Were colocation rack-space rent and a percentage pass-through of the provider's electricity bill taxable in Illinois?

Plain-English summary

A tax-software supplier asked how Illinois treated colocation charges for rack or cabinet space and a monthly percentage allocation of the provider's overall electric bill.

IDOR did not expressly classify the rack-space charge as real property or a tangible-personal-property rental. It instead explained Illinois lease rules: conditional-sale receipts are taxed, while under a true lease the lessor pays Use Tax on its cost and rental receipts are not taxed.

For electricity, the answer was clearer. A provider selling electricity at retail is a delivering supplier responsible for collecting Electricity Excise Tax. But when the provider paid that tax to its utility and merely passed a percentage of its overall electricity charge to the customer—inside rent or separately—it was not responsible for collecting the tax again.

The letter also summarized telecommunications bundling: separately identified equipment and reasonably identifiable nontaxable charges may be excluded, while an unidentifiable combined charge can be attributed to taxable telecommunications.

Common questions

Did IDOR say rack-space rent was nontaxable real-property rent? No. That classification was not expressly answered.

Was a taxed electricity-cost pass-through taxed again? No, under the described arrangement.

Citations and references

• 35 ILCS 105/1 et seq. and 120/1 et seq.
• 35 ILCS 630/1 et seq.
• 35 ILCS 640/1
• 86 Ill. Adm. Code 130.220 and 130.2010

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0041.pdf

Original ruling text

ST 13-0041-GIL 08/23/2013 TELECOMMUNICATIONS EXCISE TAX
Telecommunications Excise Tax is imposed upon the act or privilege of originating or receiving intrastate or
interstate telecommunications in Illinois at the rate of 7% of the gross charges for such telecommunications
purchased at retail from retailers. See 35 ILCS 630/1 et seq. (This is a GIL.)

August 23, 2013

Dear Xxxxx:
This letter is in response to your letter dated July 11, 2013, in which you request information. The
Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the Department in
response to specific taxpayer inquiries concerning the application of a tax statute or rule to a particular fact
situation. A PLR is binding on the Department, but only as to the taxpayer who is the subject of the request for
ruling and only to the extent the facts recited in the PLR are correct and complete. Persons seeking PLRs must
comply with the procedures for PLRs found in the Department’s regulations at 2 Ill. Adm. Code 1200.110. The
purpose of a General Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not a statement of
Department policy and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our
website at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with a GIL.
In your letter you have stated and made inquiry as follows:
ABC is a supplier of tax compliance software.
We are currently reviewing all states to determine the sales tax status of certain billing protocols
in the colocation data service industry. In a typical colocation arrangement, a provider invoices
recurring charges for rack or cabinet space, internet bandwidth, and electrical power to a
customer locating computer hardware in the providers facilities. In addition to these recurring
customer charges, provider offers other colocation managed services on a stand-alone basis as
requested by customers and separately states various combinations of its colocation and managed
service charges on their customer’s invoice.
In particular there are charges that colocation service providers will charge their customers for
rack-space. Here the customer in addition to renting the server from the colocation facility also
rents on a per month basis the actual space where that server is to be stored. We understand the
nature of this transaction to be the rental of real property and if there is no sales tax on the rental
of real property then there would also be no sales tax on the rental of rack-space from a
colocation service provider.
However, we have found certain exceptions to this rule and that some states view the transaction
as a taxable rental of TPP (or of real property). Does your state consider the transaction cited
above to be a taxable rental?

In addition we would like to know if a monthly charge for electricity passed on to the customer
by the provider is subject to the state level sales tax. This charge is not a meter-based electric
charge but more like a percentage of the service providers overall electric bill. We have found
that most states consider the service provider to be the end-user of the electricity and therefore
the corresponding electric charge billed to the customer is not a taxable transaction. Is the same
true in your state or is there some regulation which taxes this charge?
Thank you in advance for your prompt reply.

DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax
The Illinois Retailers’ Occupation Tax (commonly known as sales tax) is imposed upon persons
engaged in this State in the business of selling tangible personal property to purchasers for use or consumption.
See 35 ILCS 120/1 et seq. This tax is measured by the seller’s gross receipts from such sales made in the
course of such business. See 86 Ill. Adm. Code 130.101. Transactions which do not involve the sale of tangible
personal property at retail are not subject to the Retailers’ Occupation Tax. In addition, Use Tax is imposed on
the privilege of using, in this State, any kind of tangible personal property that is purchased anywhere at retail
from a retailer. See 35 ILCS 105/1 et seq. and 86 Ill. Adm. Code 150.101.
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax purposes than
the majority of other states. For Illinois sales tax purposes, there are two types of leasing situations: conditional
sales and true leases. A conditional sale is usually characterized by a nominal or one dollar purchase option at
the close of the lease term. Stated otherwise, if a lessor is guaranteed at the time of the lease that the leased
property will be sold, that transaction is considered to be a conditional sale at the outset of the transaction.
Persons who purchase items for resale under conditional sales contracts can avoid paying tax to suppliers by
providing certificates of resale that contain all the information set forth in 86 Ill. Adm. Code 130.1405. All
receipts received by a lessor/retailer under a conditional sales contract are subject to Retailers’ Occupation Tax.
See 86 Ill. Adm. Code 130.2010. The lessors/retailers generally owe Retailers’ Occupation Tax on any
installment payments when they are received by the lessors/retailers. The lessees/purchasers owe corresponding
Use Tax on the amount of the installment payments that are collected by the lessors/retailers.
A true lease generally has no buy out provision at the close of the lease. If a buy-out provision does
exist, it must be a fair market value buy-out option in order to maintain the character of the true lease. Lessors
of tangible personal property under true leases in Illinois are deemed end users of the property to be leased. See
86 Ill. Adm. Code 130.220. As end users of tangible personal property located in Illinois, lessors of a true lease
owe Use Tax on their cost price of such property. The State of Illinois imposes no tax on rental receipts.
Consequently, lessees incur no tax liability. As stated above, in the case of a true lease, the lessors of the
property being used in Illinois would be the parties with Use Tax obligations. The lessors would either pay
their suppliers, if their suppliers were registered to collect Use Tax, or would self-assess and remit the tax to the
Department. If the lessors already paid taxes in another state with respect to the acquisition of the tangible
personal property, they would be exempt from Use Tax to the extent of the amount of such tax properly due and
paid in such other state. See subsection (a)(3) of 86 Ill. Adm. Code 150.310.
Telecommunications Excise Tax
The Telecommunications Excise Tax Act, 35 ILCS 630/1 et seq., imposes a tax upon the act or privilege
of originating or receiving in the State of Illinois interstate or intrastate telecommunications by a person in
Illinois at the rate of 7% of the gross charge for such telecommunications purchased at retail from a retailer by
such person. Under Section 2(c) of the Act,

“’[t]elecommunications’, in addition to the meaning ordinarily and popularly ascribed to it,
includes, without limitation, messages or information transmitted through use of local, toll and
wide area telephone service; private line services; channel services; telegraph services;
teletypewriter; computer exchange services; cellular mobile telecommunications service;
specialized mobile radio; stationary two way radio; paging service; or any other form of mobile
and portable one-way or two-way communications; or any other transmission of messages or
information by electronic or similar means, between or among points by wire, cable, fiber-optics,
laser, microwave, radio, satellite or similar facilities. As used in this Act, ‘private line’ means a
dedicated non-traffic sensitive service for a single customer, that entitles the customer to
exclusive or priority use of a communications channel or group of channels, from one or more
specified locations to one or more other specified locations. The definition of
‘telecommunications’ shall not include value added services in which computer processing
applications are used to act on the form, content, code and protocol of the information for
purposes other than transmission. ‘Telecommunications’ shall not include purchases of
telecommunications by a telecommunications service provider for use as a component part of the
service provided by him to the ultimate retail consumer who originates or terminates the taxable
end-to-end communications. Carrier access charges, right of access charges, charges for use of
inter-company facilities, and all telecommunications resold in the subsequent provision of, used
as a component of, or integrated into end-to-end telecommunications service shall be non-taxable
as sales for resale.” 35 ILCS 630/2(c).
"’Gross charge’ means the amount paid for the act or privilege of originating or receiving
telecommunications in this State and for all services and equipment provided in connection
therewith by a retailer, valued in money whether paid in money or otherwise, including cash,
credits, services and property of every kind or nature, and shall be determined without any
deduction on account of the cost of such telecommunications, the cost of materials used, labor or
service costs or any other expense whatsoever.
“Gross charges’ does not include charges for customer equipment, including equipment that is leased or
rented by the customer from any source, wherein such charges are disaggregated and separately identified from
other charges. ‘Gross charges’ also does not include charges for nontaxable services or telecommunications if
(i) those charges are aggregated with other charges for telecommunications that are taxable, (ii) those charges
are not separately stated on the customer bill or invoice, and (iii) the retailer can reasonably identify the
nontaxable charges on the retailer's books and records kept in the regular course of business. If the nontaxable
charges cannot reasonably be identified, the gross charge from the sale of both taxable and nontaxable services
or telecommunications billed on a combined basis shall be attributed to the taxable services or
telecommunications.
The burden of proving nontaxable charges shall be on the retailer of the
telecommunications.
Electricity Excise Tax
The Electricity Excise Tax Law, 35 ILCS 640/1, is imposed upon the privilege of using in this State
electricity purchased for use or consumption and not for resale, other than by municipal corporations owning
and operating a local transportation system for public service. The incidence of this tax is on the consumers of
electricity. Generally, if you sell electricity at retail to your customers, you are considered a delivering supplier
of electricity and therefore liable for the collection of the tax. However, if you pay the tax to your supplier and
then pass on a percentage of your overall electricity charge to a customer, whether included in a monthly rental
charge or as a separate charge, you would not be responsible for the collection of the tax.
I hope this information is helpful. If you require additional information, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Richard S. Wolters
Associate Counsel
RSW: