The New York State Tax Appeals Tribunal has upheld an Administrative Law Judge determination that a company was not entitled to a refund of sales tax paid on electricity used to power equipment necessary to provide telecommunications services and carry signals to its customers, rejecting the company’s claim that the electricity was not subject to sales tax because it was a purchase for resale. Matter of XO Commc’ns Servs., LLC, DTA Nos. 826686 & 827014 (N.Y.S. Tax App. Trib., May 9, 2018).

Facts. XO Communications Services, LLC (“XO”), is a provider of intrastate, interstate, and international telecommunications services, including voice services, Internet services, optical services, and private data networks, to businesses, wholesalers, and governmental entities. XO maintains a number of central offices that house equipment used to provide telecommunications services, including voice switches that provide basic voice services, routers for voice and Internet services, and longhaul optical transport equipment to provide connectivity over a fiber optic network. 

XO filed two refund claims, originally totaling over $1.1 million, seeking a refund of sales tax it paid on the electricity used to power the central office equipment that provided telecommunications services and carried signals to its customers. XO asserted that its purchase of electricity was a nontaxable purchase for resale, but the Department denied XO’s claims.

Tax Law. New York State imposes sales tax on the receipts from every “retail sale of tangible personal property,” Tax Law § 1105(a), and provides a purchase for resale exclusion within the statutory definition of “retail sale” for tangible personal property that constitutes a physical component part of services performed. Tax Law § 1101(b)(4). Under the regulations, the exclusion applies when a person in the course of business operations purchases tangible personal property for resale “either in the form in which purchased, or as a component part of other property or services.” 20 NYCRR § 526.6(c)(1). 

Separately, New York State imposes sales tax on the receipts from every “sale” of certain utilities, including electricity, “other than sales for resale.” Tax Law § 1105(b). The regulation outlining the sales taxation of utility services, including electricity, discusses the sale for resale exclusion in Tax Law § 1105(b), stating that “[p]urchases of utility services by a utility for resale as such may be made without payment of the sales tax,” but when the utility services are resold by the purchaser, it must collect sales tax on such sales. 20 NYCRR § 527.2(e) (emphasis added). 

ALJ Decision. In briefs submitted to the ALJ, XO agreed that it could only be refunded the amount of tax paid for electricity used in its taxable services, and it provided a one-page chart recalculating its refund claim to be under $150,000. Nevertheless, relying in part on a sales tax decision issued by the Appellate Division in 2008, which rejected a sales tax refund claim by a predecessor entity to XO based on arguments similar to those made in the current case, the ALJ concluded that XO was not entitled to even its reduced refund claim. See XO N.Y., Inc. v. Comm’r of Taxation & Fin., 51 A.D.3d 1154 (3d Dep’t, 2008) (the “XO Appellate Division decision”). 

Tribunal Decision. While the Tribunal agreed with XO’s position that the language in Tax Law § 1105(b) constitutes an exclusion from tax, rather than an exemption, and therefore must be construed “most strongly against the government and in favor of the taxpayer,” the Tribunal nevertheless upheld the ALJ’s determination that XO was not entitled to a refund of sales tax paid on electricity used to power its communications equipment.

The Tribunal first rejected XO’s argument that its purchases of electricity qualified for the resale exclusion on the basis that the electricity was “tangible personal property” resold as a component part of the telecommunications services XO sold to its customers. Significant to the Tribunal’s conclusion was the definition of tangible personal property in Tax Law § 1101(b)(6), which defines electricity as tangible personal property only for purposes of the sales tax on utilities imposed by Tax Law § 1105(b). In essence, this statutory limitation prevents electricity from being considered tangible personal property for purposes of the resale exclusion applicable to tangible personal property comprising a physical component part of services performed, as outlined in Tax Law § 1101(b)(4). According to the Tribunal, since Tax Law § 1105(b) makes no mention of a resale exclusion for utilities comprising a component part of property or services sold to a taxpayer’s customers, no such exclusion exists. Thus, it found that the resale exclusion in Tax Law § 1105(b) is properly interpreted to apply only to resales of electricity “as such.”

Relying on the XO Appellate Division decision, the Tribunal also rejected XO’s argument that the imposition of sales tax on its electricity purchases would result in multiple taxation. According to the Tribunal, the XO Appellate Division decision stands for the proposition that there was nothing inherently improper about multiple taxation under XO’s facts, and purchases made to produce or provide a product subject to sales tax are not automatically exempt from sales tax

.Finally, the Tribunal concluded that, even if XO would have been entitled to a resale exclusion for the electricity used to power the equipment used in providing telecommunications services, XO’s evidence was insufficient to support the amount of its refund claim. XO agreed that the resale exclusion only applies to the services it provides that are subject to tax, and ultimately claimed the exclusion only for a percentage of the electricity used by its central offices, equal to the percentage of its revenue from services subject to tax. However, XO provided no evidence demonstrating that the percentage of sales in each service category correlated to the actual amount of electricity purchased to provide such services. Thus, the Tribunal agreed with the ALJ’s determination that, even assuming that some of the electricity it purchased eventually flowed to its customers, the evidence provided by XO was insufficient to show how much electricity was purchased solely for resale. 


As discussed in the December 2017 issue of New York Tax Insights, which examined the Wegmans Food Markets, Inc. v. Tax Appeals Tribunal, 155 A.D.3d 1352 (3d Dep’t, 2017), New York Appellate Division case, New York courts have consistently held that ambiguities related to a statutory exclusion contained in a tax imposition statute must be construed in favor of the taxpayer and against the taxing authority. However, to take advantage of this principle, a petitioner must also be able to establish that an ambiguity actually exists. In this case, XO was able to establish that the resale exclusion in Tax Law § 1105(b) (applicable to sales of electricity) was an exclusion provision, and that ambiguities in the statute must be interpreted in its favor, but nevertheless it was unable to convince the Tribunal that any statutory ambiguity existed to overcome the guidance provided by Department regulations.