Are nonmonitored fire alarm systems taxable, and can a taxpayer pull a vendor's untaxed purchases out of an audit sample by calling them a one-time glitch?

Plain-English summary

An electrical contractor was audited and assessed use tax on untaxed vendor purchases, including fire alarm/safety systems installed by a subcontractor. It appealed on three points: some purchases were nontaxable services; some invoices already had tax paid; and one vendor's untaxed purchases were a one-time "glitch" that shouldn't be in the audit sample.

The Department's answer was mixed: nonmonitored fire systems are taxable (that stays), invoices proving tax was already paid come out, but the "glitch" purchases stay in the sample because the contractor didn't prove they were isolated.

Monitored vs. nonmonitored fire/alarm systems

Virginia draws a sharp line (23 VAC 10-210-230):

• Monitored systems — furnished, installed, and monitored under one contract by the same seller — are a nontaxable service. The seller is the consumer of the equipment and pays tax when it buys the materials.
• Nonmonitored systems — sold/leased and installed without that ongoing monitoring by the seller — are a taxable retail sale of tangible personal property. The whole charge is taxable, except separately stated installation charges.

Here the contractor subcontracted the provision and installation of fire safety systems, and the invoices showed they were nonmonitored. So the subcontractor's charge (less separately stated installation) was correctly taxed. The contractor's argument that the auditor had wrongly treated them as taxable "monitoring services" didn't hold — monitored services would be nontaxable, but these weren't monitored.

The invoices that came out

Where the auditor had taxed transactions because there was no proof tax had been paid, and the contractor later produced invoices showing the tax was in fact paid, the auditor agreed to remove those items from the sample. That's straightforward substantiation relief.

Why the "glitch" purchases stayed in the sample

The contractor wanted a vendor's untaxed purchases pulled from the audit sample, arguing a vendor system glitch caused the missing tax, making them a one-time event. The Department explained how sampling works and its limits:

• Sampling projects a reviewed slice across the whole period; it's valid when properly applied.
• The Department removes an item from a sample only if the taxpayer shows the transaction is isolated and not a normal part of the business.
• An assessment is prima facie correct (Va. Code § 58.1-205), so the burden is on the taxpayer, and adequate records are required (Va. Code § 58.1-633; 23 VAC 10-210-470).

The contractor provided no documentation showing the transactions were truly isolated rather than ordinary purchases, so it didn't meet its burden and the purchases stayed in the sample.

Where it landed

The audit goes back to the field audit staff to make the agreed adjustments (removing the substantiated invoices), after which a revised bill with interest issues; no additional interest accrues if paid within 30 days of the revised bill.

What this means for you

• Selling and installing a fire/alarm system without your own monitoring = a taxable sale. Tax the full charge, breaking out installation separately to exempt it.
• Monitoring is what flips it to a nontaxable service — and only when the same seller furnishes, installs, and monitors under one contract.
• To remove items from an audit sample, prove they're isolated. A vendor "glitch" explanation isn't enough without documentation that the transactions weren't normal business.
• Keep proof of tax paid. Invoices showing tax was already paid are exactly what gets purchases removed from an assessment.

Common questions

Q: Are fire alarm systems taxable in Virginia?

A: A nonmonitored system is a taxable retail sale (only separately stated installation is exempt). A monitored system furnished, installed, and monitored by the same seller is a nontaxable service, and the seller pays tax on its own materials.

Q: A vendor forgot to charge me tax because of a system error. Can I keep those purchases out of the audit sample?

A: Not without proof. You must show the transactions were isolated and not a normal part of your business. A general "glitch" explanation with no documentation won't meet your burden.

Q: I already paid tax on some audited purchases. Will those be removed?

A: Yes, if you produce invoices showing the tax was paid. The auditor agreed to remove such substantiated items here.

Citations and references

• 23 VAC 10-210-230 — monitored vs. nonmonitored burglar/security/fire alarm systems; nonmonitored sale is taxable, separately stated installation exempt
• Va. Code § 58.1-205 — assessment is prima facie correct; burden of proof on the taxpayer
• Va. Code § 58.1-633 and 23 VAC 10-210-470 — recordkeeping requirements

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-95

Original ruling text

August 27, 2019

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period November 2013 through October 2016. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is an electrical contractor for both residential and commercial properties. As a result of the Department’s audit, the Taxpayer was assessed use tax on several purchases from vendors on which the tax was not previously paid. The Taxpayer was also assessed use tax on purchases from a subcontractor who completed installation of fire alarm and safety systems.

The Taxpayer contends the purchases from a recycling company constitute the nontaxable provision of services and should be removed from the audit. The Taxpayer also submitted several invoices corresponding to the exceptions held in the audit, contending the tax had already been paid and such purchases should be removed from the audit. Lastly, the Taxpayer believes certain purchases should not be included in the sample because they represent a one-time occurrence.

DETERMINATION

Fire Alarm Systems

Title 23 of the Virginia Administrative Code (VAC) 10-210-230 A defines “monitored systems” as “burglar, security and alarm systems which are furnished, installed and monitored under contract with the person furnishing and installing such system.” The regulation also provides that:

Charges for monitored systems constitute charges for a service which is not subject to the tax. The person selling/leasing and installing the monitored system is deemed to be the consumer of all property used in providing the service and must pay the tax on such property at the time of purchase.

The regulation further states that systems monitored by persons other than the seller who furnishes and installs the system, such as those connected directly to the police or fire department, are not considered to be monitored systems as the term is used in the regulation.

Title 23 VAC 10-210-230 B addresses the retail sales and use tax application to “nonmonitored” systems and provides that:

Persons engaged in the sale or lease and installation of burglar, security or fire alarm systems are engaged in making retail sales, the total charge for which is subject to the tax. Separately stated installation charges are not subject to the tax. Persons engaged in retail sales or leases must register as a dealer and collect and pay the tax with respect to such transactions. All items used by a dealer in installing such a system, for example wiring which remains part of the building, nails and similar items, are taxable to the dealer at the time of purchase.

The Taxpayer subcontracted for the provision and installation of fire safety systems. Nonmonitored systems of this nature are considered the taxable sale of tangible personal property, subjecting the entire charge from the subcontractor to the tax less separately stated installation charges.

The Taxpayer contends the auditor taxed these transactions after determining they were the sale of fire monitoring services, but pursuant to Title 23 VAC 10-210-230 A, monitored systems that include monitoring services would not be taxable. The invoices support the contention that the purchases were for nonmonitored systems. The auditor properly held the sale and installation of nonmonitored fire safety systems as taxable and, therefore, there is no basis for removing the transactions from the audit.

Various Invoices

The auditor held transactions taxable where documentation was not available to determine whether tax had been paid. The Taxpayer has since provided a number of invoices corresponding with the exceptions in question. To the extent these invoices show the tax has been paid on transactions included in the audit, the auditor has agreed to remove the items from the sample.

Audit Sample

The Taxpayer contests the inclusion of untaxed purchases from * (“Company A”) in the audit’s purchases sample. The Taxpayer contends there was a glitch in the vendor’s system during the audit period that caused the vendor’s failure to charge the tax to the Taxpayer on a number of invoices and, because of this glitch, the purchases should not be included in the sample as they were a one-time occurrence.

Sampling is an audit technique of significant value that is widely used in both the public and private sectors. The Department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the final results should be within a narrow percentage range of the actual amount that would have been determined by a detailed audit. When evaluating the validity of an audit sample, the Department will remove an item or items from an audit sample only if it is shown that the transaction is isolated in nature and not a normal part of a taxpayer's business activity.

Virginia Code § 58.1-205 states that an assessment of tax by the Department is deemed to be prima facie correct. The burden of proving that a tax assessment is erroneous is on the Taxpayer. In this case, the Taxpayer has not met its burden of proving that the inclusion of these purchases in the sample resulted in an invalid sample and assessment. The Taxpayer has not demonstrated that the contested transactions are isolated in nature and are not normal purchase transactions for the business, as no further documentation has been provided regarding the nature of the transactions.

Virginia Code § 58.1-633 and Title 23 VAC 10-210-470 require taxpayers to maintain adequate and complete records necessary to determine the proper amount of tax liability. The records must provide sufficient information to confirm that sales or use taxes were paid when due and that the retail sales tax has been properly charged if taxable sales were made for the period being examined. Without sufficient documentation to support the Taxpayer's claim, the removal of these purchases from the audit is not warranted.

CONCLUSION

In accordance with this determination, the audit will be returned to the appropriate field audit staff for revision. The audit staff will adjust the audit assessments based on the determination and after the adjustments are completed, a revised bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the revised bill. Please remit payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections, regulations, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1551L