Sales Tax State Activity Update - October 2005

Fiber Optic Lines Change the Rules in New York

A taxpayer requested an Advisory Opinion on whether its monthly charges to customers for the use of its fiber optic cable system were subject to sales tax.

The taxpayer's primary activity was leasing the use of its fiber optic cable network to commercial customers such as banks and telecommunication service providers. The taxpayer provided its customers with both "dark" (unlit) and "lit" fiber. With "dark" fiber, the taxpayer merely provided the physical cable used to connect the customers' locations. They did not provide the equipment that was necessary to "light" or activate the fiber optic cable for the transmission of communications. The taxpayer also offered "Lit Services". These differed from the provision of "dark" cable in that the taxpayer used its own equipment to activate the fiber optic cable for the customer. The charges for the "lit" cable were listed on the customer's monthly invoice separately from the charges for the "dark" cable.

The Department held that the monthly charges to customers for the use of the "dark" cable were not receipts from the sale of telephone or telegraph services and were not subject to sales tax. However, the charges to customers for the use of the taxpayer's "lit" fiber were considered to be sales of telephone or telegraph service and were subject to sales tax.

The entire charge to the customer for the use of the fiber optic network, including any expenses in providing the services across the network (i.e., equipment and energy costs necessary to "light" the cable) were subject to sales tax, regardless of whether the charges for such components were separately stated on the invoice.

The Department went on to state that charges to customers for telephone and telegraph services connecting points within New York State were subject to sales tax, regardless of the customer's billing address. Separate charges for interstate and international telephone services were exempt from sales tax. If the taxpayer could not distinguish between intrastate, interstate and international telephone services, the entire charge for the telephone services were taxable.

(TSB-A-05(32)S, New York State Department of Taxation and Finance, Office of Policy Analysis, Technical Services Division, 8/18/05)

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