Sales and Use Tax TAA 17A-003 Security System Installation and Maintenance Services

Question: Will the installation of security equipment (Door card readers, video surveillance systems, and similar equipment under the proposed contract) Be subject to sales tax as a security service under s. 212.05(1)(I), f.S.? If no, Will the examples of anticipated types of work be treated as real property contracts based on the predominate nature of the work? If the contract is treated as a real property contract, Will sales tax only apply to the cost of materials and supplies purchased by the contractor.

Department’s response: The contracts submitted are predominantly for real property improvements to install the security equipment described (Door card readers, video surveillance systems, and similar equipment). Taxation of taxpayer under s. 212.05(1)(I), f.S., is dependent upon whether the items are installed as a completely new system, upgrade or expansion of its existing security system or for the purpose of maintaining or repairing the system.

Taxation does not occur under s. 212.05(1)(I), f.S., for new installations, upgrades and expansions. In this instance, sales tax Will only apply to the cost of materials and supplies consumed by the contractor. The contractor should pay sales tax to its dealer on the cost price of materials and supplies purchased for use in the fulfillment of its contract with the taxpayer.

Question: Will the upgrade of security equipment be subject to sales tax as a security service under s. 212.05(1)(I), f.S.? If no, Will the examples of anticipated types of work be treated as real property contracts based on the predominate nature of the work? If the contract is treated as a real property contract, Will sales tax only apply to the cost of materials and supplies purchased by the contractor.

Department’s response: Installation of equipment to upgrade taxpayer’s security system entails making improvements to real property. Taxpayer should not be charged sales tax by the contractor under s. 212.05(1)(I), f.S., on the upgrade of security equipment under the proposed contract. As stated, the anticipated types of work being performed constitutes real property improvements involving the installation of a new or upgraded security equipment. The contractor should pay sales tax on the cost of materials and supplies purchased for use in the fulfillment of its contract with the taxpayer.

Question: Will the repair or maintenance of security equipment be subject to sales tax as a security service under s. 212.05(1)(I), f.S.? If yes, Will the contractor be responsible for the sales tax on any items incorporated into the work orders?

Department’s response: Sales tax Will apply under s. 212.05(1)(I), f.S to the total contract price or charge for maintaining, and repairing taxpayer’s existing system, regardless of whether the installation constitutes real property or tangible personal property. Sales tax must also be paid by the contractor to its dealer based on the cost price of materials and supplies purchased for use in the fulfillment of its contract with the taxpayer. See s. 212.05 and 212.06, f.S. Each transaction represents a distinct taxable privilege subject to tax.

Question: Can taxpayer use its direct pay authority to self-accrue sales tax due on taxable services?

Department’s response: Given that the nature of the transactions involved in this requests entail both tangible personal property and real property improvements, and given that taxpayer’s automated accounts payable system is programmed to use the direct pay authorization already given to it by the department, this method of reporting and remitting sales tax is acceptable.

Question: If taxpayer enters a single contract that invoices both the sale of a taxable services and the sales of a service or other item not subject to sales tax, can nontaxable services be separately identified and charged? Does this apply to taxpayer’s use of distinct service calls for maintenance requests or work orders for new installations?

Department’s response: If taxpayer enters a single contract that involves both the sale of a taxable services and the sales of nontaxable services, to include distinct service calls for maintenance requests or work orders for new installations, it is the responsibility of the contractor and the taxpayer to separately state taxable services and nontaxable services in its billing invoices and other documents. Furthermore, if the contract is a mixed contract, taxability of the contract Will be based on the predominate nature of the contract. As such, sales tax should be applied as explained above. However, there is an exception. Where the mixed contract also involves charges allocated for ongoing monitoring, maintaining and repairing the security system, after the completion of construction or installation of the newly installed, upgraded, or expanded security system, the portion of the contract price allocated for such ongoing repair or maintenance services must be treated separately and sales tax should be charged to the customer for these services.

January 31, 2017

Re: Technical Assistance Advisement 17A-003

Florida Sales and Use Tax – Security System Installation and Maintenance Services

Section 212.05(1)(i)1.a., Florida Statutes (F.S.), and Rules 12A-1.0092(1), (2)(a), 12A-1.016, and 12A-1.051, Florida Administrative Code (F.A.C.)

XXXX (“Taxpayer”)

BPN: XXXX

FEI Number: XXXX

Dear XXXX:

This letter is a response to your petition received on May 23, 2016, and subsequent correspondence dated September 19, 2016, for the Department of Revenue’s (“Department”) issuance of a Technical Assistance Advisement (“TAA”) concerning the above-referenced petitioner and matter. Your petition has been carefully examined and the Department finds it to be in compliance with the requisite requirements set forth in Chapter 12-11, F.A.C., This response to your request constitutes a TAA and is issued to you under the authority of Section (“s.”) 213.22, F.S.

FACTS PRESENTED

Taxpayer anticipates entering into a contract for the installation of new equipment, upgrades, expansion, maintenance and repair of existing security systems. The selected contractor (“Contractor”) will not provide monitoring services. The herein described work to be performed by the Contractor, as also contained in the proposed contracts, extends to Taxpayer’s Physical Access Control System (PACS), Video Management System (VMS) and other related peripheral equipment and devices.

Additionally, completely new physical security systems will be installed at various warehouses owned by Taxpayer. The work likewise entails installation of PACS and VMS security system equipment.

Scope of Work to Be Performed 

Installations and Upgrades 

The first type of work to be performed is described as the installation and upgrade of new card readers and video cameras within the PACS and VMS segments of Taxpayer’s existing security system. The PACS system controls access entry to designated areas at Taxpayer’s facility via controllers/sensors and access card readers. The VMS provide video surveillance in designated areas throughout the facility. The cameras connect to video recorders.

Under the proposed contract, approximately XXXX new card readers and XXXX controllers/sensors will be installed. These devices and sensors are hard-wired into the electrical systems and permanently affixed. For the VMS segment, new installations and upgrades will include approximately XXXX cameras, XXXX video recorders (DVRs and NVRs) and other related peripheral equipment and devices. During the contract period, Contractor will also be responsible for installing any new installations and upgrades to the existing system whenever Taxpayer implements new project innovation ideals.

Maintenance and Repair Services of Security Systems 

During the life of the contract, Contractor will answer service calls, and provide preventative maintenance and repair, through replacement, of defective security system parts. The maintenance and repair services extend to existing security equipment as well as any new equipment installed as an upgrade to the security system. Non-routine service calls will be initiated by Taxpayer as needed for optional operation of the security system.

Contractor will perform preventative maintenance that include physically inspecting all camera equipment for environmental damages and wear and tear; cleaning and adjusting camera lenses and domes/housings apparatus; documenting camera placement, and supplying satellite photos from its vendor for the calendar year. Also, Contractor will test camera alarm triggers and camera presets. Repairs and maintenance services performed by Contractor will be required to comply with various state and federal regulatory agencies, as well as and any other governmental certifications, including local city, county, state and federal ordinances, as required by the Taxpayer.

New Physical Security System Installation - Warehouse 

Taxpayer’s contract will also include installation of completely new security systems at various warehouses owned by Taxpayer. Installation involves multiple card reader access systems and video cameras. The access systems (PACS) and video cameras (VMS) will be placed at all the warehouses to provide access clearance to authorized personnel and video security for the warehouses. All card readers and cameras will be hardwired into the electrical system and permanently affixed.

REQUESTED ADVISEMENTS

Taxpayer seeks a binding opinion from the Department on the following:

• Will the installation of security equipment (door card readers, video surveillance systems, and similar equipment under the proposed contract) be subject to sales tax as a security service under s. 212.05(1)(i), F.S.? If no, will the examples of anticipated types of work be treated as real property contracts based on the predominate nature of the work? If the contract is treated as a real property contract, will sales tax only apply to the cost of materials and supplies purchased by the contractor.
• Will the upgrade of security equipment be subject to sales tax as a security service under s. 212.05(1)(i), F.S.? If no, will the examples of anticipated types of work be treated as real property contracts based on the predominate nature of the work? If the contract is treated as a real property contract, will sales tax only apply to the cost of materials and supplies purchased by the contractor.
• Will the repair or maintenance of security equipment be subject to sales tax as a security service under s. 212.05(1)(i), F.S.? If yes, will the contractor be responsible for the sales tax on any items incorporated into the work orders?
• Can Taxpayer as the holder of a Direct Pay Permit use it to self-accrue sales tax due on taxable services?
• If Taxpayer enters a single contract that invoices both the sale of a taxable services and the sales of a service or other item not subject to sales tax, can nontaxable services be separately identified and charged? Does this apply to Taxpayer’s use of distinct service calls for maintenance requests or work orders for new installations?

LAW & DISCUSSION:

Section 212.05(1), F.S., enumerates transactions that are subject to sales and use tax. In relevant part, it provides as follows:

* * *

(1) . . . [A] tax is levied on each taxable transaction or incident, which tax is due and payable as follows: . . .

(i)1. At the rate of 6 percent on charges for all:

a. Detective, burglar protection, and other protection services (NAICS National Numbers 561611, 561612, 561613, and 561621)....

* * *

2. As used in this paragraph, “NAICS” means those classifications contained in the North American Industry Classification System, as published in 2007 by the Office of Management and Budget, Executive Office of the President.

This U.S. industry code for establishments primarily engaged in selling security alarm systems, such as burglar and fire alarms, along with installation, repair, or monitoring services, are included under the NAICS National Number 561621. The following services are included under the 2007 NAICS National Number 561621:

• Alarm system monitoring services
• Alarm systems sales combined with installation, repair, or monitoring services
• Burglar alarm monitoring services
• Burglar alarm sales combined with installation, repair, or monitoring services
• Fire alarm monitoring services
• Fire alarm sales combined with installation, repair, or monitoring services
• Security alarm systems sales combined with installation, repair, or monitoring services
• Security system monitoring services

Rule 12A-1.0092, F.A.C., has been promulgated to administer and provide guidance on the scope of the activities that are protection services taxable under section 212.05(1)(i), F.S.

Rule 12A-1.0092(2)(a), F.A.C., provides in part:

(2)(a) Detective, burglar protection, and other protection services are those services which are rendered to minimize or prevent loss or damage to life, limb, or property and are of a kind typically performed by security or alarm system companies, or are those investigative services which are rendered to obtain evidence or other information for legal, business, employment, or personal purposes of a kind typically performed by detective or investigative agencies. Illustrative examples of taxable services are:

* * *

3. Burglar or fire alarm or other security system devices monitoring and maintenance;

a. The installation of alarm or security systems that remain tangible personal property is governed by the provisions of Rule 12A-1.016, F.A.C.

b. The installation of alarm or security systems that become a part of real property is governed by the provisions of Rule 12A- 1.051, F.A.C. 1

c. The monitoring or maintenance of alarm or security systems is a taxable service whether such systems are considered tangible personal property or a part of real property. The term maintenance includes any inspection of an alarm or security system to confirm its proper working order. The term maintenance does not include the expansion or upgrade of an existing system, but it does include the replacement of defective components.

Maintenance and Repairs to Existing Systems 

Monitoring and maintenance services are taxable to a consumer of such services in full, regardless of whether the security system itself would be considered tangible personal property or a real property improvement. See Rule 12A-1.0092(2)3.c., F.A.C. Monitoring services are not performed by Contractor. Contractor will, however, perform maintenance and repairs for Taxpayer. Taxable maintenance services include repairs and replacements of defective parts and components. If a job involves replacing, repairing, or maintaining components in an existing security system, that does not result in any substantial improvement or upgrade to the system, the job is a taxable security system under s. 212.05(1)(i), F.S.

To be noted, purchases made by the Contractor to maintain and repair Taxpayer’s existing security system are not tax-exempt as sales or purchases for resale. Rule 12A-1.0092(6), F.A.C., provides that the service provider (Contractor) is considered the ultimate user or consumer of tangible personal property sold to it and used in connection with its provisions of taxable services. As the end user, Contractor is required to pay the tax imposed upon such tangible personal property to its dealers. Thus, any parts, materials, supplies, etc., purchased for the purpose of providing a taxable security service (e.g., services provided to the fire alarm, explosion protection, and fire detection system) cannot be purchased tax-exempt for resale, even though sales tax must be collected from the customer on the entire charge for the taxable security service.

When considering taxable services, it is important to understand that Chapter 212, F. S., provides that taxation of services for maintaining, repairing, and monitoring a security system (s. 212.05(1)(i), F.S.) is a separate and distinct taxing privilege from taxation of tangible personal property (s. 212.05 and 212.06, F.S) sold for consumption by a contractor for purposes of repairing or maintaining a security system. As supported by case law, Courts have ruled in similar cases that each transaction involves a separate and discrete taxing privilege. See Ryder Truck Rental, Inc. v. Bryant, 170 So.2d 822 (Fla. 1964); Air Jamaica, Ltd. v. Department of Revenue, 37 So.2d 575 (Fla. 3rd DCA 1979); Florida Hotel and Motel Association, Inc. v. Department of Revenue, 635 So. 2nd 1044 (Fla. l 51 DCA 1994); and American Video Corp. v. Lewis, 389 So.2nd 1059 (Fla. 151 DCA 1980).

In contrast, the installation of a new, upgraded, or expanded security system is not a taxable service under s. 212.05(1)(i), F.S. See also Rule 12A-1.0092 (2)3.c., F.A.C. The tax treatment for purchases of tangible personal property consumed in these types of installations (i.e., new, expanded, and upgraded) depend on whether the installation performed by the contractor is deemed a real property improvement or sale of tangible personal property. See discussions below.

New, Upgraded, Expanded Security Systems - Real Property 

An alarm or security system that becomes an improvement to real property is administered under the provisions of Rule 12A-1.051, F.A.C. [See also s. 212.06(14), F.S.] Rule 12A-1.051(4), F.A.C., makes the real property contractor the ultimate consumer of any materials, supplies, parts, or devices used in the fulfillment of a real property contract. As such, a security service provider or installer (e.g., Contractor) of such a system is considered a real property contractor and the ultimate consumer of any parts, materials or equipment that are used or installed in connection with the security system. Sales tax should be paid by the Contractor to its vendor at the time materials, parts, supplies, or other items are purchased for fulfillment of the installation of the security system, given they are taxable sales of tangible personal property under the provisions of ss. 212.05 and 212.06, F.S. If the tax was not charged to, and paid by, the Contractor, it should be self-accrued by the Contractor, and remitted to the Department. Again, the treatment for real property improvements is applicable where the Contractor, as the security service provider, is installing a new system or when providing an upgrade or expansion to an existing system that is deemed a real property improvement installation. No tax would be charged to the Taxpayer for these types of installations; i.e., there is no sale of a taxable security system nor a sale of tangible personal property to Taxpayer.

New, Upgraded, Expanded Security Systems - Tangible Personal Property 

While tangible personal property is defined in pertinent part by s. 212.02(19), F.S., to be personal property which "may be seen, weighed, measured, touched or is in any manner perceptible to the senses” it does not include property which is permanently attached to real property (i.e., the surface land), including improvements thereto such as fixtures. Accordingly, a determination that installation of a security system represents tangible personal property as opposed to a real property improvement is dependent upon the terms of an agreement for work to be performed and whether s. 212.06(14), F.S., and Rule 12A-1.051, F.A.C., for real property and fixtures is applicable to those terms.

If the Contractor is installing a new, upgraded or expanded, security system that is not considered an improvement to real property but instead installation of tangible personal property, sales tax, plus any applicable discretionary surtax, should be added to the total charge(s) made to the Taxpayer. Contractor, if engaged in such transactions, may purchase tangible personal property from its dealer exempt from tax as a sale for resale through extension of a resale certificate. See s. 212.07, F.A.C and Rule 12A1.039, F.A.C.

Based on the contracts presented, it is undeterminable whether there are particular facets of the contractual agreement between Taxpayer and Contractor that constitute the installation of a new, upgraded, or expanded security systems that is tangible personal property. Based on the contracts presented, the predominant nature of the scope of work to be completed by Contractor is that of a real property improvement contract. Therefore, as a real property improvement contract, Contractor will pay or self-accrue tax on its purchases of tangible personal property consumed in the performance of a contract for new installation of equipment to upgrade or expand Taxpayer’s existing security system. Taxpayer would pay no tax under the provisions of s. 212.05, F.S., for tangible personal property consumed under the contract, and likewise no tax under s. 212.05(1)(i), F.S., applicable to taxable security services.

Mixed Contract for Taxable and Non-Taxable Security Services 

Taxpayer’s proposed contract with Contractor involves elements for new installations, upgrades and expansion of Taxpayer’s security system as well as preventative maintenance and repairs following completion of the former activities. When a security service contract involves elements in the contract for both taxable and nontaxable services, the portion of the contract price allocated for these services must be identifiable and sales tax charged to the customer for the taxable services. See s. 212.05(1)(i)4., F.S.2 Contractor and Taxpayer must separately state taxable services and nontaxable services in its billing invoices and other documents that clearly distinguish charges for new installations, upgrades and expansion of Taxpayer’s security system from subsequent charges during the contract period for preventative maintenance and repairs of defective parts.

ANALYSIS

Services performed by the Contractor under the anticipated contractual agreement with the Taxpayer will consist of both taxable and nontaxable services. When the installation involves installing a new, upgraded, or expanded security system that is deemed real property, the installation is considered a real property improvement contract; thus, sales tax is not due on the total contract price. In these instances, Taxpayer is making improvements to real property which does not constitute a taxable security services. Contractor should pay sales tax on all purchases made pursuant to the contract. This involves purchases of materials, component parts, supplies, etc. (e.g., door card readers, video surveillance equipment, and similar equipment and devices) that are permanently hardwired and embedded into the physical structure of the building, and which are installed as a new, upgraded, or expanded security systems.

Sales tax will apply to the total contract price or charge for installations of a new, upgraded, or expanded security system that is deemed tangible personal property. This installation involves materials, component parts, supplies, etc. (e.g., door card readers, video surveillance equipment, and similar equipment and devices) not installed as a permanent attachment (i.e., are not hardwired and embedded) to the physical structure of the building. These types of installations are not a taxable security service. Purchases of materials, component parts, supplies, etc. (e.g., door card readers, video surveillance equipment, and similar equipment and devices) can be purchased (tax exempt) for resale by the Contractor.

Sales tax will also apply to the total contract price or charge for monitoring, maintaining, and repairing an existing system. The Physical Access Control System (PACS) and Video Management System (VMS), as described above, are existing functions of Taxpayer’s security system. Any services performed by the Contractor to monitor, maintain, and repair these systems is subject to sales tax. This includes replacing any defective component parts of the system. Only where the installation of upgraded or expanded component parts are required, can the charges for improving system be treated as the installation of real property or tangible personal property. Moreover, purchases of materials, component parts, supplies, etc. (e.g., door card readers, video surveillance equipment, and similar equipment and devices) are not purchases for resale, therefore, cannot be purchased tax exempt. Instead, contractor must pay sales and use tax on all purchases made pursuant to the contract.

If the anticipated contract is a mixed contract, taxability of the contract will be based on the predominate nature of the contract. As such, sales tax should be applied as explained above. However, there is an exception. Where the mixed contract also involves charges allocated for ongoing monitoring, maintaining and repairing the security system, after the completion of construction or installation of the newly installed, upgraded, or expanded security system, the portion of the contract price allocated for such ongoing services must be treated separately and sales tax should be charged to the customer for these services.

CONCLUSION

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice, as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes, or judicial interpretations of the statutes or rules, upon which this advice is based, may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response, your request and related backup documents are public records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions of s. 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material and this response, deleting names, addresses and any other details which might lead to identification of the taxpayer. Your response should be received by the Department within 10 days of the date of this letter.

Sincerely,

Joseph D. Franklin III

Tax Law Specialist

Technical Assistance & Dispute Resolution

(850)717-6729

Record Control ID: 210791

End Notes:

1 Rules 12A-1.051(4), F.A.C., provides:

(4) General rule of taxability of real property contractors. Contractors are the ultimate consumers of materials and supplies they use to perform real property contracts and must pay tax on their costs of those materials and supplies, unless the contractor has entered a retail sale plus installation contract. Contractors performing only contracts described in paragraphs (3)(a), (b), (c), or (e) do not resell the tangible personal property used to the real property owner but instead use the property themselves to provide the completed real property improvement. Such contractors should pay tax to their suppliers on all purchases. They should also pay tax on all materials they fabricate for their own use in performing such contracts, as discussed in subsection (10). They should charge no tax to their customers, regardless of whether they itemize charges for materials and labor in their proposals or invoices, because they are not engaged in selling tangible personal property. Such contractors should not register as dealers unless they are required to remit tax on the fabricated cost of items they fabricate to use in performing contracts.

2 Section 212.05(1)(i)4., F.S., provides:

If a transaction involves both the sale or use of a service taxable under this paragraph and the sale or use of a service or any other item not taxable under this chapter, the consideration paid must be separately identified and stated with respect to the taxable and exempt portions of the transaction or the entire transaction shall be presumed taxable. The burden shall be on the seller of the service or the purchaser of the service, whichever applicable, to overcome this presumption by providing documentary evidence as to which portion of the transaction is exempt from tax. The department is authorized to adjust the amount of consideration identified as the taxable and exempt portions of the transaction; however, a determination that the taxable and exempt portions are inaccurately stated and that the adjustment is applicable must be supported by substantial competent evidence.