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What's worse: fire or water damage / Comment on leases and taxes

August 4, 2021
What's worse: fire or water damage
         As you know we are both a fire alarm company and a fire suppression contractor.  Many of our subscribers use us for both services, fire alarm and sprinkler system services.
    It is conceivable to have a Dry Pipe System malfunction.  With a dry pipe system, the piping is charged with air that holds the valve closed until a sprinkler opens and the air pressure drops and lets the water flow.  These systems are for unheated area protection.  If there is a malfunction our choice is either allow the system to stay wet (if the temperature is above freezing) thus providing protection or turned off.  If left charged and full of water, the water flow switch is in alarm mode, and needs to be disabled, thus, should water start flowing out of the pipe (leak or fire) there will be no alarm indication.
    In the past we have left systems on and charged to provide fire suppression capability, but, leaks or breaks in the piping can happen.
    Which do you feel is the better course of action?   Chance of fire vs chance of a leak?
    I'm curious what insurance underwriters would prefer, where is the bigger risk, leak or fire?
    Would you prefer to break your right leg or left leg?  Fire and water damage claims often result in lawsuits against alarm companies and sprinkler companies too.  Most times looks like both your legs will get broken.
I have defended dry system sprinkler alarm cases, wet too, and fire cases as well.  They are typically among the more serious cases with the higher damages and more costly to defend.  
    You need to start with contractual defenses.  You should be using the Fire All in One for the fire alarm and the Fire Protection All in One for the sprinkler service.  Both have the best contractual protection available.
    I am surprised to hear that the wet system can be left with water in the pipes; I thought the sprinkler heads were always open on a dry system.  Good thing I don't sell and install sprinklers or the alarms that monitor the sprinklers.  A wet system would of course need sprinkler heads that didn't open unless a fire condition exists.
    What causes the most damage and expense, fire or water?  Usually they accompany each other.  Water will typically damage the building contents and interior portions of the building; only sometimes the building structure.  Fire will damage contents, interior, exterior and building structure.  Either loss can eat up your insurance limits.  
Comment on leases and taxes
(1) Property Tax on leased alarm equipment.
    When alarm equipment/systems, such as fire alarms, are leased, pursuant to, say, the KK all-in-one lease agreement, rather than sold to the Subscriber, some jurisdictions assess annual personal property tax on the value of the installed equipment/system, and charge that tax to the alarm company which owns the equipment/system.
    The amount of the tax may depend on a negotiated value, ie: determined by the alarm company negotiating with the taxing authority. But if the taxing authority feels the need, they could demand to perform a physical audit of the alarm company's records, to see what equipment was installed at its Subscribers within the jurisdiction, it's wholesale price, and labor costs to install it. Statute of limitations would apply. Could be a painful experience for the alarm company, and a significant labor burden to the tax assessor. 
    Most likely that alarm companies which don't have billboards or radio ads, or dealer programs, or a sports arena named after them, or a door-to-door sales army, will be too small for the taxing authorities to bother with.
    In any event, the KK all-in-one agreements provide that such government imposed tax amounts may be, and should be, passed on to the Subscriber as an additional charge.
(2) Sales Tax, of course, is due on the leased equipment, and should have been paid by the alarm company, as the alarm company is the ultimate user of the equipment. Some alarm companies have gotten into tax problems by claiming such equipment to be for resale, in an effort to avoid payment of sales taxes.
    Maybe Mitch could offer some additional context on these two types of taxes. 
    And perhaps the folks at the litigious fire alarm leasing company you (Ken) often refer to (sorry, can't recall their name) could comment as well.
    One More Thing About Leasing:
    The KK all-in-one lease agreement is a Service Agreement and will provide that the Subscriber is granted use of the leased equipment/system, and, depending on what the deal is, will also include monitoring and/or T&M repairs, free repairs, service availability, inspections/testing, etc, etc.
Anon on the West Coast
    The tax I was thinking about is an Ad Valorem Tax, AVT tax.  I don't know which states have it and I don't know how it's different from a Use or Sales tax.  The All in One does pass along taxes to the subscriber but if you're in a AVT state and you lease systems you may want to have your accountant check the contract wording and also how you are trying to charge and invoice the customer for it.

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301