Is a competitive local phone carrier's purchase of fiber optic network access from an in-state network owner taxable, or is it exempt as a purchase for resale?

Plain-English summary

Deloitte & Touche asked on behalf of a client that was about to become a new competitive local exchange telephone carrier in a New York municipality, entering the market without any prior New York operations. The client signed an 11-year agreement with an in-state network owner (a company that had mostly done construction work, not telecom, but had a special municipal franchise to lay fiber optic lines) for exclusive use of part of its fiber optic network. The client would pay an upfront lump sum plus monthly access fees, use that fiber network alongside its own network and the incumbent carrier's network to provide local phone service, and would itself collect and remit sales tax on what it charged its own end-user customers. Separately stated construction/installation charges weren't at issue. The network owner would also maintain, repair, and monitor the lines around the clock. The question: are the client's payments to the network owner for fiber access taxable?

The Department said no. Even though the network owner is described mainly as a construction company rather than a traditional phone carrier, providing exclusive access to fiber optic lines used to carry the client's telephone traffic counts as selling "telephony and telegraphy" service under New York's tax law -- and it doesn't matter whether either party is regulated as a public utility for this purpose. Because the client will incorporate this fiber capacity into its own combined network and resell telecommunications service (including this capacity) to its own end-user customers, the purchase qualifies for the standard utility-service resale exclusion, much like one telephone company buying "leased lines" from another. The client should provide the network owner with a properly completed resale certificate within 90 days of the service; when the client later bills its own customers, it's the one responsible for collecting and remitting New York sales tax on those charges.

What this means for you

Competitive local exchange carriers and other telecom resellers entering New York

Buying network capacity -- fiber, leased lines, or similar infrastructure -- from another provider to incorporate into telecommunications service you resell to your own customers generally qualifies for the resale exclusion, regardless of whether your supplier is itself a regulated "telephone corporation." Make sure to furnish your supplier a properly completed resale certificate (Form ST-120) within the required window.

Non-telecom companies that own fiber, conduit, or similar network infrastructure and lease access to carriers

If a construction company or other infrastructure owner leases exclusive network capacity to a telecommunications carrier that will resell service built on that capacity, the lease payments can qualify as a resale, not a retail purchase, taxable only when the carrier resells the service downstream to its own customers.

Accountants and tax professionals

This ruling extends the "leased lines" resale precedent from Commonwealth Long Distance, Inc., TSB-A-94(33)S, to fiber optic network-access agreements, and confirms that regulatory status under the Public Service Law (whether either party is a "telephone corporation") is irrelevant to the sales tax resale analysis under 20 NYCRR § 527.2.

Common questions

Q: Is a telecom carrier's purchase of network capacity from another provider taxable?
A: Not if the carrier is incorporating that capacity into telecommunications service it resells to its own end-user customers -- it qualifies for the utility-service resale exclusion.

Q: Does it matter whether the network owner is a regulated public utility?
A: No. Whether either party is subject to Public Service Commission regulation as a "telephone corporation" has no bearing on the sales tax analysis.

Q: Who collects sales tax in this kind of arrangement?
A: The reselling carrier collects tax when it bills its own end-user customers for telephone service; the underlying network-access purchase itself isn't taxed, provided a resale certificate is furnished.

Q: Does this ruling apply to my telecom network-access agreement?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Whether your specific arrangement qualifies as a resale depends on your own facts.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_12s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(12)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S971022A

On October 22, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Deloitte & Touche LLP, 2 World Financial
Center, 8th Floor, New York, New York 10281-1426.
The issue raised by Petitioner, Deloitte & Touche LLP, is whether the
purchase of telephone network access to fiber optic lines by a local exchange
carrier is subject to New York State and local sales taxes or if such a purchase
is considered for resale.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner’s client is a competitive local exchange telephone carrier that
has not previously conducted any business operations in New York State. The
client will begin offering local telephone service in a New York municipality.
The client has entered into a fiber optic use agreement (the Agreement) with an
in-state network owner for use of a fiber optic network in the municipality,
through which the client’s local telephone service will be provided. The network
owner received a special franchise from the municipality to lay the fiber optic
lines. The network owner has been primarily a construction company, not an
incumbent local exchange or interexchange carrier, and has not provided
telecommunications services or equipment to its customers.
The client will use the network owner’s fiber optic network as a component
of its competitive local exchange telephone network in the New York marketplace.
The fiber optic lines of the network owner will be used in conjunction with the
client’s own network, as well as with the network of the incumbent local exchange
carrier.
The combined network will be used by the client to provide local
exchange and other telecommunications services to end-users in New York. The
client will be responsible for collecting and remitting all applicable sales
taxes associated with charges assessed to the network’s end-users.
Under the Agreement, the client will pay an initial lump sum plus monthly
network access fees to the network owner for the exclusive use of a portion of
its fiber optic network in New York for a period of 11 years. The Agreement
prohibits the network owner from leasing the use of this portion of the network
to anyone else during its term. The network owner will provide the necessary
construction and installation services required to connect its fiber optic
network with the client’s origination and termination equipment. The charges for
these construction and installation services will be separately stated from the
network access fees and are not at issue in this Opinion.
The network owner will also maintain and repair the lines to ensure that
the lines operate properly. The network owner must perform all routine and
scheduled maintenance on the fiber optic network. In addition, it will be

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TSB-A-98(12)S
Sales Tax

required to operate and maintain one or more “operation centers.” An operation
center is a centralized monitoring station to ensure the network is operational.
The network owner’s personnel will staff the operational centers 24 hours a day,
seven days a week.
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes
imposed by subdivisions (a), (b), (c) and (d) of section eleven
hundred five and by section eleven hundred ten, the following terms
shall mean:
*
*
*
(5) Sale, selling or purchase.
Any transfer of title or
possession or both, exchange or barter, rental, lease or license to
use or consume ..., conditional or otherwise, in any manner or by
any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article,
for a consideration or any agreement therefor.
Section 1105(b) of the Tax Law imposes sales tax, in part, upon:
The receipts ... from every sale, other than sales for resale,
of telephony and telegraphy and telephone and telegraph service of
whatever nature except interstate and international telephony and
telegraphy and telephone and telegraph service ....
Section 527.2(a)(2) of the Sales and Use Tax Regulations as it pertains to
the tax imposed under Section 1105(b) of the Tax Law provides, in part:
Although this tax is generally known as the “consumer’s
utility tax,” the intention of the statute is to tax the enumerated
sales and services whether or not rendered by a company subject to
regulation as a utility company. The words “of whatever nature”
indicate that a broad construction is to be given the terms
describing the items taxed ....
Section 527.2(d) of the regulations provides, in part:
Telephony and telegraphy; telephone and telegraph service.
(1) The provisions of section 1105(b) of the Tax Law with respect to
telephony and telegraphy and telephone and telegraph service impose
a tax on receipts from intrastate communication by means of devices
employing the principles of telephony and telegraphy.
(2) The term telephony and telegraphy
operation of any apparatus for transmission
reproduction or coded or other signals.
*

*

*

includes use or
of sound, sound

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TSB-A-98(12)S
Sales Tax

(5) The tax on utility services applies to every charge for
any telephone and telegraph service.
Among these charges are
monthly message rate and intrastate toll charges and charges for
special services, such as installation, change of location,
conference connections, tie-lines, WATS lines and the furnishing of
equipment.

Section 527.2(e) of the regulations provides:
Sales for resale. Purchases of utility services by a utility
for resale as such may be made without payment of the sales tax.
The purchaser must furnish the supplier of the utility to be resold
with a resale certificate (Form ST-120). When the utility services
are resold by the purchaser he must collect the sales tax on the
receipts from his sales as imposed under section 1105(b) of the Tax
Law. A purchase of a utility service which is not resold is subject
to tax as a purchase at retail.
Opinion
The initial lump sum payment plus the monthly network access fees that
Petitioner’s client will pay to the network owner for access to a portion of its
fiber optic network will not be subject to New York State and local sales taxes.
The purchase of access to the fiber optic network will be considered a purchase
of a telephone service for resale as such by Petitioner’s client in conducting
its local exchange and other telecommunication services.
This fiber optic
network will form an integral component of the client’s overall telecommunication
facilities and Petitioner’s purchase of such access is not unlike the purchase
of “leased lines” shared among telephone companies. (See, Commonwealth Long
Distance, Inc., Adv Op Comm T&F, July 29, 1994, TSB-A-94(33)S.) For sales tax
purposes, it is of no consequence whether Petitioner’s client or the in-state
fiber optic network owner is subject to regulation by the Public Service
Commission as a “telephone corporation,” as defined in Section 2(17) of the
Public Service Law, or is otherwise subject to regulation as a utility. (See,
20 NYCRR 527.2(a)(2).)
It is noted that when Petitioner’s client purchases access to the fiber
optic network, the client should provide the network owner with a properly
completed Resale Certificate (Form ST-120) within 90 days after the rendition of
the service. See Section 1132(c) of the Tax Law and Section 532.4 of the Sales
and Use Tax Regulations.

DATED: February 27, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.