by Lessing E. Gold, Contributing Legal Columnist Security& the Law
Taxation & Interstate Commerce in a Monitoring Case
A very interesting, yet controversial, case regarding the taxation of an alarm com- pany in Arizona was recently decided by the Court of Appeals in the state of Arizona. The alarm company, herein after referred to as the “taxpayer,” was in the business of providing alarm monitoring service to residences. When alarms were triggered, a message traveled by a local land line and then was publicly switched to one of two long distance carriers. The information then proceeded as a WATS call, via circuits the taxpayer leases from these carriers, to the taxpayer’s central monitoring station in Texas. The taxpayer required its customers to have a local land line in order to activate the monitor- ing process. The monitoring information and process ends in Arizona, either at the customer’s request or by a call to the local police department.
The customers of the taxpayer paid to the taxpayer a flat monthly monitor- ing fee after the security systems were installed in their homes. The taxpayer did not pay a transaction privilege tax to any jurisdiction based upon gross income earned from security or burglar alarm service charges billed to Arizona custom- ers. The municipal transaction privilege tax is a tax levied by the city on revenue received by the taxpayer from the securi- ty systems installed in the cities involved. Two of the cities assessed the transac- tion privilege tax against the taxpayer pursuant to their city codes. The tax- payer protested the cities’ assessments. A hearing officer resolved the protests in taxpayer’s favor, concluding that the statutes precluded taxation of gross income earned from the alarm monitor- ing business in the cities in Arizona. The cities appealed to the Arizona Tax Court. The Tax Court granted summary
62 October 2010
judgment in favor of the cities. The taxpayer appealed to the Arizona Court of Appeals. The issue on appeal was whether the taxpayer’s monitoring service was sub- ject to the transaction privilege tax. Ari- zona law grants cities broad authority to impose transaction privilege taxes and the cities adopted the model city tax code provision on transaction privilege taxes. The taxpayer contended that it was
exempt from the transaction privilege tax as it supplied interstate telecom- munications services and that the Ari- zona laws prohibits cities from levying a transaction privilege tax on interstate telecommunications services. The tax- payer further contended that the imposi- tion of the transaction privilege tax was inappropriate because each step of the monitoring service was a separate inter- state telecommunications transmission. The court of appeals disagreed stating that the taxpayer’s service, viewed in its entirety, was a telecommunications service loop that began in Arizona and ended in Arizona. Without a home alarm triggered in Arizona, the calls from Arizona to Texas and back to Arizona would not occur. That the taxpayer’s monitoring facility is locat- ed outside Arizona had no impact on the intrastate telecommunications service bar- gained to begin and end in Arizona. The court therefore rejected the tax-
payer’s assertion that it was solely inter- state rather than intrastate, holding that the information transmitted originated and terminated in the state and therefore did not preclude the tax because tax- payer was providing intrastate telecom- munication services. The court further pointed out that the taxes did not dis- criminate against interstate commerce, as by upholding the tax, all monitoring companies share the tax burden equally
irrespective whether the phone bank was in Arizona or elsewhere. The court stated, “Indeed, were we not to uphold the tax on the taxpayer, businesses with Arizona monitoring stations monitor- ing Arizona homes would be placed at a competitive disadvantage.”
A dissenting judge pointed out that, in her opinion, Arizona statutes bar the cities from imposing transaction privilege taxes on income a taxpayer receives for per- forming its own security monitoring ser- vices because the transmission by which taxpayer performs its monitoring services is, in fact, interstate telecommunications.
READERS ASK Q
have exposure. If there is a loss, whether by burglary, fire, injury or damage caused by the system, and the church or any of its members or guests can ultimately prove that you or any of your employees were neg- ligent, there certainly can be liabil- ity. Before you install the system, even though you are not to receive any monetary compensation, it is important to have the duly autho- rized representative of the church sign your company agreement which contains all of the appropri- ate clauses which would protect you, i.e., third party indemnifica- tion, limitation of liability, liqui- dated damage clause and limitation of warranty provisions.
A
My church has recently suf- fered a set of break-ins and has asked me to install an alarm system. I am prepared to install an alarm system and to monitor the system without charge to the church (as a charitable contribu- tion). Do I have any exposure?
If you install and monitor a system for the church, you do
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