For a company that prewires new homes for audio/video and security systems, sells stereo equipment after the builder sells the house, and installs and monitors security systems: what's taxable, and does prewiring alone count as a security service or as ordinary contractor work?

Plain-English summary

A residential audio/video and security installer asked the Comptroller to sort out its tax obligations across three overlapping business lines. The answer turns almost entirely on what's bundled with what.

Audio/video prewiring and equipment (new construction). Installing audio/video wiring, in-wall speakers, and blank plates during construction is ordinary contractor work under Rule 3.291: the installer may use a lump-sum contract (pay tax on materials at purchase) or a separated contract (maintain tax-free inventory via resale certificate, then charge/report tax on materials separately). Selling additional stereo equipment to homeowners AFTER the builder sells the house does NOT fall under the contractor rule unless the equipment becomes permanently attached to the house structure — otherwise the installer must collect tax on the full sales price (equipment, installation, mileage) as a straightforward retail sale.

Security system prewiring vs. full installation — the key distinction. A charge solely for prewiring a house for alarm/security equipment (before any keypad, battery, alarm, or transformer goes in) can be treated under the ordinary contractor rule — materials taxable, labor not, per the lump-sum/separated contract choice. But the moment the SAME job also installs the keypad, battery, alarms, and transformer, the entire charge for prewiring plus equipment installation becomes taxable as a security service under Rule 3.333 — regardless of whether the prewiring is billed as a separate line item or bundled together. Monitoring charges after installation are always taxable as a security service.

Post-sale monitoring and service to homeowners. Monthly monitoring, installation labor, and labor/materials on homeowner service calls are all taxable.

Tax-paid-twice relief. If the installer paid sales tax to its own suppliers on materials that later get resold or used in a taxable job, it can either issue a resale certificate up front (in lieu of paying tax) or, if it already paid tax, reduce its reported taxable sales by the cost of those already-taxed materials (Rule 3.338 credit mechanism).

What this means for you

Home audio/video and security system installers

Keep prewiring-only jobs separate from full equipment-installation jobs if you want prewiring taxed under the (often more favorable) ordinary contractor rule. The instant your crew installs the keypad, battery, alarm panel, or transformer on the same job, the WHOLE charge — including the prewiring — becomes taxable as a security service, even if you itemize the prewiring on its own line.

Post-construction equipment sellers

Selling stereo or security equipment to homeowners after the builder has already sold the house is a straight retail sale (full price taxable) unless the equipment is permanently attached to the house's structure, in which case contractor rules apply instead.

Accountants and tax professionals

This letter illustrates a recurring TX sales tax theme: bundling different services together can convert an otherwise-partially-taxable contractor job into a fully taxable service job. Watch for similar "prewiring plus equipment" bundling issues in other trades (e.g., audio/visual, home theater, data/telecom).

Common questions

Q: Is prewiring a new house for a security system taxable?
A: If billed alone, it can qualify for the ordinary contractor rule (materials taxable, labor not, per your contract type). But if you also install the keypad, battery, alarm, and transformer on the same job, the entire prewiring-plus-installation charge becomes taxable as a security service.

Q: Do I owe tax on stereo equipment I sell to a homeowner after the builder sells the house?
A: Yes, on the full sales price (equipment, installation, mileage), unless the equipment becomes permanently attached to the house structure.

Q: Is monthly alarm monitoring taxable?
A: Yes, always, as a security service.

Q: Can I get credit if I already paid sales tax to my supplier on materials I now need to resell or use differently?
A: Yes — you may reduce the taxable sales you report on your next return by the cost of materials you already paid tax on, per Rule 3.338.

Citations and references

• 34 Tex. Admin. Code Rule 3.333 (Security Services — taxes the entire prewiring-plus-installation charge once alarm/keypad equipment is also installed, and taxes monitoring)
• 34 Tex. Admin. Code Rule 3.291 (Contractors — governs lump-sum vs. separated contract treatment of prewiring-only jobs and construction materials)
• 34 Tex. Admin. Code Rule 3.338 (credit mechanism for sales tax already paid to suppliers on materials later resold or reclassified)

Subject

Burglar/Alarm Security System — Prewiring Building Only Vs. Prewiring As Part Of System Installation — License Requirements

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9711053L

Original ruling text

November 24, 1997

Dear**:

Thank you for your letter of November 10, 1997. You asked that we address the
taxability of the following situations.

1. We work with builders in new residential housing whereby we install audio
   video wiring for telephones, computers, TV's, and stereo systems. At a trim
   stage of construction, we install in-wall speakers and blank plates for the
   builders. In model homes of the builders, we also install stereo equipment
   such as surround sound speakers, CD players, and receivers. This equipment is
   billed separately

Question: We do work whereby we have different sales tax requirements and
responsibilities. Can we buy materials under both systems? What documentation
is required to prove our payment of sales taxes? Does each item sold have to
be documented?

Response: You stated that you believe you are acting as a contractor in this
situation and that you may use either a lump-sum or separated contract. You
are correct.

You may purchase materials for use in a lump-sum contract and pay tax on the
materials at the time of purchase. The receipt from your supplier showing you
paid tax on the materials is sufficient documentation that the tax liability is
satisfied for these lump-sum construction contracts.

You may also maintain a valid, tax-free inventory. You may issue a resale
certificate in lieu of paying tax to your suppliers on the purchase of these
inventory items. The contract with your customer separately stating materials
and labor should have a separate line stating the amount of tax charged on the
materials or a statement stating the separately stated charge for materials
includes the sales tax.

You may remove items from a valid, tax-free inventory for use in a lump-sum
contract. You must accrue tax on the cost of these items and report the tax on
the taxable purchase line of your sales tax return.

B. After the builder sells the house; we sell additional stereo system
equipment such as speakers, TV's, TV satellites, and other stereo components to
the homebuyers.

Question: Do any of these sales to homeowners fall under the contractor rules
at 3.291 ? Do these billings have sales taxes on materials and labor?

Response: Sales of this type of equipment will not fall under the contractor
rule unless the equipment is permanently attached to the structure of the
house. You are responsible for collecting tax on the sale and installation of
these items when they retain their identity as tangible personal property.

Question: If we have paid the sales taxes to our supplier thinking the
materials were to be used in our contracting business and later the items were
sold to a homeowner, do we to charge the homeowner's sales tax on labor and
materials? Do we get a credit for the sales taxes paid to our supplier? How
do we calculate the credit under rule 3.338?

Response: I am unsure whether the materials you refer to is the wiring and
other items you asked about in Question or the items you refer to in Question B
above. If you are referring to the wiring, wall speakers, etc., installed in
residential property, you are considered a contractor. The type of contract
you enter into with your customer will determine the taxability of the
materials. Please refer back to the response given to question 1.

The total sales price of tangible personal property refererred to in Question B
above (i.e., cost of the item, installation, mileage, etc.) is taxable. To
obtain credit for tax you paid suppliers, you may lower the amount you report
as taxable sales on your sales tax return by the cost of the items you paid tax
on.

2. We have a license from the Private Investigators and Private Security
   Agencies to do alarm monitoring sales and installation of security system
   equipment.

We install wiring for security system equipment for the builders. We do a
security trim whereby we install security system equipment (keypad, battery,
and transformer) for the builder. After the builder sells the house, we sell
monitoring to the homebuyers plus additional security system equipment.

Question: Is prewiring the house for alarm/security equipment considered
security services for Rule 3.333? Is the installation of security equipment
considered security services for Rule 3.333? Is the monitoring of house
considered security services for Rule 3.333? Which work do we charge sales
taxes? Do the contractor rules of section 3.291 come into play for the prewire
and trim (equipment installations)?

Response: A charge solely for prewiring a structure under construction could
fall under the contractor rule. In this situation, the materials are taxable,
the labor is not. The type of contract (lump-sum or separated) you have with
your customer will determine who is responsible for tax on the materials.

However, I should point out that the charge for the prewiring does not fall
under the contractor rule if you also install the keypad, battery, alarms, and
transformer. Under this situation, the entire charge for prewiring and alarm
equipment installation falls is taxable as described in Rule 3.333. This is
true whether the prewiring charge is separately stated or billed together with
the other equipment and installation. The monitoring charge after installation
is also taxable.

Questions: If we pay the suppliers the sales taxes on the materials for
security services, do we in turn charge the builder sales taxes again? Are
there credits to calculate?

Response: You may issue a resale certificate in lieu of paying tax on the
material used in a security service. However, if you paid tax on the
materials, you may lower your taxable sales on your next sales tax return by
the cost of the materials you paid tax on. You should charge the builder tax
on your total charge for the security service.

3. We sell monitoring to homeowners with alarm/security equipment.

Questions:
A. Do we charge sales taxes on the monthly monitoring? Response: Yes.
B. Do we charge sales taxes on the charge for installation labor? Response:
Yes.
C. Do we charge sales taxes on the labor and materials on homeowner service
calls?

Response: Yes.

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

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division