Which of a telecom carrier's transmission assets qualify for New York's central-office-equipment sales-tax exemption?

Plain-English summary

MCI Telecommunications Corp. and three related carriers (MCI International, RCA Global Communications, and Western Union International — together "MCI") asked which of eleven categories of telecommunications assets qualify for the sales/use-tax exemption in Tax Law § 1115(a)(12) for telephone central office equipment and station apparatus. The carriers install equipment at central terminal sites, junction sites, and repeater sites; central terminal and junction sites perform switching/initiating/receiving functions like a traditional telephone central office, while repeater sites merely receive and re-transmit signals without switching, initiating, or receiving at destination.

The Department applied the statutory test — the asset must be central office equipment or station apparatus used directly and predominantly in receiving at destination, initiating, or switching telephone communication:

• Exempt (when used directly and predominantly for those functions, at a central terminal site, junction site, or customer premises): Antenna System, Multiplex Equipment, Termination Equipment, Switch Equipment, Radio Equipment, Digital Cross Connect Equipment, Customer Premises Equipment, Satellite Equipment, Fiber Optic Electronics Equipment; Fault Alarm Equipment (only if hard-wired to exempt equipment and used predominantly to test that equipment); frame-mounted, hard-wired Test Equipment; and hand-held Test Tools used on exempt central-terminal-site equipment.
• Taxable regardless of location: Power Equipment, Portable Test Equipment, hand-held Test Tools used on non-exempt equipment, Furniture/Fixtures/Office Equipment, Service Quality Equipment and backups (including Fault Alarm equipment whose predominant use is monitoring service quality rather than the equipment itself), and Main Billing System machinery and equipment.
• Repeater sites break the exemption. Because repeater-site equipment functions only as a conduit (no switching/initiating/receiving at destination), even otherwise-exempt asset types do not qualify when installed there.
• Predominant use governs mixed assets. Where an asset performs both taxable and exempt functions, its predominant (more than 50%) use determines the tax status.
• Documentation: to buy qualifying assets tax-exempt, the carrier must give the supplier a properly completed Form ST-121, Exempt Use Certificate.

What this means for you

The exemption is about function, not the label on the box

Section 1115(a)(12) exempts equipment used directly and predominantly to switch, initiate, or receive-at-destination telephone communication. The same category of equipment can be exempt in one place and taxable in another depending on what it actually does — so map each asset to a switching/initiating/receiving function.

Where it's installed can decide the answer

Equipment at central terminal and junction sites performs central-office functions and can qualify; equipment at repeater sites (which only relay signals) does not — even if it's a type that's otherwise exempt. Track installation site alongside function.

Support, power, monitoring, and billing gear stay taxable

Ancillary equipment — power systems, portable test tools, office furniture, service-quality monitoring, and billing machinery — doesn't switch/initiate/receive, so it's taxable wherever installed. And use Form ST-121 to claim the exemption on the qualifying assets; for dual-use assets, document the predominant use.

Common questions

Q: What's the test for the telecom equipment exemption?
A: The asset must be central office equipment or station apparatus used directly and predominantly (more than 50%) to switch, initiate, or receive telephone communication at its destination.

Q: Is equipment at a repeater site exempt?
A: No. Repeater-site equipment only relays signals without switching/initiating/receiving at destination, so it's taxable even if it's an otherwise-exempt equipment type.

Q: Which assets did the Department treat as always taxable?
A: Power equipment, portable test equipment, hand-held test tools used on non-exempt equipment, furniture/fixtures/office equipment, service-quality monitoring gear, and main billing-system machinery.

Q: How do I claim the exemption?
A: Give the supplier a properly completed Form ST-121 (Exempt Use Certificate); for mixed-use assets, the predominant (over-50%) use controls.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1115(a)(12) (exemption for telephone central office equipment/station apparatus used directly and predominantly in receiving at destination, initiating, or switching communication; excludes parts with a useful life of one year or less, tools, supplies)
• 20 NYCRR § 528.13 (scope of the exemption; Example 1 — switchboards/handsets exempt; Example 3 — testing devices that don't initiate/receive/switch are not exempt)
• Tax Law § 1105(a) and § 1110 (sales tax and compensating use tax on tangible personal property)
• Form ST-121 (Exempt Use Certificate)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_71s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (71)S
Sales Tax
November 12, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890519B

On May 19, 1989 a Petition for Advisory Opinion was received from MCI
Telecommunications Corp., MCI International Telecommunications Corp., RCA Global
Communications, Inc., and Western Union International, Inc., 1133 19th Street, N.W., Washington,
D.C. 20036.
The issue raised by Petitioners, MCI Telecommunications Corp., MCI International
Telecommunications Corp., RCA Global Communications, Inc., and Western Union International,
Inc., (hereinafter together referred to as MCI), is which of the telecommunications assets enumerated
below are exempt from New York State and Local Sales and Use Tax pursuant to the provisions of
Section 1115(a)(12) of the Tax Law when purchased by MCI Telecommunications Corporation
(MCIT), MCI International Telecommunications Corp. (MCIIT), RCA Global Communications, Inc.
(RCA) or Western Union International, Inc. (WUIC):
Antenna Systems
Multiplex Equipment
Termination Equipment
Switch Equipment
Radio Equipment
Fiber Optic Electronics Equipment
Satellite Equipment
Digital Cross Connect Equipment
Power Equipment
Fault Alarm Equipment
Customer Premise Equipment
MCIT, MCIIT, RCA and WUIC are corporations subject to the New York State and local
sales and compensating use tax on their purchases of tangible personal property and taxable services
imposed by sections 1105 and 1110 of the Tax Law.
MCIT is a specialized common carrier engaged in the business of providing long distance
intrastate telecommunication services in New York State. Additionally, MCIT provides interstate
and international telecommunication services to its customers in New York State. These services are
provided through the use of microwave transmission, fiber optic cable, undersea cables, earth
stations and satellite equipment. MCIT is subject to the regulation of the Federal Communications
Commission (the "FCC"), the Public Service Commission of New York State and various other
public service commissions of other states.
MCIIT provides international voice and data transmission between the United States and
foreign destinations.

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RCA and WUIC are federally licensed and regulated common carriers engaged in furnishing
telex and other voice and data communication services to their customers located in New York State
and elsewhere.
In the course of doing business, Petitioners purchase telecommunications property which is
subject to New York State sales or compensating use tax except in those instances where the
purchases are eligible for the sales and use tax exemption provided under Section 1115(a)(12) of the
Tax Law.
Petitioners purchase certain telecommunication assets consisting of the following:
Antenna Systems which are devices used for transmitting and/or receiving
electromagnetic waves used to transmit and/or receive microwave radio signals between
originating and terminating terminals via repeater and junction sites.
Antennas which are used to propagate or receive radio signals and may be located at
terminals, junctions or other sites (including customer locations) and may be mounted on
towers or other supports.
Multiplex Equipment which serves the function of combining a number of individual
channels for transmission over a common path.
Termination Equipment which is circuit distribution equipment that provides the
interface between the MCI equipment and the facilities of the local telephone company.
Switch Equipment which is electronic equipment used to route incoming circuits
(calls) to their desired destination on an outgoing circuit without interruption of the incoming
and outgoing calls. Equipment which opens or closes circuits, changes operating parameters,
or selects paths or circuits, either on a space or time division basis is included in the switch
equipment category. Switch equipment routes the incoming circuits and electrical signals to
the multiplex equipment.
Radio Equipment which consists of an electronic device which radiates
electromagnetic waves through space. Each radio has both a receiver and transmitter side
which corresponds to the receiving and transmitting antennas.
Fiber Optic Electronics Equipment which is computer based equipment which is
integrated with the switching of telephone communications when a fiber optic transmission
medium is involved.
Satellite Equipment which consists of earth stations which contain telemetry
receiving equipment and antenna monitoring control systems, satellite radio equipment such
as baseband distribution bays which demodulate the signal and patch data between systems
and synchronization, encryption, monitoring and power equipment.

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Digital Cross Connect Equipment which is computer based equipment that rearranges
or groups through cross connection different high and low speed channels. Experts describe
it as functioning as a slow switch or as a multiplex with characteristics common to both
switch and multiplex.
Power Equipment which includes both primary and auxiliary power generators and
associated equipment is used to provide the normal uninterrupted power source to operate
the electronic central office and station apparatus equipment, including batteries (with
associated battery chargers), used to provide a primary and/or backup power source for the
transmission sites. Power equipment is directly related to and necessary for the uninterrupted
operation of switching, operator system, central office transmission and radio and circuit
equipment.
Fault Alarm Equipment which is electronic equipment that continuously monitors the
computer switching and other electronic equipment signals for circuit and/or system
problems that cause failure or disruption of the communication transmission network.
Customer Premise Equipment which is located at the business location of the
customer and can include switch, multiplex, fiber optic electronic, power or antenna systems
or station apparatus depending upon the characteristics of the service provided and the needs
of the customer.
Petitioners' equipment has been installed at central terminal sites, junction sites and at
repeater sites. The equipment installed at Petitioners' central terminal sites performs the same
functions as equipment found at a traditional telephone central office. Likewise, equipment installed
at Petitioners' junction sites also performs in a like manner in that such equipment perform a
switching, initiating or receiving at destination function. The equipment installed at Petitioners'
repeater sites merely functions as a conduit for the purpose of receiving incoming signals and
transmitting them on to another site without performing the functions of switching, initiating or
receiving at destination.
Section 1105 of the Tax Law states, in part:
Imposition of sales tax.--. . .there is hereby imposed and there shall be paid a tax. .
.upon:
(a)
The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
Section 1110 of the Tax Law states, in part:
Imposition of compensating use tax.--Except to the extent that property or services
have already been or will be subject to the sales tax under this article, there is hereby
imposed on every person a use tax for the use within this state. . .except as otherwise
exempted under this article, (A) of any tangible personal property purchased at retail. . . .

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Sales Tax
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Section 1115 of the Tax Law states, in relevant part:
(a)
Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
(12). . .telephone central office equipment or station apparatus or comparable
telegraph equipment for use directly and predominantly in receiving at destination
or initiating and switching telephone or telegraph communication, but not including
parts with a useful life of one year or less or tools or supplies used in connection with
such machinery, equipment or apparatus. . . .
Section 528.13 of the Sales and Use Tax Regulations states, in relevant part:
(a)

Exemption.

(1)
An exemption is allowed from the tax imposed under section 1105(a) of the
Tax Law, and from the compensating use tax imposed under section 1110 of the Tax
Law, for receipts from sales of:
*

*

*

(ii) telephone central office equipment or station apparatus or comparable telegraph
equipment for use directly and predominantly in receiving at destination or initiating
and switching telephone or telegraph communication.
*
(f)

*

*

Telephone and telegraph equipment.

(1)
Telephone and telegraph central office equipment and station apparatus, used
directly and predominantly in receiving at destination, initiating or switching
telephone and telegraph communication is exempt, when such equipment and
apparatus is purchased or leased by the vendor of such service for sale.
*
Example 1:

*

*

A telephone company purchases switchboards and handsets
for installation at a subscriber's premises. Such purchases are
exempt.
*

*

*

(3)
The exemption does not apply to other equipment used in conjunction with
telephone and telegraph communication, such as testing equipment.

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Sales Tax
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Example 3:

A telephone company purchases devices which are installed
on relay racks and are used to test two-way trunk transmission
level. These devices are not exempt as they neither initiate,
receive or switch communication.

In order for the purchases of telephone communication assets to qualify for the tax exemption
provided under Section 1115(a)(12) of the Tax Law and Section 528.13 of the Sales and Use Tax
Regulations such assets must meet the statutory tests of being classified as either central office
equipment or station apparatus and of being used both directly and predominantly in performing the
function of receiving telephone communication at its destination, of initiating telephone
communication or of switching telephone communication.
The functions of initiating telephone communication and receiving telephone communication
at its destination is generally performed by certain station apparatus.
The function of switching telephone communication is generally performed by central office
equipment.
The equipment installed at Petitioners' junction sites which directly and predominantly (more
than 50%) performs a switching,, initiating or receiving at destination function is considered to
perform a central office function and falls within the sales tax exemption provided under Section
1115(a)(12) of the Tax Law. However, as the equipment installed at the repeater sites does not
perform a central office function, such equipment does not qualify for the exemption provided under
Section 1115(a)(12).
Accordingly, under the provisions of Section 1115(a)(12) of the Tax Law and Section 528.13
of the Sales and Use Tax Regulations, Petitioners' purchases of the following telecommunications
assets which Petitioner has stated are used directly and predominantly to perform a switching,
initiating or receiving at destination function are exempt from all sales and use taxes provided such
assets are installed at a central terminal site, at a junction site or on a customers' premises.
Antenna System
Multiplex Equipment
Termination Equipment
Switch Equipment
Radio Equipment
Digital Cross Connect Equipment
Customer Premises Equipment
Satellite Equipment
Fiber Optic Electronics Equipment
Fault Alarm Equipment
(if hard wired to exempt central terminal site equipment or to
exempt junction site equipment which performs central site
functions and if used predominantly for testing equipment.)
Test Equipment
(frame mounted and hard-wired to exempt central terminal site
equipment)

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Test Tools (Hand held - used on exempt central terminal site equipment)
Whereas the following assets do not directly and predominantly perform any of the functions
of switching, initiating or receiving at destination, purchases of such assets will not qualify for the
exemption provided under Section 1115(a)(12) of the Tax Law but will be subject to the applicable
state and local sales tax regardless of where installed:
Power Equipment
Portable Test Equipment
Test Tools (Hand-held - used on equipment other than exempt Central
Terminal Site Equipment)
Furniture/Fixtures/Office Equipment
Service Quality Equipment and Applicable Backup Equipment (including F a u l t
Alarm Equipment where predominant use is to monitor the quality of the
telephone service being provided as opposed to the monitoring of equipment
to insure that such equipment is functioning properly)
Main Billing System Machinery and Equipment and applicable Back Up System or
any other machinery or equipment for use in recording information for billing
purposes such as identifying telephone from where call originates, destination
of call, length of call and applicable charges therefor.
It is noted that purchases of those assets which are exempt from all sales and use taxes by
virtue of being installed at a central terminal site, at a junction site or on a customer's premises and
used to perform a switching function or a receiving at destination or initiation function, respectively,
will not qualify for the exemption provided under Section 1115(a)(12) when installed at a repeater
site.
It is also noted that in any instance where Petitioner purchases an asset which will perform
both taxable and exempt functions, the predominant (more than 50%) use of such asset will
determine the sales tax status of such purchase.
When Petitioner purchases telecommunication assets which qualify for the tax exemption
provided under Section 1115(a)(12) of the Tax Law and Section 528.13 of the Regulations,
Petitioner may make such purchases tax exempt provided Petitioner furnishes the supplier a properly
completed Form ST-121, Exempt Use Certificate.

DATED: November 12, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.