Is leasing dark fiber taxed as a property lease and lit fiber as a telecommunications service in Connecticut?

Plain-English summary

A facilities-based intrastate telecommunications company owns buried fiber-optic cable and offers business customers (banks, other carriers) two products. Dark fiber is the bare cable, leased for the customer's exclusive use — the customer must supply its own equipment to "light" it before it can carry anything. Lit fiber is the cable plus the company's own equipment, which energizes the fiber and transmits the customer's voice or data as light pulses. DRS was asked how each is taxed.

DRS ruled both are taxable, under different provisions:

• Dark fiber = a taxable lease of tangible personal property under Conn. Gen. Stat. § 12-407(a)(2)(J). Even buried in conduit, the cable does not become a fixture (real property): it's removable by pulling it through the conduit, and the company installs it to lease fiber and sell services, not as a permanent accession to a building (applying the fixtures test from Lesser and Waterbury Petroleum). Fiber is "tangible personal property" — it can be seen, weighed, measured, felt or touched (§ 12-407(a)(13)) — and Connecticut property-tax law expressly lists cables and conduits as tangible personal property.
• Lit fiber = a taxable telecommunications service under Conn. Gen. Stat. § 12-407(a)(2)(K). Because the company supplies the equipment that codes and transmits the customer's communications as light pulses, it is "rendering telecommunications service" (§ 12-407(a)(26)(A) — the same result under the definition as amended by 2007 Conn. Pub. Acts 253).

What this means for you

Telecom and network operators

Whether your fiber deal is taxed as a property lease or a telecommunications service turns on who lights the fiber. Hand over bare, unlit fiber for the customer's exclusive use, and you're leasing tangible personal property. Supply the transmission equipment and actually carry the customer's traffic, and you're providing a telecommunications service. Both are taxable in Connecticut, but the distinction affects definitions, sourcing, and which rules apply.

Companies leasing "dark" infrastructure

Burying an asset doesn't make it real property. Under Connecticut's fixtures test, easily removable equipment installed for your own business use (not as a permanent part of a building) stays tangible personal property — so leasing it is a taxable TPP lease.

Accountants and tax professionals

The property-vs-service line here is § 12-407(a)(2)(J) versus (a)(2)(K). Dark fiber is TPP under § 12-407(a)(13); the fixtures analysis draws on Lesser v. Bridgeport-City Trust and Waterbury Petroleum (the objectively manifested intent of the annexer; removability). The telecom-service definition (§ 12-407(a)(26)(A)) was amended by 2007 Conn. Pub. Acts 253 § 32 effective Oct. 1, 2007, but DRS said the amendment didn't change the result.

Common questions

Q: Is leasing dark fiber taxable in Connecticut?
A: Yes. DRS treats it as a lease of tangible personal property under Conn. Gen. Stat. § 12-407(a)(2)(J). The fiber stays personal property even when buried in conduit.

Q: Why is lit fiber taxed differently?
A: With lit fiber, the company supplies the equipment that energizes the fiber and transmits the customer's data. That's "rendering telecommunications service," taxable under Conn. Gen. Stat. § 12-407(a)(2)(K), not a lease of the cable.

Q: Doesn't burying the cable make it part of the real estate?
A: No. DRS applied Connecticut's fixtures test and found the cable remains personal property — it's removable by pulling it through the conduit and was installed for the company's leasing business, not as a permanent part of a building.

Q: Does this ruling apply to my company?
A: Not automatically. A Connecticut Ruling binds DRS only for the taxpayer and facts it addressed. Different fiber arrangements could be analyzed differently.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(a)(2)(J) (lease of tangible personal property is a taxable "sale")
• Conn. Gen. Stat. § 12-407(a)(2)(K) (rendering of telecommunications service is a taxable "sale")
• Conn. Gen. Stat. § 12-407(a)(13) (definition of "tangible personal property")
• Conn. Gen. Stat. § 12-407(a)(26)(A) (definition of "telecommunications service" before Oct. 1, 2007)
• Conn. Gen. Stat. § 12-41(c) (property-tax declaration lists cables, conduits and similar items as tangible personal property)

Regulations and session laws:

• Conn. Agencies Regs. § 12-407(2)(i)(I)-1(b)(1) (meaning of "real property")
• 2007 Conn. Pub. Acts 253, § 32 (amended the definition of "telecommunications service," effective Oct. 1, 2007)

Cases:

• Lesser v. Bridgeport-City Trust Co., 124 Conn. 59 (1938)
• Waterbury Petroleum Products, Inc. v. Canaan Oil & Fuel Co., Inc., 193 Conn. 208 (1984)
• United Illuminating Co. v. Groppo, 220 Conn. 749 (1992)
• Andersen Consulting, LLP v. Gavin, Conn. Super. Ct., Tax Sess. (Feb. 3, 2000)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2007-3

Original ruling text

Ruling 2007-3, Sales and Use Taxes / Leasing / Telecommunications Services

FACTS:

A company operates under a Certificate of Public Convenience and Necessity from the Connecticut Department of Public Utility Control as a facilities-based intrastate telecommunications provider. The Company owns fiber optic cable that supports voice, data and Internet applications. The fiber optic cable is composed of long, thin strands of transparent glass or plastic that is arranged into a bundle. The fiber optic cable is contained in a conduit. The conduit is typically buried anywhere from three to six feet underground and under streets. The Company “leases” “dark fiber” and “lit fiber” to its customers, granting them exclusive use capacity rights. The Company’s customers are businesses such as banks and other telecommunications providers. A customer may not sublease, swap, assign, license, sell or share the fiber, and may not perform any repairs or maintenance on the fiber without the express written consent of the Company.  The Company has sole discretion to provide alternative portions or facilities of its fiber optic network to a customer or to relocate all or a portion of its network, if circumstances require. A customer’s origination or termination point, or both, may or may not be within Connecticut, and the fiber leased may or may not be within Connecticut.

“Dark fiber” is the fiber optic cable itself, provided without the equipment needed to energize (“light”) the fiber so that it can transmit communications.  The Company connects the dark fiber to a customer’s location, but the customer needs to provide the transmission equipment and connect the dark fiber to the equipment in order to utilize the dark fiber. Each end of the fiber enters or exits the conduit directly from or into a limited access, secured box located in a building, at which box the customer connects its transmission equipment to the fiber.  A customer may not gain access to the fiber at any location other than the secured box even though it might be accessible by the Company from a manhole or a handhole.  Even if a customer could gain access to the conduit, the customer would be unable to locate its fiber because it would be grouped with many other fiber strands that are allocated to other customers.

The Company also offers several “lit fiber” services that differ from dark fiber in that the Company uses its own equipment to light fiber optic cable strand(s) for the customer. Fiber optic cable is “lit” when it is energized so that it is ready to be used by the customer to transmit data or communications.  The Company’s customer connects its communications- or data-generating equipment (e.g., telephone or computer) to a transmitter provided by the Company, which translates the electronic signals it receives from such equipment into light pulses and then transmits those light pulses via the fiber optic cable.

ISSUES:

Whether, with respect to the dark fiber, the Company is leasing tangible personal property subject to sales and use taxes.

Whether, with respect to the lit fiber, the Company is providing telecommunications services subject to sales and use taxes.

RULINGS:

With respect to the dark fiber, the Company is leasing tangible personal property subject to sales and use taxes under Conn. Gen. Stat. § 12-407(a)(2)(J).

With respect to the lit fiber, the Company is providing telecommunications services subject to sales and use taxes under Conn. Gen. Stat. § 12-407(a)(2)(K).

DISCUSSION:

I. Dark Fiber

Leases of tangible personal property are subject to sales and use taxes under Conn. Gen. Stat. § 12-407(a)(2)(J). Real property, at least when the term is used in Conn. Gen. Stat. §12-407(a)(37)(I), means “property that is considered to be real property under the laws of the State of Connecticut.” Conn. Agencies Regs. § 12-407(2)(i)(I)-1(b)(1).  Connecticut law recognizes that an article of personal property may be so annexed to real property that it is regarded as being part of the real property.

It is essential to constitute a fixture that an article should not only be annexed to the freehold, but that it should clearly appear from an inspection of the property itself, taking into consideration the character of the annexation, the nature and the adaptation of the article annexed to the uses and purposes to which that part of the building was appropriated at the time the annexation was made, and the relation of the party making it to the property in question, that a permanent accession to the freehold was intended to be made by the annexation of the article.

Lesser v. Bridgeport-City Trust Co. , 124 Conn. 59, 63-4, 198 A.2d 252 (1938) (citations omitted) (bowling alleys became a part of the realty and were properly retained as part of the mortgaged realty by foreclosing mortgagee).  “[O]ur test focuses on the objectively manifested intent of the annexer.” Waterbury Petroleum Products, Inc. v. Canaan Oil & Fuel Co., Inc. , 193 Conn. 208, 216, 477 A.2d 988 (1984) (citations omitted) (20,000 gallon petroleum storage tanks that rested in cradles by force of gravity but otherwise were not attached to the realty and were easily removable remained personalty).

Fiber optic cable does not become a fixture when contained in an underground conduit. Under such circumstances, the fiber optic cable remains “free of and unattached to the realty.” Id. at 217. A cable can be removed by pulling it through the conduit that contains it, and replaced by pulling a new cable through the conduit, without extensive digging.  Furthermore, the Company installs fiber optic cable with the intention of leasing dark fiber to customers or selling its lit fiber services to customers, and in fact the cable is an “indispensable element” to the Company’s business that would not be transferred as a sale of realty if a customer sells its building ( Waterbury Petroleum , 193 Conn. at 219). Accordingly, the fiber optic cable is not a fixture, and the lease of dark fiber is therefore not a lease of real property.

Conn. Gen. Stat. § 12-407(a)(13) defines “tangible personal property” as “personal property which may be seen, weighed, measured, felt or touched or which is in any other manner perceptible to the senses. . . .” Fiber optic cable may be seen, weighed, measured, felt or touched and is otherwise perceptible to the senses. Connecticut courts have, in the past, referred to Connecticut property tax law when determining whether property was tangible personal property; see, e.g., United Illuminating Co. v. Groppo , 220 Conn 749, 601 A.2d 1005 (1992) and Andersen Consulting, LLP v. Gavin , Super. Ct., Tax Sess., No. CV 98 0492505S (Feb. 3, 2000).  Conn. Gen. Stat. § 12-41(c), a property tax statute, provides that the “annual declaration of the tangible personal property owned by such person on the assessment date, shall include, but is not limited to, the following property: . . . cables, wires, poles, underground mains, conduits, pipes and other fixtures of water, gas, electric and heating companies, leasehold improvements classified as other than real property. . . .” Fiber optic cable is required to be included in this annual declaration of tangible personal property.

Because fiber optic cable remains tangible personal property after its installation, its lease is taxable, and the Company’s lease of dark fiber is subject to sales and use taxes.

II. Lit Fiber

The definition of “sale” and “selling” for purposes of the sales and use taxes includes “the rendering of telecommunications service.” Conn. Gen. Stat. § 12-407(a)(2)(K). Prior to October 1, 2007, “telecommunications service” is defined in Conn. Gen. Stat. 12-407(a)(26)(A) as “the transmission of any interactive electromagnetic communications including but not limited to voice, image, data and any other information, by means of but not limited to wire, cable, including fiber optical cable, microwave, radio wave or any combinations of such media, and the leasing of any such service.”

Conn. Gen. Stat. § 12-407(a)(26) was amended by 2007 Conn. Pub. Acts 253, §32, effective October 1, 2007.  “Telecommunications service” is defined in the legislation as the electronic transmission, conveyance or routing of voice, image, data[,] audio, video or any other information or signals to a point or between or among points. “Telecommunications service” includes such transmission, conveyance or routing in which computer processing applications are used to act on the form, code or protocol of the content for purposes of transmission, conveyance or routing without regard to whether such service is referred to as a voice over Internet protocol service or is classified by the Federal Communications Commission as enhanced or value added.  This amended definition of “telecommunications service” does not change the conclusion of this ruling.

The provision of lit fiber services by the Company is a telecommunications service under the current definition because such services are the transmission of interactive electromagnetic communications by means of fiber optic cable. It is also a telecommunications service under the amended definition, because the lit fiber services are the electronic transmission, conveyance or routing of voice, image, data, audio, video or any other information or signals. Unlike the dark fiber, which is provided without any additional services by the Company and is not capable of transmitting communications until the customer connects transmission equipment to it, the lit fiber is provided with transmission equipment by the Company, and that equipment codes the data generated by the customer’s communications- or data-generating equipment and sends the communications or data as light pulses through the fiber optic cable. Thus, in providing its lit fiber services, the Company is transmitting the customer’s communications and, as such, the Company is rendering telecommunications service subject to Connecticut sales and use tax under Conn. Gen. Stat. § 12-407(a)(2)(K).

LEGAL DIVISION

July 13, 2007