Not Collecting Sales Tax on Service Agreements? Here’s How.

Security dealers and custom integrators that offer remote systems management and other taxable services to out-of-state clients must collect sales tax.

It’s not uncommon for custom integrators and security dealers to do installations and then service systems for their wealthy clients in their vacation homes… often in another state. So the situation begs the question: do you need to collect sales taxes from those clients?

The short answer is “yes” if you are providing remote monitoring service for a client in a state, even if you do not have a physical presence. Keep in mind that this only applies to services that are taxable in the particular state.

And as more integrators and dealers adapt their businesses to include ongoing remote service agreements and monitoring service for customers, it can create a sticky situation if sales taxes are not being collected, and subsequently paid over to the state, on those service agreements.

The scenario was recently brought to light by tax expert Mitch Reitman of Reitman Consulting Group in Fort Worth, Texas, in response to a query to Ken Kirschenbaum of Kirschenbaum & Kirschenbaum and SSI‘s Legal Briefing columnist. The question was specifically related to’s service and the fact that the company has been adding a charge to integrators’ bills for the collection of sales tax to its monitoring service.

According to Reitman, “If the service, in this case Alarm.Com, is taxable in the state, you, [the integration company], are responsible for collecting and remitting the tax from your customer.”

Reitman says that is “rightly” collecting sales tax to “cover itself” because it cannot ensure the integrators are collecting the tax from the end users. Sales and Use Taxes are generally collected from the end users of the goods and services.

Most states require “wholesale” providers of these services to obtain Resale Certificates from the Retailers (the integrators) so that they can verify that the tax was actually collected from the end user (customer).  He goes on to say, “In this case Alarm.Com is not the end user, but, in most states, if it cannot ensure that the tax isn’t being collected from the end user (i.e., your company has no Sales and Use Tax Permit), it must consider its customer to be the end user and must collect tax from its customer.”

Lack of Physical Presence Is No Excuse

Reitman points out that’s recent decision to start collecting sales tax on services on behalf of states in which the dealer doesn’t have a seller’s permit is a red flag for many smaller integrators.

“For small dealers. the relative time investment involved in compliance in each state is enormous,” he notes. He surmises that most have never charged a sales tax on their remote service agreements.

“Tax laws are tax laws,” he says emphatically. “While many states make allowances for de-minimis sales, even if the seller does not have a physical presence in the state, if you have more than the threshold in sales, you must collect and remit sales and use tax, and file the necessary returns in that state. The fact that you are a ‘small dealer’ doesn’t get you any relief.”

The tax liability holds true even if you physically did not install the system yourself, or if you don’t have a license to operate in that particular state.

Specifically related to integrators using for security monitoring of clients’ homes located in another state, Reitman says dealers are either going to have to start collecting the sales tax on their own from their clients, or absorb the fee, but that doesn’t relieve them from the tax requirements.  Dealers who don’t properly charge and remit taxes can still be subject to audits and liability for the uncollected taxes.

Supreme Court Wayfair Sales Tax Decision

By the way, Reitman notes that a recent Supreme Court decision (South Dakota v. Wayfair) required entities based outside a state to collect sales tax on services performed in the state. That means it is mandatory.

The Supreme Court overturned a previous decision from 1992 that required sales tax be collected only if the servicing company was based in the same state. The Wayfair ruling said that previous decision created “cross-border distortions” because it discouraged out-of-state sellers from having an in-state physical presence and encouraged customers to buy from out-of-state vendors.

Many of you may be familiar with Wayfair, it is an online retailer that sells ready-to-assemble furniture and home furnishings.  It had no physical presence in South Dakota, it was simply taking orders online and shipping them to the state.

The Wayfair Decision only applies to goods and services that are already taxable in a state.  It doesn’t make anything taxable that wasn’t already.

“Paying the tax to Alarm.Com gets them off the hook, but not you. Your company is responsible for collecting and remitting the tax, not If you are passing the service through, then you will probably survive an audit based on the fact that the tax was paid, but you will get a slap on the wrist from the state and a bill from your accountant,” he notes.

“You will also land on a ‘follow-up list’ at that state auditor’s office,” he continues. “Don’t think that they won’t come to visit you, every state has offices around the country to audit large corporations that are based in your state, it’s not going to be hard for one of their auditors to pay you a visit.”

Reitman also warns integrators not to mark up the sales tax fee, calling that action “a whole new can of worms.”

He says that if an integration company is caught marking up sales tax on its service or monitoring agreements, the company will most probably be held “responsible for the taxes that you didn’t collect and remit. Good luck trying to collect for three years of sales and use tax from your customers. If the underlying monitoring is taxable, get ready for a tax bill for that as well. If you are lucky the state may credit you for the tax that you paid to Alarm.Com, but don’t count on it.”

That is the reason that paying tax on the “wholesale” price to doesn’t get you off the hook.

He concludes, “So in summary, if the service is taxable in a state, you have to charge the customer and remit the tax. is well within its rights to charge you the tax, but this gets them off the hook, not you. No, you can’t call it a ‘surcharge’ but you can call it a ‘tax.’ Yes, there is a statute, but, more importantly, there is case law (and it is Supreme Court Case Law, the kind that you don’t want to mess with) that not only allows you to charge the tax, it requires you to charge the tax.”

Most well written monitoring and service agreements allow the integration company to pass through sales and other taxes, so you should be well within your rights to charge your customers.

This article first appeared on SSI sister site

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About the Author


Jason Knott is Chief Content Officer for Emerald Expositions Connected Brands. Jason has covered low-voltage electronics as an editor since 1990, serving as editor and publisher of Security Sales & Integration. He joined CE Pro in 2000 and serves as Editor-in-Chief of that brand. He served as chairman of the Security Industry Association’s Education Committee from 2000-2004 and sat on the board of that association from 1998-2002. He is also a former board member of the Alarm Industry Research and Educational Foundation. He has been a member of the CEDIA Business Working Group since 2010. Jason graduated from the University of Southern California. Have a suggestion or a topic you want to read more about? Email Jason at

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