Were fees for allowing cable companies and other utilities to attach equipment to privately owned utility poles subject to public utility tax or exempt as real-property rent?

Plain-English summary

The Washington Department of Revenue held that fees paid by cable companies and other utilities to attach their equipment to an electric utility's poles were not subject to public utility tax, but they remained taxable under the service and other activities B&O classification.

The electric and natural-gas utility licensed space on its privately owned poles. The users installed and operated their own equipment. The utility had originally reported the fees under service B&O, but Audit reclassified them as light-and-power public utility income.

Public utility tax applies to income from performing the light-and-power business and operations incidental to it. Pole attachments did not generate, produce, distribute, or wheel electricity through the utility's equipment. The utility produced and distributed the same electricity regardless of the licenses, so the attachment activity played no role in performing its power business and was not incidental to it. PUT therefore did not apply.

The fees were still business income unless the agreements were exempt rentals of real property. A real-property lease gives the tenant exclusive possession and control; a license merely permits use while the owner retains control. The sample agreement called the parties licensor and licensee and expressly said the user's rights remained “a mere license,” with no ownership or property rights. The arrangement was not a real-property rental, so the service B&O tax remained due.

The Department granted the petition by removing PUT from the pole revenue but denied the requested refund of service B&O already paid on that income.

What this means for you

Electric utilities

Not every receipt earned from utility infrastructure is public utility income. Determine whether the activity actually performs or is subordinate to generation, distribution, or wheeling.

Pole owners

Attachment agreements that preserve owner control and grant only a use right are licenses. Their fees may remain service B&O income even when PUT does not apply.

Cable and telecommunications companies

The tax classification depends on the pole owner's activity and contract rights, not merely on the physical location of the attached equipment.

Contract teams

Exclusive possession, control, ownership rights, maintenance responsibility, and express license language help distinguish taxable licenses from exempt real-property rentals.

Common questions

Q: Why were pole fees not subject to light-and-power PUT?

A: The licensees used their own equipment, and the attachment activity did not generate, distribute, or wheel electricity or affect the utility's performance of those functions.

Q: Were the attachment fees exempt real-property rent?

A: No. The agreement conveyed no exclusive possession or property rights and expressly created a mere license while the pole owner retained control.

Q: How were the fees ultimately taxed?

A: They were subject to service and other activities B&O tax under RCW 82.04.290(2).

Q: Why did an earlier leasehold-excise-tax ruling not control?

A: Leasehold excise tax uses a broader statutory concept that can include licenses to use publicly owned property. These poles were privately owned, and the issue here was a traditional real-property rental exemption.

Q: What part of the petition was granted?

A: The Department removed public utility tax from the pole-license revenue but denied a refund of the service B&O tax the utility had reported.

Citations and references

• RCW 82.16.010(3)-(4), RCW 82.16.020(1)(b), and WAC 458-20-179 (light-and-power PUT)
• RCW 82.04.220 and RCW 82.04.290(2) (B&O and service classification)
• WAC 458-20-118(2)-(3) (real-property lease versus license)
• RCW 82.29A.020 and WAC 458-29A-100(2)(g) (leasehold excise tax distinction)
• King County Water District No. 68 v. Tax Commission, 58 Wn.2d 282 (1961)
• Det. No. 16-0190, 36 WTD 42 (2017)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 40WTD169.pdf
• Source archive: Volume 40 ZIP (member WTDvol40/40WTD169.pdf)

Original ruling text

Det. No. 18-0228, 40 WTD 169 (November 30, 2021)

169

Cite as Det. No. 18-0228, 40 WTD 169 (2021)
BEFORE THE ADMINISTRATIVE REVIEW AND HEARINGS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
)
)
)
...
)
)

DETERMINATION
No. 18-0228
...

RULE 118; RULE 179; RCW 82.16.020; RCW 82.04.290– PUBLIC UTILITY TAX – TAXATION OF RENTAL OF SPACE ON UTILITY POLES – Licensing of space on a utility pole is not subject to PUT. When space on a utility pole is licensed to be used by others, and the owner of the pole does not grant a lease or rental of real property on the utility pole, revenue from the license is subject to service & other activities business and occupation tax. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision or in any way to be used in construing or interpreting this Determination. Fisher, T.R.O. – A utility company in the business of generating and selling electrical power protests the classification of certain revenue streams. The company argues money received for licensing space on its utility poles is not subject to tax. . . . The petition is granted in part, and denied in part. 1 ISSUES

1. Whether revenue received for licensing the use of space on a utility pole is subject to public
   utility tax (“PUT”) under WAC 458-20-179.
2. Whether revenue received for licensing the use of space on a utility pole is exempt from tax as
   a rental of real property under WAC 458-20-118.
   ...
   FINDINGS OF FACT
   . . . (“Taxpayer”) is an electric and natural gas utility headquartered in . . . . Taxpayer’s customers reside in . . . Washington, [and elsewhere].

1

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410.

Det. No. 18-0228, 40 WTD 169 (November 30, 2021)

170

The Department of Revenue (“Department”) audited Taxpayer’s books and records for the period of January 1, 2012, through December 31, 2015 (“Audit Period”), to determine whether Taxpayer was properly reporting its Washington tax obligations. During the Audit Period, Taxpayer reported revenue it received from cable companies and other utilities to use Taxpayer’s utility poles under the Service and Other Activities business and occupation (“B&O”) tax classification . . . . The Department determined that the revenue from allowing others to use Taxpayer’s utility poles . . . was taxable as PUT. The Department ultimately assessed Taxpayer $ . . . in power and light business PUT, $ . . . in gas distribution PUT, and $ . . . in interest; the Department credited Taxpayer with having paid $ . . . in service and other activities B&O tax during the Audit Period. Taxpayer timely sought administrative review regarding the revenue from the usage of its utility poles . . . . Regarding the utility poles, Taxpayer asserted that allowing cable and other utility companies to use space on Taxpayer’s utility poles was not subject to PUT or B&O tax. Taxpayer explained that the cable and other utility companies used the space to install their own equipment. Taxpayer provided a sample agreement between itself and [Cable Company] 2 entitled . . . (“Agreement”). The Agreement labels Taxpayer as “Licensor,” and [Cable Company] as “Licensee.” Section 16 of the Agreement states, “No use, however, extended, of such pole under this agreement shall create or vest in Licensee any ownership or property rights therein, but Licensee’s rights therein shall be and remain a mere license . . . .”
...
ANALYSIS
The B&O tax is imposed for the privilege of engaging in business in Washington. RCW 82.04.220. The term “business” includes “all activities engaged in with the object of gain, benefit, or advantage to the taxpayer or another person or class, directly or indirectly.” RCW 82.04.140. The measure of the tax is the gross proceeds of sales, value proceeding or accruing, or gross income of the business. RCW 82.04.220. A. Pole Revenue The B&O tax does not apply to persons in respect to a business activity to which tax liability is imposed under chapter 82.16 RCW, the code chapter imposing the public utility tax (PUT). PUT is imposed for the act or privilege of engaging within this state in any of the public service or transportation businesses listed in RCW 82.16.020, including a “light and power business,” RCW 82.16.020(1)(b). A “light and power business” is defined as “the business of operating a plant or system for the generation, production or distribution of electrical energy for hire or sale and/or for the wheeling of electricity for others.” RCW 82.16.010(4). “Wheeling of electricity” is “the activity of delivering or distributing electricity owned by others using power lines and equipment of the person doing the wheeling.” WAC 458-20-179(303).

2

...

Det. No. 18-0228, 40 WTD 169 (November 30, 2021)

171

The tax is computed by multiplying the “gross income of the business” by the rate specific to the particular type of business being taxed. For instance, the gross income of a light and power business is currently taxed at the rate of 3.62%. RCW 82.16.020(1)(b). The term “gross income” for the purposes of PUT means: “Gross income” means the value proceeding or accruing from the performance of the particular public service or transportation business involved, including operations incidental thereto, but without any deduction on account of the cost of the commodity furnished or sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses. RCW 82.16.010(3) (emphasis added). The term “incidental” is not defined in Chapter 82.16 RCW. When a statutory term is not defined, it is given its plain, ordinary meaning. Garrison v. Wash. State Nursing Bd., 87 Wn.2d 195, 196, 550 P.2d 7 (1976). A term’s ordinary meaning may be ascertained from its dictionary definition. Id. “Incidental” means “subordinate to something of greater importance; having a minor role.” Black’s Law Dictionary, 879 (10th ed. 2014). Thus, to be subject to PUT, the gross income must be derived from the performance of the public service or transportation business at issue, or operations incidental thereto. . . . Taxpayer claims its revenue from licensing space on its utility poles for other entities to attach and operate equipment is not subject to the PUT. We agree. WAC 458-20-179(104)(a) 3 provides that amounts derived from services that are incidental to a public utility activity are subject to PUT. WAC 458-20-179(104)(a) lists several activities that are incidental to a public utility activity, but does not list “pole contact charges” among those activities. Because the current version of the rule is silent as to pole contact charges, we must decide whether charging to use space on a utility pole qualifies as performance of the light and power business activity, or operations incidental thereto, under RCW 82.16.010(3). Licensing of space on Taxpayer’s utility pole does not constitute operating a plant or a system for the generation, production, or distribution of electrical energy for hire or sale because Taxpayer does not generate, produce, or distribute electrical energy for sale through Licensee’s equipment attached to Taxpayer’s poles. RCW 82.16.010(4). Additionally, Taxpayer is not wheeling the electricity because wheeling of electricity requires delivery or distribution of electricity owned by others through the wheeler’s own equipment. WAC 458-20-179(303). Taxpayer does not own Licensee’s equipment attached to Taxpayer’s poles, or any electricity distributed through such equipment. Furthermore, the licensing of space on the poles is not incidental to Taxpayer’s business of generating, producing, or distributing electrical energy for sale. In King County Water, the Washington Supreme Court noted “[t]he phrase ‘including operations incidental thereto’ is governed by the specific words ‘performance of the business’ . . .” 58 Wn.2d at 286. Taxpayer generates, produces, and distributes the same amount of electrical energy regardless of whether 3

...

Det. No. 18-0228, 40 WTD 169 (November 30, 2021)

172

Taxpayer licenses out space on its poles. “Incidental” means having a minor role. Black’s Law Dictionary (10th ed. 2004). The licensing of space on Taxpayer’s poles plays no role and has no effect on Taxpayer’s performance of its light and power business. Accordingly, we conclude that, Taxpayer’s revenue from licensing space on the poles was not subject to PUT because it was not part of, or incidental to, Taxpayer’s light and power business. Because Taxpayer’s licensing of space on the poles is not subject to PUT, Taxpayer’s revenue is generally subject to the B&O tax, unless an exemption applies. City of Kennewick, 67 Wn.2d at 593-4. Taxpayer asserts its pole contract revenue is exempt from B&O tax under WAC 458-20118(1), which exempts amounts received from the rental of real estate from B&O tax. WAC 458-20-118 draws a distinction between a rental of real property and a license to use real estate: (2) A lease or rental of real property conveys an estate or interest in a certain designated area of real property with an exclusive right in the lessee of continuous possession against the world, including the owner, and grants to the lessee the absolute right of control and occupancy during the term of the lease or rental agreement. . . . (3) A license grants merely a right to use the real property of another but does not confer exclusive control or dominion over the same. Usually, where the grant conveys only a license to use, the owner controls such things as lighting, heating, cleaning, repairing, and opening and closing the premises. WAC 458-20-118(2)-(3). Here, the sample contract provided by Taxpayer makes clear that Taxpayer maintains control over the poles. The Agreement labels Taxpayer as “Licensor” and the entity using space on the pole as “Licensee,” which indicates Taxpayer thought it was granting a license to use the space on its poles rather than a rental. Furthermore, Section 16 specifically states, “. . . Licensee’s rights [under the Agreement] shall be and remain a mere license . . . .” Accordingly, based on the terms of the Agreement, we conclude that the Agreement grants a license to use real property (space on the poles), [and not a lease of real property,] and therefore the revenue from the [license fees for] space on the poles is subject to B&O tax under RCW 82.04.290(2). Taxpayer argues that Det. No. 16-0190, 36 WTD 42 (2017) mandates we find that the [provision] of pole space constitutes rental of real property, and therefore exempt from B&O tax under WAC 458-20-118(2). In 36 WTD 42, we examined whether or not amounts paid to use publicly owned utility poles were subject to leasehold excise tax (“LET”) under Chapter 82.29A RCW. The contract quoted in 36 WTD 42 identified the owner as “Licensor” and the entity using the space on the pole as “Licensee” and stated that the Licensee’s rights “shall be and remain a mere license,” mirroring Taxpayer’s Agreement. 36 WTD at 43-44.

Det. No. 18-0228, 40 WTD 169 (November 30, 2021)

173

However, as 36 WTD 42 made clear, a leasehold interest for the purposes of LET is different from a traditional rental of real property: We begin our interpretation by noting the inclusive nature of potential types of agreements that can establish a taxable leasehold interest under RCW 82.29A.020(1), specifically the repeated use of the word “any” to modify the variety of agreements that can create such a taxable interest. Specifically included are both licenses and leases. So long as the agreement conveys both possession and use it is a leasehold interest under RCW 82.29A.020(1) and subject to LET.
...
Also, as the court has noted, the term “leasehold interest” as used in the LET statute has “a meaning not ordinarily contemplated by the term.” Mac Amusement Company v. Dep’t of Revenue, 95 Wn. 2d. 963, 971, 633 P.2d 68 (1981). As we stated in Det. No. 92-316, 12 WTD 477 (1992), “it is clear that the law intends ‘possession and use’ to have a broader meaning than the kind of exclusive dominion and control exercised by a lessee under a traditional lease, since the legislature expressly included other types of rights and other types of agreements within its reach.” 36 WTD at 46-7 (emphasis added). Because a leasehold interest for the purposes of LET can result from “any agreement,” it did not matter in that case whether or not the agreement established a license or a lease. 4 RCW 82.29A.020; WAC 458-29A-100(2)(g). Because 36 WTD 46 only determined whether or not the agreement created a leasehold interest under RCW 82.29A.020(1), it is not relevant in determining whether Taxpayer’s Agreement creates a traditional lease or license under WAC 458-20-118. Accordingly, we conclude that the Department erred when it assessed PUT on Taxpayer’s revenue from [licensing] space on its poles, and we conclude that Taxpayer is not entitled to a refund of the service & other business activities B&O tax Taxpayer paid on such revenue during the Audit Period.
....
DECISION AND DISPOSITION
Taxpayer’s petition is granted as to the imposition of PUT on revenue for the licensing of space on the poles, but denied as to the refund of service and other activities B&O tax paid on such revenue. Dated this 28th day of August 2018.

4

A leasehold interest for LET is an interest in “publicly owned real or personal property . . .” RCW 82.29A.020(1)(a). Here, Taxpayer owns the utility poles, so the poles are not publicly owned and any interest in the poles are not a leasehold interest for the purposes of LET.