank you for your letter requesting a ruling on the taxability of the sale of
security contracts.

You explained that Company A and Company B are both in the security industry
selling residential security systems. The customers of these companies sign
three year monitoring contracts.

Presumably, Company A wishes to "sell" a number of its customer contracts to
Company B, who will then be responsible for monitoring the customer and
collecting the remainder of the contract monitoring fee. Company A will be
released from all obligations to its customer and will receive no further
payments from the customer.

You further clarified that both companies do know that monitoring fees are
subject to sales tax in Texas and tax is properly included on the customer's
bill. The contracts which will be "sold" belong to customers living throughout
the United States. However, both companies involved are headquartered in Texas
and the monitoring centers are located in Texas.

You asked "Is this sale of contracts subject to sales tax?" You explained that
your were told in a telephone conversation with a representative of this
office, that this transaction is not taxed because it is a sale of an
intangible.

The sale of a sale contract to perform a taxable service is the sale of an
intangible. This particular transaction is not taxed.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Administration Division