Is a monthly charge to lease unlit 'dark' fiber optic cable subject to Colorado sales or use tax?

Plain-English summary

A local exchange carrier owns a buried network of fiber optic cables and leases the right to use part of it to corporate clients (including other telecom providers). What it leases is the raw, unlit cable capacity — so-called "dark fiber." The customer gets only the right to use the strands; the carrier keeps ownership of the cable infrastructure. To actually carry voice, data, or Internet traffic, the customer must "light" the fiber with its own external energy source. (The carrier could also supply that energy and lease "lit fiber," but this question was about dark fiber.) The carrier asked whether its monthly lease charge for dark fiber is subject to Colorado sales tax.

The Department's answer: it likely is taxable. Colorado imposes sales and use tax on tangible personal property. Tangible personal property that is incorporated into real property and can't be removed without substantial damage is treated as real property (which would generally be outside the tax). The Department has not formally settled by regulation whether buried dark fiber is tangible personal property or real property — but its general understanding is that dark fiber is tangible personal property subject to tax. On that view, leasing the cable may be subject to sales or use tax. (Colorado treats a lease of tangible personal property as a taxable transaction.)

This is general guidance, hedged with "may" and "general understanding" — the Department expressly did not make a binding determination, and pointed to its earlier letter GIL-07-004 for similar guidance.

What this means for you

Telecommunications and fiber providers

If you lease dark (unlit) fiber in Colorado, plan on the Department treating that cable as tangible personal property, which makes the lease potentially taxable — even though the cable is buried underground. The fact that the customer must light the fiber themselves doesn't turn the lease into a nontaxable service in the Department's view. Because the Department hasn't fixed this by regulation, a taxpayer wanting certainty should consider requesting a binding private letter ruling on its specific arrangement.

Customers leasing dark fiber

Expect a sales/use tax line on dark-fiber leases, or a use-tax obligation if the provider doesn't collect. "Lit fiber" (where the provider supplies the energy and you're really buying a transmission service) raises different questions than leasing the bare cable.

Accountants and tax professionals

The pivot is the TPP-vs-real-property classification under Reg. 39-26-102(15): property incorporated into real property and not removable without substantial damage is real property. The Department declined to treat buried fiber as real property and leaned to TPP, so the lease falls under §§ 39-26-104(1) (sales tax) and 39-26-202 (use tax). Note the soft language ("may be," "general understanding") — this is a GIL, not a determination. Compare GIL-07-004.

Common questions

Q: Is leasing dark fiber taxable in Colorado?
A: The Department's general understanding is yes — it treats dark fiber as tangible personal property, so the lease may be subject to sales or use tax. It did not, however, issue a binding determination.

Q: Isn't buried cable part of the real estate, and therefore not taxable?
A: Tangible personal property incorporated into real property and not removable without substantial damage can be treated as real property, but the Department has not adopted that view for dark fiber by regulation and instead treats it as tangible personal property.

Q: Does it matter that the customer has to "light" the fiber themselves?
A: In this letter it didn't change the result for the lease of the unlit cable. Leasing "lit fiber," where the provider supplies the energy and the customer buys transmission, can raise separate service-taxability questions.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, is not binding on the Department, and makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes:
- § 39-26-104(1), C.R.S. (sales tax on tangible personal property)
- § 39-26-202, C.R.S. (use tax)

Rules:
- 1 CCR 201-4, Department Regulation 39-26-102(15) (tangible personal property incorporated into real property and not removable without substantial damage is real property)
- Department Rule 24-35-103.5 (GIL / PLR procedure)

Department guidance:
- GIL-07-004 (similar earlier guidance on dark fiber)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-15-018.pdf

Original ruling text

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

GIL-15-018
June 8, 2015
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Dark Fiber
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXX (“Company”) a request for guidance to determine
whether a monthly lease of unlit fiber optic cable is subject to Colorado sales tax.
The Colorado Department of Revenue (“Department”) issues general information letters and
private letter rulings. A general information letter provides a general overview of the relevant tax
issues but is not binding on the Department. A private letter ruling provides a specific
determination for a specific set of facts, is binding on the Department but not on the taxpayer, and
requires payment of a fee. For more information about general information letters and private letter
rulings, please see Department Regulation 24-35-103.5 at www.colorado.gov/revenue/tax > Tax
Library > Rulings.
The Department treats this request as one for a general information letter. It is important to
remember that general information letters, such as this one, are general discussions of tax law and
are not binding on the Department. If a retailer would like the Department to issue a private letter
ruling on the issue raised here, the retailer can resubmit a request and fee in compliance with
Department Regulation 24-35-103.5..
Issue
Is a monthly leasing charge by Company to its corporate clients for the use of unlit fiber optic cable
subject to Colorado sales tax?
Background
Company is a local exchange carrier licensed to do business in Colorado. Company owns a
network of “fiber optic cables” which (when activated) is used to support voice, data, and Internet
service applications. The bundles of fiber optic cables are buried underground and accessible only
through highly secured “locked-box” locations. Company leases the right to use part of this fiber
optic cable network to a variety of corporate clients including other providers of
telecommunications services. The lease agreements Company enters into with its customers limit
the rights of those customers exclusively to usage of the fiber optic network (i.e., Company
maintains ownership of the fiber optic cable infrastructure at all times).

What Company is leasing is the raw fiber optic cable “capacity.” Essentially, Company is leasing
“unlit” fiber optic cable - often referred to as dark fiber. In order to activate the fiber optics, the
leasing entity must energize or “light” the fiber optics with an external electronic energy source.
Company may also provide the energy source needed to “light” the fiber optic cable and lease “lit
fiber”. Only “lit fiber” may be used to transmit voice data communications.
Discussion
Colorado levies sales and use tax on the sale, use, consumption and storage of tangible personal
property.1 Generally speaking, tangible personal property that is incorporated into real property
and cannot be removed without substantial damage is considered real property.2 The Department
has not formally addressed in regulation whether dark fiber is tangible or real property.3 However,
it is our general understanding that dark fiber is tangible personal property subject to tax.
Therefore, the leasing of such cable may be subject to sales or use tax.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule
counties. You may wish to consult with local governments which administer their own sales or use
taxes about the applicability of those taxes. Visit our web site at www.colorado.gov/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within
that 60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

1
2
3

2

§§ 39-26-104(1) and 202, C.R.S.
1 CCR 201-4; Department Regulation 39-26-102(15).
The Department provided similar guidance in General Information Letter GIL-07-004, which can be viewed
at www.Colorado.gov/revenue/tax > Legal Research > Rulings.
DR 4010A (06/11/14)