Sales Tax State Activity Update November 2005

Electricity Not "Current"ly Exempt in New York Telecom

A taxpayer was subject to sales tax on its purchase of electricity used to provide power to its telecommunications equipment.

The company, XO Communications, Inc. (XO), is a nationwide provider of telecommunications services. XO purchased electricity from Con Edison that was used to power its telecommunications equipment. It filed a refund claim on the sales tax paid on its purchases of electricity. Their reliance on various provisions of the New York Tax Code to justify its position that it was entitled to a refund on its purchases of electricity to power its equipment was rejected.

XO first relied on Section 1115(a)(12-a) of the Tax Law arguing that its purchases of electricity were used in the production, delivery, or rendering of telecommunication services and were not taxable. However the exemption set forth in Section 1115(a)(12-a) does not apply to purchases of electricity. The taxpayer also relied on Section 1115(a)(12) claiming an exemption for machinery and equipment used in manufacturing tangible personal property for sale. However, the term “machinery and equipment” did not include electricity. In addition, the electricity purchased by XO did not produce tangible personal property for sale; it was used to produce a service.

XO’s reliance on Section 1115(c)(1) was also rejected because telecommunications services were not corporeal property because they cannot be seen or handled. In addition, telecommunications are not taxed as tangible personal property under the Tax Law but as a service. XO’s alternate argument under Section 1115(c)(1) was that its purchase of alternating current, which it purchased as a raw material, and converted to direct current was also rejected because the conversion was considered to be an intermediate step in the process to sell its telecommunications services.

XO New York, Inc., New York Division of Tax Appeals, Administrative Law Judge, DTA No. 820005, 9/29/05