Ohio sales / use tax: High-speed communication cable lines are now nontaxable real property improvements creating significant refund opportunity for taxpayers
The Ohio Board of Tax Appeals recently overturned precedent and held that the installation of industry-standard communication lines constituted nontaxable real property improvements rather than taxable business fixtures. Nationwide Mutual Insurance Co. v. McClain, Ohio BTA Case No. 2018-313 (October 22, 2019). Despite a previous ruling that the same type of cabling was a business fixture, the Board found this type of high-speed computer cabling was not a business fixture because it was no longer unique to specific businesses and is common in any commercial property. Common building elements, including electrical and communication lines, are excluded from the definition of “business fixture.” R.C. 5701.03(B). The ruling supports refund opportunities for taxpayers who have paid tax on cable installation projects, which the Department of Taxation has traditionally treated as taxable.
This case illustrates that certain improvements once taxable as business fixtures may evolve into nontaxable real property improvements. In the 1990s, the Board held internet cable installations were taxable business fixtures because they were not common in every building and primarily benefited the specific business occupant instead of the realty. See Newcome Corp. v. Tracy (Dec. 11, 1998), BTA No. 97-M-320. Now, this type of high-speed computer cabling is so commonplace that any subsequent business occupying the property would use the installed cabling for their own benefit. Further, as certain technologies and installations become more common, past decisions involving business fixtures could be overturned in favor of classifying them as nontaxable real property improvements.
The issue in this case arose out of refund claims filed by Nationwide Insurance asserting that its installation of industry standard computer cabling constituted nontaxable real property improvements performed under a construction contract. The Tax Commissioner, relying upon Newcome, denied the refund concluding the cabling was a business fixture.
The Board noted that when Newcome was decided, the type of high-speed communication cable installations were tailored to the specific customers’ business, as the existing cabling was rarely used when systems were upgraded, and similar cabling was not found in every commercial building nor usable by other building occupants. However, times have changed and computer equipment has evolved significantly since Newcome was decided in 1998. In this case, the parties stipulated that if Nationwide abandoned the buildings where the cabling was installed, any business could use the cabling for its voice and internet communications. Although the Board noted there might be some specialized cable installations that constitute business fixtures, that was not the case here where only industry standard cabling was installed.
This ruling creates refund opportunities for taxpayers that paid or were assessed Ohio sales/use tax on computer cable installation projects. If you have questions about the tax treatment of your installation projects, or about real property improvements and business fixtures, do not hesitate to contact us.
Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reach at [email protected] or 330.258.6460.
Richard B. Fry III is a partner and Buckingham’s Taxation Practice Group Chair. He focuses on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. Rich can be reached at [email protected] or 330.258.6423
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