We sell and install security systems, cabling, and home audio-visual equipment for homebuilders -- do we owe sales tax on the equipment, or does it become part of the house and become the homebuilder's tax burden instead?

Plain-English summary

A dealer that sells, installs, services, and monitors security alarms, camera systems, smart home systems, and structured cabling asked the Department how Virginia sales tax applies across three real-world scenarios, all involving sales to homebuilders (who then sell the finished home to a homeowner) rather than direct sales to homeowners.

The general legal framework: is it a fixture, or still "stuff"? When someone contracts to install property into real estate, Virginia treats the installer as the end consumer of that property if it becomes a real property fixture (Va. Code § 58.1-610). Whether that's happened turns on a three-part test from Danville Holding Corp. v. Clement (1941) and Transcontinental Gas Pipe Line Corp. v. Prince William County (1970): (1) is the item physically annexed (actually or constructively) to the building; (2) is it adapted to the purpose the building is used for; and (3) did the installer intend it to become a permanent addition. If all three aren't met, the transaction is instead treated as a straightforward retail sale of tangible personal property, taxable to the ultimate buyer.

Because the dealer sells to homebuilders (not homeowners), all three scenarios are "nonmonitored" security system sales under 23 VAC 10-210-230 B -- meaning the dealer must collect tax on the total charge for system components regardless of the fixture analysis, though separately stated installation labor charges are excluded from tax. (Installation supplies like wiring, nails, and screws that stay part of the building remain taxable to the dealer itself, per longstanding Department policy.)

Scenario 1 -- mixed package (wireless + hardwired devices + cabling): Whether the hardwired portion becomes a tax-exempt real property fixture depends on the three-part test. The Department pointed to an earlier ruling (P.D. 21-76) where an integrated life-safety system, fully wired into a building's telephone lines and electrical network, was found to satisfy the annexation prong and become part of the real property -- shifting the tax burden to the installer as end user. Whether this dealer's hardwired components meet that same standard depends on the specific installation, and it's the homebuilder's intent (as the party in control of the construction) that determines the third prong.

Scenario 2 -- wireless devices only: These fail the fixture test at the very first step. Because a wireless system is merely placed or fastened to the property rather than wired into it, it doesn't satisfy the "annexation" requirement the way the hardwired life-safety system in P.D. 21-76 did. The Department found it doubtful a wireless system would ever become part of the realty -- so it remains a straightforward taxable retail sale of tangible personal property.

Scenario 3 -- home audio-visual equipment: Similarly, receivers, amplifiers, speakers, and in-wall speaker wiring generally remain taxable tangible personal property sales, even when installed inside walls. The Department cited a prior ruling (P.D. 09-117) finding that audio-visual systems, even when bracketed to walls, are still retail sales because such equipment is typically easily removable and relocatable -- undermining the "permanent addition" element of the fixture test. Again, though, the specific facts of a given installation (and the homebuilder's intent) still need to be evaluated.

What this means for you

Security and smart-home system dealers selling to homebuilders (not directly to homeowners)

Your sales are treated as nonmonitored security system sales, fully taxable on the total system charge regardless of the fixture analysis -- separately state your installation labor charge if you want that portion excluded from tax, but expect installation supplies (wiring, screws, etc.) to remain taxable to you.

Dealers installing genuinely hardwired, integrated security or life-safety systems

There's a real (if fact-specific) path to having such systems treated as real property fixtures -- meaning you, as the installer, would owe use tax on the components rather than collecting sales tax from the customer -- but only if the system is truly wired into the building's electrical/telephone network and the installer (or, for homebuilder sales, the homebuilder) intends it as a permanent addition.

Dealers installing wireless security devices or home audio-visual equipment

Don't expect these to qualify as tax-exempt real property fixtures. This ruling treats wireless devices and audio-visual equipment as taxable tangible personal property sales as a general rule, because they typically fail the "annexation" and "permanence" elements of Virginia's fixture test.

Common questions

Q: Does installing a hardwired security system into a house make it exempt from Virginia sales tax as a real property fixture?
A: It's possible, but not automatic. This ruling explains the system needs to satisfy all three parts of the Danville Holding fixture test -- physical annexation, adaptation to the building's use, and the installer's/homebuilder's intent for permanence -- and cites a prior ruling where a fully wired-in life-safety system met that standard.

Q: Is a wireless security system ever treated as part of the real property for Virginia sales tax purposes?
A: The Department finds this doubtful, since a wireless system is merely placed or fastened rather than wired into the building, failing the annexation requirement outright.

Q: Does mounting home audio-visual equipment inside walls make it a tax-exempt fixture?
A: Generally no. This ruling reaffirms a prior finding that audio-visual equipment, even when bracketed to walls, is typically easily removable and relocatable, and so remains a taxable retail sale of tangible personal property.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-610 A -- a contractor furnishing tangible personal property while performing real property construction/installation is deemed the ultimate consumer of that property
• Va. Code § 58.1-610 D -- property incorporated into real property that loses its identity as tangible personal property is deemed used/consumed by the contractor
• Va. Code § 58.1-603 -- imposes retail sales tax on sellers of tangible personal property
• Va. Code § 58.1-602 -- defines "retail sale"
• 23 VAC 10-210-410 A-B -- a using-and-consuming contractor can also register and collect tax as a retailer of tangible personal property
• 23 VAC 10-210-230 B -- dealers of nonmonitored security systems make retail sales taxable on the total system charge; separately stated installation labor is not taxed, but installation supplies are
• Danville Holding Corp. v. Clement, 178 Va. 223 (1941) -- three-part test for whether tangible personal property becomes a real property fixture
• Transcontinental Gas Pipe Line Corp. v. Prince William County, 210 Va. 550 (1970) -- confirms the Danville Holding fixture test

Prior rulings referenced (described here, not linked): P.D. 90-210 (11/28/1990), P.D. 92-29 (4/20/1992), P.D. 95-106 (5/8/1995), P.D. 03-87 (11/12/2003), and P.D. 10-89 (6/4/2010) -- longstanding policy treating installation wiring that remains part of a building as a taxable installation supply; P.D. 21-76 (5/25/2021) -- an integrated life-safety system fully wired into a building's electrical/telephone network was found to become part of the real property, shifting the tax burden to the installer; P.D. 09-117 (7/31/2009) -- home audio-visual equipment, even when bracketed to walls, remained a taxable retail sale because it was easily removable and relocatable.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-116

Original ruling text

October 19, 2023

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter on behalf of * (the “Taxpayer”) in which you request a ruling on the sales tax implications of sales of security systems, cabling, and audio visual entertainment equipment. I apologize for the delay in responding.

FACTS

The Taxpayer sells, installs, services, and monitors security alarm systems, camera systems, smart home systems, and low voltage structured cabling. The Taxpayer requests guidance regarding the application of the Virginia retail sales and use tax to various transactions. The Taxpayer’s scenarios will be addressed separately below.

RULING

Installation of Tangible Personal Property into Real Property Generally

Virginia Code § 58.1-610 A provides that:

Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax to the extent required by this chapter.

Virginia Code § 58.1-610 D states that “tangible personal property incorporated in real property construction which loses its identity as tangible personal property shall be deemed to be tangible personal property used or consumed within the meaning of this section.” Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A provides, in pertinent part, that “[t]angible personal property incorporated in real property construction which loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor.”

Virginia Code § 58.1-603 imposes retail sales tax on “every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth…” “Retail sale” is defined, in part, in Virginia Code § 58.1-602 as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services under this chapter…”

The distinctions between real and tangible personal property have been addressed by the Virginia Supreme Court in Danville Holding Corp. v. Clement , 178 Va. 223 (1941) and confirmed in subsequent cases, such as Transcontinental Gas Pipe Line Corp. v. Prince William County , 210 Va. 550 (1970). Both cases provide a three-part test to determine if tangible personal property loses its identity and becomes real property upon installation. The three general tests are as follows: (1) annexation of the chattel to the realty, actual or constructive; (2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) the intention of the owner of the chattel to make it a permanent addition to the freehold. The intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture.

Title 23 VAC 10-210-410 B provides that a using and consuming contractor may also engage in the business of selling tangible personal property to customers and other contractors. In such cases, the Taxpayer is required to register with the Department and collect and remit the sales tax on the sales price of the property it sells at retail. If the sale and installation of tangible personal property does not meet all three of the tests set out in Danville Holding, the transactions are considered the sale of tangible personal property.

Scenario 1

The Taxpayer sells a security system and structured cabling package that includes the sale and installation of wireless security devices, hardwired security devices, network cabling, and TV/cable/satellite cabling to a homebuilder while the house is under construction. The sale and installation of the listed items are invoiced to homebuilders who will go on to sell the completed home to a homeowner. The monitoring of the alarm system would then be contracted directly with the homeowner independent from the homebuilder.

Because the Taxpayer sells its systems to homebuilders instead of homeowners, it would be considered to be engaged in the sale of nonmonitored security systems. Under Title 23 VAC 10-210-230 B, dealers engaged in the sale or lease and installation of nonmonitored burglar, security, or fire alarm systems are treated as making retail sales and are required to collect tax on the total charge for system components.

Title 23 VAC 10-210-230 B also states that separately stated installation charges would not be subject to the tax. However, all items used by the dealer in installing a system, i.e. wiring, nails, screws and other items which remain a part of the real property, are taxable to the dealer. The Department’s long-standing policy has been to treat wiring that remains a part of the building as an installation supply. See Public Document (P.D.) 90-210 (11/28/1990), P.D. 92-29 (4/20/1992), P.D. 95-106 (5/8/1995), P.D. 03-87 (11/12/2003) and P.D. 10-89 (6/4/2010). For items consumed during installation, the dealer should pay the tax at the time of purchase or, if the tax was not paid, accrue and remit the tax.

In some cases, the security and fire systems become part of the real property to which they are affixed. P.D. 21-76 (5/25/2021) provides an example of a system that was considered to be incorporated into real property. In this public document, the Department ruled that, when an integrated life safety system was installed in such a way that it became permanently affixed to the realty, the dealer is considered to be the end user and consumer of the property and must pay or accrue the use tax. When installing a wired security system into a building, the Taxpayer will need to evaluate whether (1) the system is annexed to the real property, (2) it is essential to the purpose for which the building is used or occupied, and (3) it is the intention of the party making the annexation for it to become part of the real property. Regarding the Taxpayer’s installation into a house, the homebuilder would be the party that would designate the intent of the annexation.

Scenario 2

The Taxpayer sells and installs wireless security devices. Such devices are installed in a home. The sale and installation is invoiced to homebuilders who will go on to sell the completed home to a homeowner. The monitoring of the alarm system would then be contracted directly with the homeowner independent from the homebuilder.

Like Scenario One, Scenario Two involves the sale of non-monitored security systems to homebuilders. As indicated above, dealers of non-monitored security systems are treated as making retail sales and must collect tax on the total charge for system components.

Unlike Scenario One, the security system involved is wireless. The wireless security system fails part one of the Virginia Supreme Court’s three-part test, “annexation of the chattel to the realty, actual or constructive,” as the system is not wired into the building but rather placed or fastened to the real property in some manner not arising to “annexation.” As such, the wireless security devices are different from the integrated life systems described in P.D.21-76. In that ruling, the Department found, in part, that the integrated life system satisfied part one of the three-part test because the systems were “fully integrated into telephone lines and are hard wired into the subject building in such a way that they become part of its electrical network.” While possible, the Department finds it doubtful that a wireless system would become part of realty and would be treated as a retail sale of tangible personal property subject to sales tax.

Scenario 3

The Taxpayer sells and installs home audio visual entertainment equipment consisting of receivers, amplifiers, speakers, and speaker wiring. Such equipment is installed inside the walls of a home. The sale and installation are invoiced to the homebuilder.

Generally, sales of audio visual equipment are not sales of tangible personal property affixed to real property. In P.D. 09-117 (7/31/2009), the Department ruled that the sale of audio visual systems, even when bracketed to the walls of real property, were retail sales of tangible personal property subject to the tax, partly because the audio visual equipment was easily removable and relocatable. In such activities, the Taxpayer will need to evaluate whether the installation of a audio visual entertainment equipment into a building is annexed to the real property, essential to the purpose for which the building is used or occupied, and if it is the intention of the party making the annexation for it to become affixed to the real property. Regarding the Taxpayer’s installation into a house, the homebuilder would be the party that would designate the intent of the annexation.

I hope this responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia section and regulations cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

Related Documents

90-210

92-29

95-106

03-87

10-89

21-76

21-76

09-117