A recent Advisory Opinion issued by the Department of Taxation and Finance addresses several interesting New York sales tax questions relating to the furnishing of interconnection, managed IT infrastructure services and co-location services at data centers in New York State. Advisory Opinion, TSB-A-15(53)S (N.Y.S. Dep’t of Taxation & Fin., Dec. 31, 2015). The Advisory Opinion concludes, among other things, that the furnishing of so-called “dark” fiber optic cables through what are known as “cross connect” services does not constitute the sale of taxable telephone or telegraph services and is not subject to sales tax.
The service provider (“Seller”) provides options for customers to choose various ways of interconnecting with their business partners. Through these “cross connect” services, the Seller’s customers are able to directly connect to various bandwidth providers, including carriers, Internet service providers (“ISPs”) and broadband access networks. This is done through the Seller’s co-location centers in New York, called International Business Exchanges (“IBXs”). The Seller’s customers co-locate their own equipment in the Seller’s IBX facility in order to utilize the technology available at that facility, which in turn enables the customer to connect with business providers, service providers and networks.
The Department’s ruling on the taxability of each of the enumerated services is summarized below:
- Charges for “dark fiber.” The Seller provides access to a bundle of fiber optic cables through its cross connect service that allow a customer to connect its equipment with its business partners’ equipment. The customer’s equipment must be co-located at the Seller’s IBX facility in order to access the fiber optic cable. The cable is commonly referred to as “dark fiber,” which means that it remains “dark” until the customer “lights” the cable by establishing service with a third party provider. The Seller does not transmit data, sounds or signals through the cables. The Seller separately states its cross connect service charges on invoices with customers.
Ruling: Because customers use their own equipment to connect to the Seller’s cables, and the third party or ISP transmits the customers’ data or other signals to their destination, the Seller is deemed to be providing “dark cable” only, which means it is not providing taxable telephony or telegraphy services under Tax Law § 1105(b). The charges are also not considered to be for the sale or use of the cables as tangible personal property because the cables as installed constitute capital improvements to real property.
- Co-location charges. Customers contract to co-locate their equipment in “cages” or “suites” at the Seller’s IBX facility in order to utilize the technology at that facility. Customers are given exclusive possession of the space, which can be accessed 24 hours a day, seven days a week.
Ruling: The furnishing of cages or suites at the Seller’s IBX facility is considered a nontaxable lease of real property and is not a taxable storage service. The Department analyzed five indicators of a rental or lease of real property and concluded that the co-location services constituted the rental of real property and therefore was not subject to sales tax.
- Maintenance/operation of the customer’s equipment. Some of the Seller’s customers will choose to have the Seller maintain and/or operate the customer’s equipment that is co-located at the Seller’s IBX facility.
Ruling: Charges for the installation, maintenance, service or repair of the customer’s equipment will be subject to sales tax. Tax Law § 1105(c)(3). If there is a single charge for the maintenance and operation of customer equipment, the entire charge (not just the maintenance portion) will be taxable.
- Electrical power. The Seller purchases electrical power from its power suppliers in order to provide its overall service to customers. Currently, the Seller charges customers for electrical power not based on their actual consumption, but based on each customer’s general usage requirements, such as the number of servers co-located at the Seller’s facility.
The Seller is contemplating providing metered electrical power to its customers, and will separately charge customers based on the customer’s actual usage plus a negotiated administrative fee intended to cover the Seller’s related costs. Each customer would be required to purchase a “minimum commitment” amount of electricity, regardless of its actual usage.
Ruling: The Department ruled that the Seller’s current charges for fixed electrical power not based on actual consumption are incidental to the customer’s rental of the cage or suite and therefore are not for the taxable sale of electricity, citing Empire State Building Co. v. New York State Department of Taxation & Finance. 81 N.Y.2d 1002 (1993). If the Seller meters the electricity that it furnishes to its customers, however, it would be required to collect sales tax on the charges. In that case, the Seller will be able to purchase the electricity from its electrical power suppliers for resale, without having to pay sales tax on those purchases.
The Advisory Opinion’s conclusion that the Seller’s separate charges for cross connect services are not for a taxable telephone service is consistent with earlier Department pronouncements. The fact that the Seller provides other ancillary services, at least some of which (such as the furnishing of sub-metered electricity) may be subject to sales tax, does not change this outcome. The Advisory Opinion also addresses the important related question of whether the charges are for the taxable sale or use of tangible personal property, correctly concluding that the cables, as installed, constitute capital improvements to real property. Although the Department has previously ruled that co-location charges are for the rental of real property, this ruling also disposes of the ancillary question of whether the charges are taxable storage charges under Tax Law § 1105(c)(4), concluding that they are not.