Sent via email

 

June 30, 2015

 

                                       

 

            Re:      Dark Fiber

 

Dear :

 

Recently, the Department received your question regarding the taxability of dark fiber.

 

The facts and issues as stated in your letter are as follows:

 

Dark fiber is optical fiber infrastructure (cabling and repeaters) that is currently in place but is not being used.

 

In order to determine whether you should code this product offering as either “taxable” or “non-taxable” in Iowa, you are going to present a hypothetical fact pattern to illustrate the issues you are dealing with followed by a specific set of questions you need answers to.

 

FACT PATTERN:

 

XYZ Company is a Local Exchange Carrier licensed to do business in Iowa.  XYZ owns a network of “fiber optic cable” which (when activated) is used to support voice, data, and Internet service applications.  The bundles of fiber optic cable are buried underground and accessible only through highly secured “locked-box” locations.  XYZ leases the right to use part of this fiber optic cable network to a variety of corporate clients including other providers of telecommunications service.  The lease agreements which XYZ enters into with its’ customers limit the rights of those customers exclusively to usage of the fiber optic network, i.e., XYZ maintains ownership of the fiber optic cable infrastructure at all times.

 

However, what XYZ is leasing is the raw fiber optic cable “capacity,” meaning that XYZ is merely leasing “unlit” fiber optic cable – otherwise known as “dark fiber”.  Hence, in order to activate the fiber optics the leasing entity must energize or “light” the fiber optics with an external electronic energy source.  Alternatively, XYZ may also provide the energy source needed to “light” the fiber optic cable in which case it would be selling “lit fiber”.  Keep in mind that only “lit fiber” can be used to transmit voice or data communications.

 

Questions you presented:

 

1.  Is the monthly leasing charge billed by XYZ Company to its corporate clients for the use of its unlit fiber optic cable (i.e., “dark fiber network”) subject to the Iowa Sales Tax?

 

2.  If so, what is the theory upon which taxability is based?  For example, do charges for dark fiber leasing fall within the scope of either a lease of tangible personal property or a lease of real property or does some other theory of taxability apply? (Please specify exactly how dark fiber leasing agreements are classified.)

 

3.  If charges for the leasing of dark fiber are treated as a taxable lease of real property or tangible personal property, please identify the section of your state’s statutory code, or other source documentation (e.g., tax regulation, DOR ruling, etc), which supports such a basis of taxability.

 

Analysis and conclusion:

 

Iowa Code § 423.2(1) imposes sales tax on the sales price of tangible personal property sold at retail in Iowa.  “Sales price” means “the total amount of consideration, including cash, credit, property, and services, for which personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise….”  Tangible personal property is defined to mean “personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.”  Iowa Code § 423.1(59). 

 

Generally, the rental of real property is not subject to sales tax. 

 

Iowa Admin. Code r. 701—225.6(3) provides:

 

If a rental contract allows the renter exclusive possession or use of a defined area of real property and, incident to that contract, tangible personal property is provided which allows the renter to utilize the real property, if there is no separate charge for rental of tangible personal property, the sales price is for the rental of real property and is not subject to tax, unless taxable room rental is involved….  If a person rents tangible personal property and, incidental to the rental of the property, space is provided for the property’s use, the sales price from the rental shall be subject to tax.  It may at times be difficult to determine whether a particular transaction involves the rental of real property with an incidental use of tangible personal property or the rental of tangible personal property with an incidental use of real property. 

 

The dark fiber at issue is considered to be part of the operating property of the local exchange carrier and as such is subject to assessment to XYZ Company under Iowa Code section 433.4. See IAC 77.1(3) for the definition of operating property. Because this dark fiber it is subject to assessment under chapter 433, it is defined as real property under Iowa Code section 427A.1(1)(h). Under 701 IAC 225.6(3), the sales price for the rental of real property is not subject to sales tax. Therefore, the lease of the dark fiber by XYZ Company is not subject to sales tax if the dark fiber is being assessed to XYZ Company under section 433.4.   

 

I hope this information has been helpful to you. Please remember that this letter is an informal opinion based only on the facts you provided, and on the current law. In the future the Department could take a position contrary to that stated in this letter. Any written advice or opinion rendered to members of the public by Department personnel that is not pursuant to a Petition for Declaratory Order under 701 IAC 7.24 is not binding upon the Department. If you have any additional questions regarding this matter please do not hesitate to contact me.

 

 

Sincerely,

 

 

 

Theresa A. Dvorak

Policy Section

Taxpayer Services and Policy Division

Iowa Department of Revenue

(515) 281-3194

theresa.dvorak@iowa.gov