A recent case in Arizona involved the municipal taxation of home security services when the provider’s monitoring facility was out of state and the services included telecommunications. Municipalities are prohibited from taxing interstate telecommunication service under Arizona law.

Various cities in Arizona assessed transaction privilege taxes against the security company pursuant to their city code. Each code provided for taxation of gross income when providing “telecommunications services,” which included “charges for monitoring services relating to a security or burglar alarm system located within the city where such system transmits or receives signals or data over a communications channel.” The alarm company protested the assessments arguing that it provided interstate telecommunication services immune from municipal taxation. The tax court granted summary judgment in favor of the cities, concluding that the monitoring services were primarily intrastate and therefore taxable. The court of appeals, characterizing the alarm company’s monitoring process as a “transmission loop” that begins and ends in Arizona, concluded that the services were intrastate and therefore taxable. Arizona tax provisions defined “intrastate telecommunications services” as transmitting signs, signals, writings, images, sounds, messages, data or other information of any nature by wire, radio waves, light waves or other electromagnetic means if the information transmitted originates and terminates in this state.

On appeal to the Arizona Supreme Court, the court pointed out that the triggering of the home alarm system at issue may result in three separate transmissions. First, the home security system in Arizona sent a transmission to the Texas monitoring facility. Second, when the automated signal was received, personnel at the monitoring facility called the Arizona customer to determine whether the original transmission was a false alarm or an emergency situation. If it was a false alarm, the monitoring process ended. If it was an emergency, the security company personnel called local emergency responders, a third transmission. Each of these transmissions was made from one state to another.

The court indicated that these separate transmissions could not be characterized as “intrastate” by describing them as involving “information” that both originates and terminates in Arizona. The court of appeals correctly observed that the monitoring process may involve communications that begin with an alarm signal in the state and end with a call received by an Arizona emergency responder, but the “loop” involved separate transmissions that relayed different information. Thus, the supreme court concluded that the telecommunications involved were not “intrastate.”

The cities argued that even if the telecommunications were not “intrastate” then municipal taxes were still permissible because the statute did not apply to this kind of interstate telecommunication service, or the taxes were imposed on “monitoring services” rather than telecommunications services.

The supreme court therefore remanded the case to the court of appeals to consider whether or not the taxes are assessed on the monitoring services as opposed to the telecommunications.

Readers Ask

Q: I am confused about the customer and their insurance discounts. When we as a security company install and monitor a new customer’s security system, we always send to their insurance company a list of equipment installed and the name of the monitoring company. When the call comes in to disconnect the subscriber and we ask if they still have the same insurance company we get the run around sometimes. Are we liable if we are not able to inform their insurance company of the disconnection?

A: First, there is no obligation on the part of the alarm company to notify the insurance company of the equipment installed and the monitoring company. This information should be submitted to your subscriber. It is then the responsibility of the subscriber to submit the information to the insurance company in order to get the benefit of the insurance discount. Notwithstanding, if you in fact submit the information to the insurance company directly, that is fine. However, unless you agree otherwise, there is no responsibility on your part to notify the insurance company if your subscriber has terminated your alarm service. If, of course, you are installing a certified system, you want to make certain that you comply with the necessary rules and regulations. Bottom line, based on the scenario you present, there is no obligation on your part to notify the insurance company that the service has been terminated. Your obligation is to your subscriber.