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Jamie C. Yesnowitz
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On Oct. 22, 2019, the Ohio Board of Tax Appeals (BTA) determined that communication cabling installed during building renovations was incorporated into real property. Therefore, the cabling was installed as part of a construction contract and not a retail sale subject to sales tax.1
Further, the BTA invalidated an Information Release asserting that the sale and installation of all computer cabling is considered a taxable business fixture.2
During a renovation of its headquarters buildings, the taxpayer engaged contractors to install communication lines, which are standard CAT-5 or CAT-6 cabling and common to office and other commercial buildings. The cabling was installed underneath the floors, above the ceilings, and in the walls, affixed to the building in the same manner as telephone and electric lines. The taxpayer originally paid sales tax related to the communication cabling and its installation for the period from July 1, 2010, through Dec. 31, 2012.
Subsequently, the taxpayer applied for a refund of the sales tax paid, claiming that the installation constituted an improvement to real property not subject to tax, which was denied by the Commissioner. After the denial, the taxpayer requested a hearing at which it presented additional evidence. Unmoved, the Commissioner issued final determinations affirming the denial of the refund and concluding that the cabling constitutes a taxable business fixture.
The taxpayer appealed the Commissioner’s final determinations to the BTA, asserting that because the cabling is incorporated into real property, the cabling and installation thereof is not a “retail sale,” but rather a construction contract not subject to sales tax.
At issue was whether the taxpayer illegally or erroneously paid sales tax on the installation of communication cabling for Voice over Internet Protocol (“VoIP”) and internet service. In general, sales tax is imposed upon all retail sales made in Ohio, in addition to any storage, use, or consumption of any tangible personal property (use tax), unless the transaction is specifically exempted.3
When an item of tangible personal property is incorporated into real property pursuant to a construction contract, the contractor is considered the consumer of the personal property and is responsible for the payment of the associated sales (or use) tax on materials used.4
Real property generally includes the land along with all buildings, structures, improvements, and fixtures on the land. An exclusion from this definition is provided for “business fixtures,” which are defined as “an item of tangible personal property that has become permanently attached or affixed to the land or to a building, structure, or improvement, and that primarily benefits the business conducted by the occupant on the premises and not the realty.”5
The term does not include fixtures that are common to buildings such as heating, ventilation, and air conditioning systems primarily used to control the environment for people or other fixtures that primarily benefit the realty and not the business conducted by the occupant on the premises.
In support of its position, the BTA cited its 1998 decision in Newcome Corporation, dba Newcome Electronic Systems v. Tracy (Newcome)
which established that the installation of computer cabling in an office building was generally subject to sales tax as a business fixture. In Newcome
, the BTA relied upon the fact that the cabling primarily benefited the business occupant and was not a communication line common to buildings to reach the conclusion that the communications cabling was a business fixture. Specifically, the BTA noted in its decision that at the time, existing cabling was rarely used when systems were upgraded or installed, due in part to the rapid change in computer technology. Further, the cabling at issue was designed to meet the technical requirements of the individual business customer, would not be found in every building, and would not be available to or usable by other building occupants. Following that decision, the Commissioner issued an Information Release clarifying that the sale and installation of computer cabling would generally be treated as a business fixture and subject to sales tax as a retail sale.7
The BTA distinguished the instant case from its earlier decision, concluding that the cabling at issue did not constitute a “business fixture” but rather is incorporated into the real property. The parties had stipulated that if the taxpayer were to abandon the buildings in which the cabling was installed, any business relocating into those buildings would be able to use the communication lines for its VoIP and internet communications. Unlike the previous instance, the communication lines at issue were not designed to meet specific business requirements of the taxpayer. Instead, they are “as common to commercial property as telephone lines and coaxial cables were in the past.” As a result, the BTA determined that the cabling is a communication line that is incorporated into real property, so that its installation constitutes a construction contract and not a retail sale subject to sales tax. Finding thus, the BTA determined that the taxpayer’s refund claim was improperly denied. Further, the BTA invalidated the Information Release imposing the rationale in Newcome
to the sale and installation of all computer cable given the current ubiquitous presence of industry-standard cabling in commercial buildings.
Under Ohio law, tangible personal property that is incorporated in or affixed to real property is classified as either a fixture in a construction contract
or a business fixture
for sales tax purposes.8
Generally, property is considered a fixture in a construction contract
if it is common to buildings and is primarily for the benefit of the realty, such as heating, plumbing, electrical work, etc.9
In this scenario, the contractor purchasing the property to be installed is generally deemed the ultimate consumer and is responsible for the payment of the requisite sales or use tax with respect to the property.10
The construction/installation fee is considered a service and is generally not subject to sales tax. Alternatively, the property is deemed a business fixture
if it primarily benefits the business of the occupant rather than the realty.11
In this circumstance, installation of the business fixture is considered a sale by the contractor to the occupant, making the occupant liable for sales or use tax on the transaction (including both materials and labor).12
It is important to recognize that, under both scenarios, sales/use tax is due with respect to the property transferred, but that it is generally due from the contractor
with respect to the tangible personal property if a fixture in a construction contract
, and from the occupant
with respect to purchase and installation of a business fixture
Despite this disparate treatment, from a practical standpoint, when construction contractors purchase materials, they typically pay sales tax to the vendor, regardless of the ultimate property classification for Ohio sales/use tax purposes. The cost of materials (including sales tax) is then generally passed on to the customer/occupant via progress invoices. In the case of installed property which is later determined to qualify as a fixture in a construction contract
, and where the contractor has already paid sales tax on the property (i.e., CAT-5 and CAT-6 network cabling, as illustrated in this case), an opportunity for customers/occupants to recoup Ohio sales tax paid may exist based on this decision. Taxpayers engaged in recent renovations including computer cabling installation should carefully review their construction contracts to identify such transactions.
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