Are 'Cross-Connect' fees that a data center charges customers for access to permanently installed fiber optic cable subject to Texas sales tax as a telecommunications service?

Plain-English summary

The Texas Comptroller ruled that a data center's "Cross-Connect" fees — charged for customer access to fiber optic cable linking their equipment to internet providers or other customers within the facility — are not subject to Texas sales tax, because the installed cable counts as real property, not tangible personal property or a taxable telecommunications service.

The colocation operator lets customers house their own computer equipment in its facilities and pay separately-stated fees for "Cross-Connects": fiber optic cable buried underground or run through overhead trays, connecting a customer's gear to an internet service provider or to other tenants. The operator itself doesn't provide internet access (customers buy that separately) and doesn't route or transmit data — customers do that with their own equipment over the cable. That mattered for two reasons. First, because the operator isn't itself performing "the electronic transmission, routing, or reception" of data, the Cross-Connect charge isn't a taxable telecommunications service. Second, and more fundamentally, applying the century-old three-factor test from Hutchins v. Masterson (physical/constructive annexation, fitness for the realty's purpose, and — most importantly — intent for permanence), the Comptroller found the cable is genuinely annexed to the building as a permanent real property improvement, not equipment the operator is renting out as tangible personal property. Since renting real property isn't a taxable sale in Texas, the Cross-Connect fees fall outside the sales tax entirely. The ruling is explicitly narrow: it applies only to cable/interconnections permanently incorporated into the building's real property — NOT to patch cables, other non-annexed tangible personal property, or wireless connection charges.

What this means for you

Data center and colocation operators

If your interconnection/cross-connect fees are for access to cable genuinely and permanently annexed to your building (not equipment you're renting out or actively routing traffic through), those fees can be treated as nontaxable real property rental — but this doesn't extend to patch cables, portable equipment, or wireless connectivity charges, which stay subject to normal tangible-personal-property or telecommunications-service tax rules.

Telecommunications and network infrastructure companies

The key distinguishing fact is whether YOU actively route/transmit data (making your charge a taxable telecommunications service) versus simply providing physical access to permanently-installed infrastructure that the CUSTOMER uses with their own equipment (which can be nontaxable real property access).

Accountants and tax professionals

The controlling test is the century-old Hutchins v. Masterson three-factor annexation analysis (annexation, fitness for purpose, and — per Logan v. Mullis — the preeminent factor of intent for permanence), applied to fiber optic cable per Comptroller's Decision No. 107,056 (2017) and STAR Accession No. 200308205L (2003). Note the ruling's explicit scope limitation: it covers only cable/interconnections permanently annexed to real property, expressly excluding patch cables and wireless equipment.

Common questions

Q: Are all data center interconnection or cross-connect fees exempt from Texas sales tax?
A: No — only fees for access to cable/infrastructure genuinely and permanently annexed to the building as real property. This ruling explicitly does NOT cover patch cables, other non-annexed tangible personal property, or wireless connection charges.

Q: Does it matter whether the data center itself routes customer data through the cable?
A: Yes — because this operator's customers use their OWN equipment to transmit data over the cable (the operator doesn't route or transmit anything itself), the charge didn't qualify as a taxable telecommunications service.

Q: What test determines whether installed cable is real property or tangible personal property?
A: The three-factor Hutchins v. Masterson test: physical/constructive annexation to the realty, fitness/adaptation for the realty's purpose, and — the most important factor — whether the installer intended the item to become a permanent part of the property.

Q: Can another data center operator rely on this ruling?
A: No. It's binding on the Comptroller only for the requesting taxpayer and facts presented, and cannot be relied on by any other taxpayer — and note the ruling's own scope limitation excluding patch cables and wireless equipment.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0103 (Telecommunications Services, definition)
• Tex. Tax Code §§ 151.010, 151.051 (taxable item; imposition)
• Hutchins v. Masterson, 46 Tex. 551 (1887) (three-factor annexation test)
• Logan v. Mullis, 686 S.W.2d 605, 607-08 (Tex. 1985) (intent as the preeminent factor)
• Comptroller's Decision No. 107,056 (2017) (annexation test applied to real property improvements)
• STAR Accession No. 200308205L (Aug. 12, 2003) (fiber optic cable installation as real property improvement)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201709001L

Original ruling text

September 7, 2017

RE: Private Letter Ruling No. 150580775

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters, [ENDNOTE 1] in response to your original request dated August 9, 2013. You submitted additional documentation to your request on February 24, 2015. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You request guidance on the taxability of Taxpayer’s Cross-Connect charges for access to fiber optic cable provided to customers who locate equipment in Taxpayer’s colocation facilities.

Facts Presented:

*** (Taxpayer) operates carrier-neutral colocation centers, called CENTERS. Customers locate their computer equipment within a CENTER and contract with Taxpayer for the provision of Cross-Connects.

A Cross-Connect can connect a customer directly to an internet service provider or to other Taxpayer customers.[ENDNOTE 2] Cross-Connects to internet service providers are established by connecting customers to fiber optic cables buried underground. Cross-Connects between Taxpayer customers are established by connecting customers’ equipment with pre-wired cables in conduits and cables located in overhead trays inside a CENTER. In all cases, Taxpayer intends for the cables to be annexed to the CENTER’s real property.

In the sample contracts provided, a “Cross-Connect” is defined as “a physical or wireless interconnection within a CENTER that (i) exits Customer’s cage or (ii) connects Customer to another [Taxpayer] customer.”[ENDNOTE 3] For purposes of this private letter ruling, based on the information provided, Cross-Connects refer only to fiber optic cables located in underground conduits, pre- wired conduits, or overhead trays.

Taxpayer does not provide internet access services. Customers purchase internet access separately from third party service providers.

Charges for Cross-Connects are separately stated on Taxpayer’s invoices.

Question, Ruling, and Analysis

Question: Are Cross-Connect charges subject to Texas sales and use tax?

Ruling: Separately stated Cross-Connect charges for access to fiber optic cable to establish connections from customers’ equipment to internet service providers or to establish connections between customers within a CENTER are charges for the rental of real property and are not subject to Texas sales and use tax.

Analysis:

Section 151.010 defines “taxable item” to mean tangible personal property and taxable services. Section 151.051 imposes sales tax on each sale of a taxable item.

Section 151.0101(a)(6) provides that telecommunications services are a taxable service. Section 151.0103, in relevant part, defines “telecommunications services” to mean the electronic transmission, routing, or reception of sounds, data, or information utilizing wires, cable, radio waves, microwaves, satellites, or fiber optics. Taxpayer provides its customers access to cables through which they transmit data using their own equipment located in Taxpayer’s CENTER. Taxpayer does not route or transmit data as described by Section 151.0103. Therefore, Cross-Connect charges are not taxable telecommunications services.

The sale or lease of real property is not the sale of a taxable item and is not subject to Texas sales and use tax. Comptroller’s Decision 107,056 (2017) addresses the question of when tangible personal property becomes part of a real property improvement:

“The starting point for most discussions regarding whether tangible personal property has been affixed to realty in such a way as to become an improvement to realty is Hutchins v. Masterson, 46 Tex. 551 (1887). Hutchins asks: (1) Has there been a real or constructive annexation of the article in question to the realty?; (2) Was there a fitness or adaptation of such article to the uses or purposes of the realty with which it was connected?; and (3) Was it the intention of the party making the annexation that the chattel becomes a permanent accession to the freehold? See also Logan v. Mullis, 686 S.W.2d 605, 607-08 (Tex. 1985) (holding that the third question, dealing with intent, is preeminent, whereas the first and second criteria constitute evidence of intention).”

Fiber optic cables Taxpayer located in underground conduits are improvements to real property. Pre-wired cables in conduits and cables in overheard trays within CENTER facilities are also affixed to real property with the intention that they remain permanently. Prior Comptroller guidance has found the installation of fiber optic cable to be an improvement to real property. See STAR Accession No. 200308205L (August 12, 2003). Accordingly, Cross-Connect charges for the right to use the fiber optic cables to connect customers with internet access service providers or other customers within a CENTER are charges for the rental of real property. These charges are not subject to Texas sales and use tax.

This ruling applies only to Cross-Connect charges for fiber optic cables permanently incorporated into or annexed to real property.

As noted above, the contracts and invoices provided define a Cross-Connect as a physical or wireless interconnection within a CENTER. This ruling does not apply to Cross-Connect charges for cables or other tangible personal property that is not incorporated into real property. For example, this ruling does not apply to Cross-Connect charges for network patch cables. This ruling also does not apply to charges for wireless equipment or the provision of wireless connections.

Comptroller’s Decisions and STAR documents cited are available on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at https://comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 150580775.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTES:

Unless otherwise noted, all references herein to “Section” are to Tex. Tax Code Ann. (Vernon 2008 and Supp. 2015) and all references to “Rule” are to 34 Tex. Admin. Code (2015).

See http://www.** last visited December 19, 2016.

Taxpayer Master Services Agreement, Switch and Data # *, dated April 16, 2016.