Is a wireless subscription background-music service (like Muzak) taxable, and how does that differ from installing a security alarm system?

Plain-English summary

This follow-up letter addresses two related scenarios. First, a contractor installing a music sound system (speakers, receiver, etc.) for a restaurant, with equipment and labor separately stated, is NOT improving realty when the restaurant itself isn't buying the sound system — a prior July 1997 letter about improvements to realty didn't apply to that transaction. By contrast, someone installing a security alarm system is providing a taxable security service even though the alarm system becomes physically affixed to the building — that distinction holds even when the customer buys the alarm system outright.

Second, and the letter's real subject: wireless subscription background-music services (the "Muzak"-style model), where customers pay a subscription fee to receive music transmitted to their location, are treated as nontaxable services. The provider installs its own sound equipment at the customer's location and retrieves it once the subscription ends. Because the underlying service is nontaxable, the provider does not need to collect sales tax from the customer on any of the associated charges — equipment, installation, or the subscription fee itself. However, the provider must pay tax on its own cost of any taxable items (including the sound equipment) it uses to provide the wireless service. The letter cautions that other related situations, like renting audio tapes, may separately require the provider to collect tax from customers.

What this means for you

Background-music service providers (Muzak-style subscriptions)

You don't collect sales tax from customers on equipment, installation, or subscription charges for providing wireless background music as a nontaxable service — but you do owe use tax yourself on the cost of the equipment you use to deliver that service. Watch for adjacent taxable transactions, like tape rentals, that may require you to collect tax separately.

Security system installers

Don't assume installing sound or entertainment equipment and installing a security alarm system are taxed the same way just because both end up affixed to a building — installing a security alarm is a taxable security service regardless of who owns the system or how it's affixed, while a nontaxable wireless music service is not.

Common questions

Q: Do I have to collect sales tax on a wireless background-music subscription?
A: No — if it fits the wireless subscription music service model described here, the whole package (equipment, installation, subscription fee) is treated as a nontaxable service to the customer.

Q: Does the music-service provider owe any tax at all?
A: Yes — the provider must pay tax on its own cost of the taxable items (like the sound equipment) used to provide the service, since it's the end consumer of that equipment.

Q: Is installing a security alarm system taxed the same way?
A: No. Installing a security alarm system is a taxable security service, even when the alarm system is affixed to the building and even if the customer purchased the system.

Q: Can another business rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9710764L

Original ruling text

October 9, 1997

Dear *****:

Thank you for your letter and our recent phone conversation concerning my July
10, 1997 letter to ***** of ABC regarding improvements to realty.

As I understand it, your contract with ABC is to install a music sound system
(i.e., speaker, receiver, etc.) for a restaurant. Charges for equipment and
labor are separately stated on the invoice. However, ABC is not purchasing the
music sound system. Therefore, this transaction is not an improvement to realty
and the information in my letter of July 10th has no bearing on the transaction
between XYZ and ABC.

In another example, a person providing taxable security services is not a
contractor improving realty when installing security alarms in a restaurant
(new or existing). That service is taxable as a security service even if the
customer purchases the security system and the system is affixed to the realty.

We have regarded wireless XYZ services in which customers pay a subscription to
receive music transmitted to the customer's location as nontaxable services.
Once the subscription ends, XYZ picks up its music sound system equipment from
the customer. XYZ does not need to collect sales tax from the customer on the
charges (e.g., equipment, installation, subscription fee, etc.) related to the
performance of the nontaxable service. However, XYZ must pay tax on the cost
of any taxable items (including the music sound system equipment) used in
providing the wireless XYZ service. Please be aware there may be other
situations (e.g., rental of tapes) that will require XYZ to collect tax from
customers.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division

cc: *****