Which data-center colocation charges - cross connects, cage rentals, equipment service, power - are subject to New York sales tax?

Plain-English summary

A data-center colocation company leases buildings in New York and offers customers space and services to interconnect their equipment. It asked about five charges. The Office of Counsel sorted them:

(1) Cross Connect (dark-fiber access) — not taxable. The company gives customers access to its "dark" fiber-optic cables so their equipment can connect to partners. The company does not transmit signals; the customer "lights" the fiber via a third-party provider. So it is not taxable telephony/telegraphy (Tax Law section 1105(b); TSB-A-05(32)S). And the installed cables are a capital improvement to real property (permanently affixed; they become the landlord's property and can't be removed), so the charge is not a taxable sale/lease of tangible personal property (Tax Law section 1101(b)(9)).

(2) Cage/Suite rentals — not taxable (real property lease). These are leases of real property, not a taxable storage service (Tax Law section 1105(c)(4); 20 NYCRR 527.6(b)(2)). The customer has a defined, exclusive space it controls 24/7, supplies its own racks, and never relinquishes control of its equipment to the provider.

(3) Maintaining/servicing customer equipment — taxable. Installing, maintaining, servicing or repairing the customer's equipment is a taxable service (Tax Law section 1105(c)(3)). A single charge bundling maintenance with operation is fully taxable; the Department couldn't opine on a separately stated operation charge without more facts.

(4) Fixed Electrical Power (unmetered) — not taxable. Priced by the allocation the customer requests, not actual consumption, this is a redistribution of electricity incidental to the space rental — it does not represent the actual economic cost of electricity, so it is not a taxable sale of electric service (Empire State Building; Debevoise & Plimpton).

(5) Metered Electrical Power (future) — taxable. Billing on actual metered consumption is a taxable sale of electric service under Tax Law section 1105(b) (Mutual Redevelopment Houses); a minimum-commitment clause does not change that. If metered, the company could buy the electricity for resale.

What this means for you

"Dark fiber" you don't light isn't a telecom service

Providing unlit fiber that the customer activates through a third party is not taxable telephony/telegraphy — you aren't transmitting anything. And permanently installed cabling that becomes part of the building is a capital improvement, not a taxable sale of property.

Colocation space can be a nontaxable real-property lease

A cage/suite the customer exclusively controls 24/7, fills with its own racks, and never hands over to you is a lease of real property, not a taxable storage service. Relinquishing possession/control to the provider is what would flip it to taxable storage.

Equipment service is taxable; bundling spreads the tax

Charges to maintain/service customer equipment are taxable. A single charge mixing taxable maintenance with other functions is taxable in full — separate, reasonable line items are what preserve any nontaxable portion.

Power: allocation vs. meter is the dividing line

Unmetered power priced by allocation (incidental to rent) is not taxed; metered power billed on actual use is a taxable sale of electricity — and a minimum charge doesn't change the metered result. Metered sellers can buy the electricity for resale.

Common questions

Q: Why isn't the cross-connect charge a taxable telecom service?
A: Because you provide only dark fiber and do not transmit signals — the customer lights it via a third party — and the installed cables are a capital improvement to real property, not a sale of property.

Q: Is renting a cage or suite taxable storage?
A: No. With a defined, exclusively controlled space the customer fills with its own racks and never relinquishes to you, it is a lease of real property, not a taxable storage service.

Q: Why is fixed power exempt but metered power taxable?
A: Fixed power priced by allocation is a redistribution incidental to the rental and doesn't reflect actual electricity cost. Metered power billed on actual consumption is a taxable sale of electric service, even with a minimum-charge clause.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(b) (telephony/telegraphy and electricity services)
• Tax Law section 1105(c)(3) (installing, maintaining, servicing, repairing tangible personal property)
• Tax Law section 1105(c)(4) (storing tangible personal property)
• Tax Law section 1101(b)(9) (definition of capital improvement)
• 20 NYCRR 527.6(b)(2) (lease of real property vs. storage service)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a15_53s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(53)S
Sales Tax
December 31, 2015

Office of Counsel

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S130910C

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTED,
and REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTED (together,
Petitioner). Petitioner asks five questions: (1) whether its sales to customers of access to a
bundle of fiber optic cables that allows the customer’s equipment to establish a connection to its
business partners through its Cross Connect service are subject to sales tax as telegraphy or
telephony under Tax Law § 1105(b); (2) whether its rentals of Cages or Suites are subject to tax
as a storage service under § 1105(c)(4); (3) whether its charges to maintain or operate its
customer’s equipment are subject to sales tax; (4) whether its sales of Fixed Electrical Power
service are subject to tax as electric service under § 1105(b); and (5) whether future sales of
Metered Electrical Power service would be subject to tax as electric service under § 1105(b).
We conclude, based on the facts presented, that: (1) Petitioner’s charges to its customers
for the use of its “dark” fiber optic cables that provide a means for the customers’ equipment to
connect to their business partners through its Cross Connect service are not subject to sales tax as
telegraphy or telephony under Tax Law § 1105(b); (2) its charges for renting its cages or suites
are not subject to tax as a storage service under § 1105(c)(4); (3) its charges to maintain its
customers’ equipment are subject to sales tax; (4) its sales of Fixed Electrical Power service are
not subject to tax under § 1105(b) because Petitioner does not meter the electricity provided to its
customers; and (5) its future sales of Metered Electrical Power service would be subject to tax as
electric service under § 1105(b).
Facts
Petitioner is in the business of providing co-location services, interconnection, and
managed IT infrastructure services at data centers in buildings in New York that it leases from
others, as discussed below. Petitioner provides options for a customer to choose a product (i.e.
Cross Connect, Cloud Exchange, Internet Exchange) to enable interconnection between the
customer and its business partners. These solutions are provided through its carrier-neutral colocation centers, called International Business Exchanges ("IBXs"), located in the buildings it
leases. Petitioner offers customers direct interconnection to an aggregation of bandwidth
providers, including the world's top carriers, Internet Service Providers ("ISPs”), broadband
access networks (DSL/cable) and international carriers. Customers locate their equipment in the
IBXs in order to utilize the technology available in the IBX to connect with business partners,
service providers and networks.

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(1) Cross Connect Service –
Under the Cross Connect service, Petitioner provides customers access to a bundle of
fiber optic cables that allows a customer's equipment to establish a connection to its business
partners. The customer’s equipment must be located in Petitioner’s IBX in order to gain access
to Petitioner’s fiber optic cable. Petitioner installed the cables that it uses to provide its services
in the buildings where its IBXs are located. Within the IBX, the cable sits in trays above the
customers' equipment. Outside the IBX, the fiber is contained in a conduit that may be buried
anywhere from three to six feet underground. Customers are unable to gain access to the cable at
any location outside the IBX. Petitioner’s leases with its landlords for its data centers provide
that leasehold improvements that Petitioner makes, such as its installation of fiber optic cables,
may not be removed at the end of the lease term and become the landlord’s property.
Petitioner does not transmit data, sounds, or signals through the cables. In this capacity,
the cable is commonly referred to as "dark fiber." The fiber remains "dark" until the customer
"lights" the cable by establishing service with a third party provider. Only when the fiber is "lit"
by the third party provider is the customer able to transmit data from, and receive data at, its
equipment in the IBX.
The Cross Connect service is provided to customers in addition to other services rendered
within the IBX or from a remote location (i.e., another IBX). Petitioner separately states its
charges for its Cross Connect service on invoices and contracts with its customers.
(2) Cage/Suite Rentals Petitioner enters into a contract with a customer to lease a “cage” or “suite” of space at its
IBX to the customer. Petitioner charges its customers a fixed fee for the space on a recurring
monthly basis. Petitioner separately states the charge for the space on invoices to its customers.
A cage is configured with cabinets, cable distribution systems, and access to electrical power. A
suite is configured with the same elements in a fully enclosed and secure space. The contract
specifies the amount of space leased or "licensed" by the customer, ranging from 75 square feet
to as many as 2,000 square feet or more. Under the agreement, the customer has control of,
access to and possession of the space 24 hours a day, seven days a week, although the customer
may provide Petitioner a key to the space. Petitioner is able to access the cage or suite, but
generally does not do so other than to respond to emergency or life safety issues. A customer
locates its equipment in the cage or suite in order to use the Cross Connect Service and other
services to connect with business partners, service providers, and networks. The customer is
permitted to supply racks, cabinets, and other facilities for its use in the space. The customer
does not relinquish possession or control of its equipment to Petitioner.
(3) Maintenance and Operation of Customer’s Equipment –
A customer will maintain and operate its own equipment located in its cage or suite.
However, a customer may elect to have Petitioner maintain the customer’s equipment, in which
case Petitioner will separately charge the customer for maintaining the equipment. Most
customers choose to maintain their own equipment. Likewise, a customer may elect to have
Petitioner operate the customer’s equipment for a separate charge.

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(4)Fixed Electric Power –
Petitioner purchases electric power from New York electric utilities and pays applicable
fees and taxes, including sales tax, to the utilities. Petitioner provides its customer access to and
use of a live power circuit to power the customer’s equipment located in the IBX and charges
them a fixed monthly amount based on the number of kilowatt hours dedicated to the customer.
A customer specifies the number of kilowatt hours it will need per month (based on the number
of servers located in its cage or suite, or similar factors) for the term of the contract, within a
range set by Petitioner. Petitioner’s charge for Fixed Electrical Power is not based on
consumption. Petitioner charges the customer the fixed amount whether or not the customer uses
all of the kilowatt hours contractually allotted to it. Petitioner uses a power monitoring system
on power circuits delivered to customers that automatically captures and stores quarter-hourly
current readings. Petitioner’s system estimates electrical usage/demand at a moment in time for
a cage or suite and compares it to the contractual draw cap. The power monitoring system can
trend the draw readings it stores to show a history of customer usage. If a customer's usage
exceeds the amount allotted to it, the customer is asked to pay an additional power charge or
decrease its usage. If a customer continually goes over its ‘fixed amount,’ it will be asked to
increase its fee structure.
(4) Metered Electrical Power Petitioner does not currently provide Metered Power Service to customers in New York,
but it may do so in the future. Under the Metered Electrical Power service, Petitioner would
charge a customer a variable amount each month based on the number of kilowatt hours the
customer consumes, plus a negotiated monthly administrative fee that is intended to cover
Petitioner’s cost to administer, monitor, and read the meter. Petitioner would separately state its
charges for Metered Electrical Power on contracts and invoices to the customer. In customer
contracts, the Metered Electrical Power would typically contain a "minimum commitment"
clause that would state the number of kilowatt hours the customer agrees to pay for each month
in the event the customer consumes less power than the agreed-upon "minimum." The Fixed
Electrical Power and Metered Electrical Power services would be mutually exclusive (except as
described above regarding minimum commitments on the Metered Electrical Power service
offering).
Analysis
(1) Cross Connect Service –
Tax Law § 1105(b) imposes sales tax on receipts from sales, other than for resale, of
telephony and telegraphy and telephone and telegraph service of whatever nature, except
interstate and international telephony and telegraphy and telephone and telegraph service.
Section 1105(b) imposes tax on receipts from intrastate communication by means of devices
employing the principles of telephony and telegraphy. Telephony and telegraphy include use or
operation of any apparatus for transmission of sound, sound reproduction or coded or other
signals. See 20 NYCRR § 527.2(d).

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Petitioner does not itself transmit sound or other signals via its Cross Connect service.
Rather, Petitioner provides its fiber optic cables to its customers to allow them to connect their
own equipment to the cables and, once they obtain connectivity from a third party or ISP, to the
Internet. Because the customers use their own equipment to connect to Petitioner’s cables, and
the third party or ISP then carries the customers’ data or other signals to their destination,
Petitioner is deemed to be providing “dark cables” and not providing telephony or telegraphy
service. If Petitioner does not provide the equipment or energy source necessary to light the
fiber optic cable for the transmission of communications when selling the use of its “dark”
cables, Petitioner’s charges to customers for their use of “dark” cable are not receipts from the
sale of telephone or telegraph services. See TSB-A-05(32)S.
Petitioner’s charges for its Cross Connect Service also do not constitute charges for the
sale or use of the cables as tangible personal property, because the cables as installed constitute a
capital improvement to real property, the sales, lease, or use of which is not subject to sales tax.
“Capital improvement” means an addition or alteration to real property which (1) substantially
adds to the value of the real property, or appreciably prolongs the useful life of the real property;
(2) becomes part of the real property or is permanently affixed to the real property so that
removal would cause material damage to the property or article itself; and (3) is intended to
become a permanent installation. Tax Law § 1101(b)(9)(i). First, it is reasonable to conclude
that the cables substantially add to the value of the real property. Second, the fiber optic cables
are installed in a manner that they become part of the real property or are permanently affixed to
the real property so that removal would cause material damage to the real property or to the
cables. See Sales and Use Tax Classifications of Capital Improvements and Repairs to Real
Property, Publication 862 (4/01). Where the cables, wires, conduits, and other equipment used
in conjunction with the cables are installed in a manner similar to the building’s electrical system
wires, conduits, and related equipment so that they become a part of the real property, their
installation would meet the second requirement of Tax Law § 1101(b)(9)(i). See TSB-A09(10)S. Finally, the installation of the cables meets the third requirement because the cables
become the property of the landlord and Petitioner may not remove them at the end of the lease
term. See Sales and Use Tax Classifications of Capital Improvements and Repairs to Real
Property, Publication 862 (4/01).
(2) Cage/Suite Rentals –
Tax Law § 1105(c)(4) imposes sales tax on receipts from sales, other than for resale, of
the service of storing tangible personal property not held for sale in the regular course of
business. While the tax is imposed on the service of providing storage space, it is not imposed
on the lease of real property for storage. The following are indicators of a rental or lease of real
property: (1) the tenant contracts for a certain amount of footage in a specific location; (2) the
tenant has unlimited control of access to the space and exclusive possession of the space; (3) the
tenant's possession and control of the space must be to the exclusion of the proprietor (as
described below); (4) the tenant is allowed to supply racks, cabinets, and other facilities for the
tenant's own use in the leased space; and (5) the proprietor does not provide additional services
that require the tenant to give up possession and control of his or her property to the proprietor
(such as receiving, handling, storing, or forwarding of the tenant's personal property). A real
property tenant's exclusive possession of the space may be established by means of a lock under
the control of the tenant, and will still be recognized if the proprietor has a duplicate or master

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key, but the written lease agreement specifically provides that the proprietor has no right of
access to the space during the term of the rental except to collect rent, make necessary repairs, or
in an emergency.
A lease can be distinguished from the provision of storage space, in that under a lease,
the tenant contracts for a certain amount of footage in a specific location, the tenant has
unlimited control of access to the space, and may supply his or her own racks, cabinets and other
physical facilities. See 20 NYCRR § 527.6(b)(2). The lease of storage space will be exempt
from sales tax only if it does not actually constitute a storage service. A key element in
providing a storage service is the relinquishment of possession and control of the stored goods by
the tenant to the proprietor. If the proprietor provides additional services (such as receiving,
handling, storing, or forwarding of the tenant's personal property) that require the tenant to give
up possession and control of the stored goods to the proprietor, a lease may be deemed to
constitute a taxable storage service. See New York Sales Tax Bulletin No. TB-ST-340,
Household Movers and Warehousers.
Customers locate their equipment in Petitioner’s IBXs "cages" or "suites" in order to
utilize "third party" technology available in the IBX to connect with business partners,
service providers, and networks. The amount of space leased by the customer is defined in the
customer contract. The customer has exclusive possession of the space for the term of the
agreement (but may at its option provide Petitioners a copy of the key to the space). The
customer is permitted to supply racks, cabinets, and other facilities for their own use in the leased
space. Petitioner’s customers do not relinquish control of the equipment they place in their space
at the IBX. Customers are permitted access to their IBX cages or suites 24 hours a day, seven
days a week. Accordingly, Petitioner’s rentals of cages or suites to its customers do not
constitute the taxable storing services under § 1105(c)(4). Instead, they are leases of real
property and are not subject to sales tax.
(3) Maintenance and Operation of Customer’s Equipment –
Tax Law § 1105(c)(3) imposes sales tax on sales, other than for resale, of the services of
installing, maintaining, servicing, or repairing tangible personal property, not held for sale in the
regular course of business, whether or not any tangible personal property is transferred in
conjunction therewith. If a customer elects to have Petitioner install, maintain, service, or repair
the customer’s equipment, Petitioner’s charges for such services would be subject to sales tax. If
Petitioner makes a single charge for the maintenance and operation of customer equipment, the
entire charge would be subject to tax. Petitioner did not provide any information about the types
of customer equipment it might operate. Thus, we cannot opine about whether a separatelystated charge to operate that equipment would be subject to sales tax.

(4 & 5) Electrical Power
Tax Law § 1105(b) imposes sales tax on sales, other than for resale, of electricity and
electric service of whatever nature. However, a commercial lessor's provision of non-metered
electricity that is paid for by tenants through rent inclusion charges is a redistribution of
electricity rather than a sale or resale, for purposes of imposition of sales tax. Since the formula

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applied by a lessor for computing the charge for redistribution of electricity does not represent
actual economic cost of the service supplied, the charges are incidental to the commercial
tenants' rent charges, and do not constitute "sales" or "resales" of electricity for purposes of §
1105 (b). Empire State Building Company v New York State Dept. of Taxation & Fin., 81 NY2d
1002 (1993). See also Debevoise & Plimpton v New York State Dept. of Taxation & Fin., 80
NY2d 657 (1993). In essence, rent inclusion charges paid by tenants consuming nonmetered
electric service are not receipts from the sale of a utility service by the landlord and thus are not
subject to sales tax. See, e.g., TSB-A-04(24)S.
Petitioner purchases electrical power from, and pays applicable charges and taxes to, its
electric power suppliers, including sales tax. Petitioner purchases electrical power in order to
provide its overall service to its customers. The amount that Petitioner charges a customer for
the Fixed Electrical Power is not based on consumption. Instead, it is based on the amount of
power that the customer requests to have allocated to it (which depends on the number of servers
it locates in its cage or suite, or similar factors). Customers locate their equipment at the IBX in
order to gain access to the Cross Connect service and other services that are available at the IBX.
As such, Petitioner’s charges for Fixed Electrical Power do not represent the actual economic
cost of the electricity supplied and are incidental to the customer's rental of the cage or suite.
Thus, its charges for Fixed Electric Power are not subject to sales tax.
However, a landlord's sales of metered electricity to its tenants are subject to sales tax as
sales other than for resale. If the individual tenants have meters by which the landlord can
determine the monthly use of electricity and the landlord bills the tenants for the electricity used,
such receipts constitute the sale of a utility service. Thus, if Petitioner meters the electricity it
provides to its customers and charges them for the electricity, it must collect tax on such sales.
See Mutual Redevelopment Houses, Inc. v Roth, 307 AD2d 422 (3rd Dept, 2003). See TSB-A04(24)S The existence of the fixed minimum charge does not produce a different result.
However, if the electricity is metered, Petitioner can purchase the electricity for resale.

DATED: December 31, 2015

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.