Sales Tax Articles
Sales Tax State Activity Update - October 2006
Virginia Digs Into Underground Fiber Taxation
A taxpayer, in the business of providing network infrastructure services, leased fiber optic cable to enterprise and carrier customers including banks and telecommunications service providers.
The taxpayer leased two kinds of fiber optic cable: dark fiber and lit fiber. Both types of fiber are installed underground. The fiber optic cable was installed by third party contractors and remained the property of the taxpayer.
The customers using the fiber 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 to the fiber optic cable. The taxpayer contended that the fiber optic cable was a lease of "real property" and therefore was not subject to sales and use tax.
The principle test used by the Department to determine whether an article of tangible personal property becomes real property or remains tangible personal property upon installation depends upon a three part test that the Virginia Supreme Court ruled in Transcontinental Gas Pipe Line Corporation v. Prince William County 210 Va. 550 (1970), which stated in part:
Three general tests are applied to determine whether an item of tangible personal property placed upon realty becomes realty itself. They are:
- Annexation of the property to realty,
- Adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and
- The intention of the parties. The intention of the party making the annexation is the chief test to be considered...
In this instance, the fiber optic cable was bundled with other fiber optic cable and placed in a conduit that was buried 3 to 6 feet underground.
The taxpayer entered into lease agreements with it's customers for the lease of the fiber optic cable. Should the customer terminate its lease, the fiber optic cable remained underground. For local tax purposes, the fiber optic cable was classified as realty. All of these factors supported a finding that it was the Taxpayer's intention to make the fiber optic cable a permanent part of the real estate.
Based on all of these factors, the Commissioner found that the fiber optic cable does become part of the real property once it is buried underground. Thus, the leases of the fiber optic cable were leases of real property and were not subject to Virginia sales and use tax.
However, the taxpayer was deemed to be the user and consumer of the fiber optic cable purchased for incorporation into real property, and therefore must pay tax to the vendor on the purchase of the cable. If the tax was not collected by the vendor, the taxpayer must then remit the proper amount of use tax to the Department.
(Ruling of the Tax Commissioner, Ruling 06-84, Department of Taxation, 8/25/06)
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