Tax Type
Retail Sales and Use Tax
Description
Leases of the fiber optic cable are real property
Topic
Basis of Tax
Classification
Date Issued
08-25-2006
August 25, 2006
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****************:
This will reply to your letter in which you request a ruling on the application of the retail sales and use tax to the lease of fiber optic cable by ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is in the business of providing network infrastructure services. Primarily, the Taxpayer leases fiber optic cable to enterprise and carrier customers, including banks and telecom providers.
The fiber optic cable is installed by third party contractors and remains the property of the Taxpayer. The customers have exclusive use rights but may not sell, share, swap, sublease, or otherwise assign the fiber optic cable to another party. In addition, the customer may not perform maintenance or repairs on the fiber optic cable.
The Taxpayer leases two kinds of fiber optic cable: dark fiber and lit fiber. Both types of fiber are installed underground. The Taxpayer contends that the lease of the fiber optic cable is a lease of "real property" and therefore is not subject to the retail sales and use tax.
RULING
In order to determine whether an article of tangible personal property becomes real property or remains tangible personal property upon installation, the Department relies upon the Virginia Supreme Court's ruling in Transcontinental Gas Pipe Line Corporation v. Prince William County 210 Va. 550 (1970), which states, in part:
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- Three general tests are applied to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered . . . .
As provided in the above Virginia Supreme Court ruling, the Department places great emphasis on the intention of the parties making the annexation in determining whether the annexed property qualifies as tangible personal property or real property.
In this instance, the fiber optic cable is bundled with other fiber optic cable and the bundle of cable is contained in conduit. The conduit is buried 3 to 6 feet underground. The Taxpayer enters into agreements with customers for the lease of fiber optic cable. Should the customer terminate its lease, the fiber optic cable remains underground. Furthermore, it is my understanding that, for local tax purposes, the fiber optic cable is classified as realty. All of these factors support a finding that it is the Taxpayer's intention to make the fiber optic cable a permanent part of real property. Based on the facts presented, I find that the fiber optic cable does become real property once it is buried underground (i.e., annexed to real property). Thus, the leases of the fiber optic cable are leases of real property and are not subject to the Virginia retail sales and use tax.
The Taxpayer should note that it is deemed the user and consumer of the fiber optic cable purchased for incorporation into real property. In accordance with Va. Code § 58.1-604, the Taxpayer is required to pay the tax on the purchase of the cable. If the tax is not collected on sales of the fiber optic cable by the vendor, then the Taxpayer must remit the proper amount of use tax to the Department.
This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.
The Code of Virginia section cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this response, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Janie E. Bowen
Tax Commissioner
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AR/54099i
Rulings of the Tax Commissioner