Are leases of dark (unlit) fiber-optic cable, and charges for 'lit' fiber, subject to Colorado sales or use tax?

Plain-English summary

A local exchange carrier owns a buried network of fiber-optic cable and leases the right to use the unlit ("dark") fiber to other telecom companies, who then "light" it with their own energy source (or buy that activation from the carrier). The carrier keeps ownership of the cable. It asked whether dark fiber and "lit" fiber are subject to Colorado sales or use tax.

Dark fiber — a taxable lease of property, but only if the fiber stays "property." Colorado taxes sales, use, and storage of tangible personal property, and a "sale" includes a lease (§§ 39-26-104(1)(a), 202(1)(a); § 39-26-102(23)). So a lease of dark fiber is taxable if the cable retains its identity as tangible personal property and can be separated from the real estate without damage. If instead it's so affixed to the realty that it loses its identity and can't be removed without significant damage, it becomes part of the real property and is not taxable (Reg 26-102.15). The Department said the letter didn't contain enough facts to decide, and listed the factors it would weigh:

• whether the property is tied to a particular business operation rather than the general improvement of the real estate;
• the degree to which the fiber is affixed to realty;
• whether and how much real property would be damaged on removal; and
• the objectively manifested intention of the parties.

The Department added that it reads the real-property statute in pari materia with the sales-tax law: § 39-1-102(11) treats a "telecommunications line, ... cable television line, or other similar business asset ... installed through an easement, right-of-way, or leasehold for ... commercial or industrial operation and not for the enhancement of real property" as personal property — pointing toward dark fiber keeping its TPP identity (citing Connecticut Legal Ruling 2007-3, that buried dark fiber doesn't lose its identity as TPP).

Lit fiber — taxable as a telephone service. Charges for "lit" fiber are taxable for intrastate telephone service (§ 39-26-104(1)(c)(I)); Colorado's rule defines telephone service to include leased circuits and facilities, non-talking circuits, and private-line service (Reg (39-)26-104.1(1)(c)). See FYI Sales 80.

What this means for you

Telecom carriers and fiber lessors

A lease of dark fiber is taxed like a lease of equipment — but the threshold question is whether your buried/affixed cable is still property or has become real estate. Cable installed through an easement to run a business (not to improve the land) generally stays personal property, so the lease is taxable. The more permanently it's embedded and the more removal would damage the realty, the stronger the argument it's nontaxable realty. Because this is fact-specific, a private letter ruling is the way to lock in an answer for your network.

Dark vs lit changes the tax theory

Dark fiber = a lease of tangible personal property. Lit fiber = a telecommunications (intrastate telephone) service. They're taxed under different provisions, so how you bill — bare conduit vs activated transport — drives which rule applies.

Common questions

Q: Is leasing dark fiber taxable in Colorado?
A: Generally yes, as a lease of tangible personal property — but only if the cable keeps its identity as property and can be removed without significant damage to the real estate. If it's an inseparable part of the realty, it's not taxable. The Department wouldn't decide on the facts given.

Q: How does Colorado decide if buried cable is property or real estate?
A: It weighs whether the cable serves a particular business operation vs improving the land, how firmly it's affixed, how much removal would damage the property, and the parties' manifested intent. It also reads the real-property statute (which treats easement-installed telecom lines as personal property) alongside the sales-tax law.

Q: Is 'lit' fiber taxed the same way?
A: No. Lit fiber is taxed as an intrastate telephone service, which Colorado defines to include leased circuits and private-line service.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department.

Citations and references

Statutes, regulations, and publications:
- §§ 39-26-104(1)(a), 39-26-202(1)(a), C.R.S. — imposition of sales/use tax on tangible personal property
- § 39-26-102(23), C.R.S. — a "sale" includes a lease
- § 39-26-104(1)(c)(I), C.R.S. — tax on intrastate telephone service
- § 39-1-102(11), C.R.S. — real-property law: easement-installed telecom/cable lines are personal property
- Department Regulation 26-102.15 — TPP that becomes integral/inseparable realty is not taxable
- Colorado Regulation (39-)26-104.1(1)(c) — telephone service includes leased circuits and private lines
- Connecticut Legal Ruling 2007-3 (07/13/2007); Colorado FYI Sales 80

Related Colorado telecom / real-vs-personal-property letters:
- [[gil-08-009-taxability-of-telecommunications-tower]] — when telecom equipment affixed to realty stays taxable TPP vs becomes realty
- [[gil-08-001-telecommunications-computer-software-freight-training-repair]] — telecommunications, software, freight, training, repair
- [[gil-08-002-web-hosting-computer-software]] — web hosting and computer software

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-004.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2007-4

XXXXXXXXXXX
Attn: XXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
December 4, 2007

Re: taxability of dark fiber
Dear XXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated July 24, 2007,
re: taxability of dark fiber. We apologize for the time it has taken to respond to your inquiry.
Issue
Are dark and “lit” fiber optic cable subject to sales or use tax?
Background
Your question concerns the following set of facts. A lessor, which is a local exchange carrier licensed
to do business in this state, owns a network of “fiber optic cable” which, when activated, is used to
support the transmission of voice, data, and internet service applications. The cables are buried
underground and accessible only through lock box locations. The lessor leases the right to use the
dark fiber to lessees, including other telecommunications companies. In order to activate the dark
fiber, the lessee must activate the fiber with external energy source; lessor may also provide this
source. Lessor retains ownership of the cable.

Discussion
1. Monthly leasing charge billed by the lessor to its corporate clients for the use of its unlit fiber
optic cable (i.e., dark fiber network) is subject to the Colorado state sales tax.
Your letter does not contain sufficient information for the department to determine whether the dark
fiber optic cable is taxable. Dark fiber is taxable if it retains its identity as tangible personal property
and can be separated from the real property without damage. In making a determination, the
department will consider, among other things: whether the tangible personal property is tied to a
particular business operation rather than the general improvement of the real property; the degree to
which the dark fiber is affixed to real property; whether, and the degree to which, there is damage to
real property if it is removed; and the objectively manifested intention of the parties.
2. Dark fiber is tangible personal property unless it is so affixed to real property as to lose its
identity and cannot be removed without significant damage.
Colorado imposes a sales tax on the sale, use, storage, and consumption of tangible personal
property. §39-26-104(1)(a) and 202(1)(a), C.R.S. (tax levied on tangible personal property). A “sale”
includes a lease of such property. §39-26-102(23), C.R.S. Tangible personal property that loses its
identity when it becomes an integral and inseparable part of the realty, irremovable without damage
to the premises, is not taxable. Department Reg. 26-102.15. Colorado tax law for real property
defines personal property to include “any pipeline, telecommunications line, utility line, cable
television line, or other similar business asset or article installed through an easement, right-of-way,
or leasehold for the purpose of commercial or industrial operation and not for the enhancement of
real property…” §39-1-102(11), C.R.S. Although real property tax law is not necessarily dispositive
on issues of sales tax, the department generally will read the real property tax law in pari materia with
sales tax law, unless the context indicates otherwise. See, also, Connecticut Legal Ruling 2007-3,
07/13/2007 (buried dark fiber does not loses its identity as tangible personal property).
3. Charges for the use of “lit fiber” subject to taxability as a form of pure telecommunications
service.
Yes, for intrastate telephone services. Telephone services are subject to tax. §39-26-104(1)(c)(I),
C.R.S. (Telephone services for all intrastate telephone services are taxable.). Colorado Regulation
(39-)26-104.1(1)(c) (Telephone service includes leased circuits and facilities, non-talking circuits, and
private line service).. See, also Colorado FYI Sales 80.
Finally, the Department makes a good faith effort to provide accurate and complete answers to
questions posed to it by taxpayers. However, the information and answers provided here are not
binding on the Colorado Department of Revenue, nor do they replace, alter, or supersede Colorado
law and regulations. The Executive Director, who by statute is the only person having authority to
bind the Department, has not formally reviewed and/or approved this response.
Respectfully,

Office of Tax Policy
Colorado Department of Revenue