Reversing a decision of the trial court, the Appellate Division, Third Department, has held that fiber optic cable installations are not taxable real property because they do not "distribute" light, heat, or power within the meaning of the statute. Level 3 Communications, LLC v. Clinton County et al., No. 522214 (App. Div. 3rd Dep't Oct. 20, 2016). However, a refund of taxes already paid was denied because no notice was given to the localities that the taxes were being paid under protest.

Facts and Decision Below. Level 3 is a telecommunications company that owns fiber optic cable installations. The fiber optic cables consisted of filaments of glass through which light beams are used to transport information and data from one point to another.

RPTL 102(12)(f) provides that taxable real property includes "equipment for the distribution of heat, light, power, gases and liquids." The issue in dispute was whether the fiber optic cable installations involved the "distribution" of light within the meaning of the statute.

Level 3 had paid real property tax on the installations, but in May 2013, after a decision involving another taxpayer issued by the First Department ruling that fiber optic installations were not taxable by New York City,

Level 3 filed applications for refunds and to have the properties removed from the tax rolls. The applications were denied, and Level 3 filed an action for a declaratory judgment seeking a refund of the taxes paid and a declaration that the property was not taxable.

The trial court upheld the denial, finding that the fiber optic cable installations were taxable real property under RPTL 102(12)(f), and that Level 3 was precluded from recovering the requested refunds because it had paid the taxes voluntarily.

Appellate Division Decision. The Third Department reversed on the question of taxability, and found that Level 3's fiber optic installations were not subject to tax. First, the court noted the well-established rules that tax imposition statutes must be strictly construed, and that all doubts concerning scope are to be resolved in favor of the taxpayer. Since the RPTL did not define "distribution," the court looked to the "usual and commonly understood meaning" of the term and, citing cases and dictionary definitions, found that "distribute" generally means "to divide among several or many" or "to give out or deliver, especially to members of a group."

The court found that the fiber optic cables do not "distribute" light within those definitions. Instead, the lights signals transmitted over the cables terminate in an optical receiver that reads the light, decodes the signals and sends electronic signals to other sources such as computers, televisions, and telephones. While the cables were found to "undeniably transmit light . . . such transmission does not result in the `distribution' of light." The court found that it was data, rather than light, that was being distributed. It also concluded that the lower court had erred in concluding there was no meaningful difference between the words "transmit" and "distribute," and noted both that the commonly understood meanings are different and that the two terms are independently used in the statute, indicating that different concepts were intended.

The court also found that, nearly 30 years after the general provisions in RPTL 102(12)(f) were enacted in 1958, the legislature had enacted RPTL 102(12)(i) to specifically address real property taxation of telecommunications equipment, and that the legislative history indicated the Legislature was aware at the time of fiber optic technology and chose to limit assessment under RPTL 102(12)(i) to wire and other property used "for electrical conductors," which did not include fiber optic cables.

However, with regard to the claimed refunds, the Third Department sustained the lower court's denial, finding that Level 3 was required to "establish appropriate legal protest" prior to or at the time of payment in order to obtain a refund, so that government entities have notice of the possibility of refunds. Since there was no indication that the taxes were paid under protest, or that notice was otherwise given, the refund of taxes paid was denied.

Additional Insights

As the Third Department found, the First Department has already reviewed a similar issue and concluded in Matter of RCN N.Y. Communications, LLC v. Tax Commission of the City of New York, 95 A.D.3d 456 (1st Dep't 2012) that fiber optic installations do not constitute real property under RPTL 102(12)(i), the more specific provision enacted in 1985 which imposes tax on lines and wires "for electrical conductors," since the fiber optic cables were not used as electrical conductors. The Third Department noted that this issue had also been raised below in Level 3, and the lower court had similarly ruled that Level 3's fiber optic cables did not constitute real property under RPTL 102(12)(i), relying on RCN N.Y. Communications, and that issue was not raised on appeal. Given that both the First Department and the Third Department have now reached the same result under two different sections of the statute, the issue of RPTL taxation of fiber optic cables appears to be resolved, absent review by the Court of Appeals.