Ruling 2008-1, Utility Exemption - Manufacturing

A nationwide provider of wireless telecommunications services (“company”) maintains a number of cell sites in Connecticut and uses electricity to transmit a signal from those cell sites.

ISSUE:

Whether the sale of electricity used to provide wireless telecommunications services is exempt under Conn. Gen. Stat. §12-412(3)(A).

RULING:

The sale of electricity used to provide wireless telecommunications services is not exempt under Conn. Gen. Stat. §12-412(3)(A)

DISCUSSION:

A nationwide provider of wireless telecommunications services, citing Conn. Gen. Stat. §12-412(3)(A), contends that providing wireless telecommunications services should be considered the manufacture of a product for the purposes of sale for resale. Conn. Gen. Stat. §12-412(3)(A) provides that the sale, furnishing or service of electricity when delivered to consumers through lines for use directly in fabrication of a finished product to be sold or in an industrial manufacturing plant is exempt.  In order for the exemption to apply to the sales of electricity to the company, the company would have to be using the electricity directly in the fabrication of a finished product to be sold or the company would have to be using the electricity directly in an industrial manufacturing plant.

Tax exemptions are construed strictly against the taxpayer and any ambiguity in the language of the exemption is resolved in favor of the commissioner. Oxford Tire Supply, Inc. v. Commissioner of Revenue Services, 253 Conn. 683, 699, 755 A.2d 850 (2000).

“In seeking to discern [legislative] intent, we look to the words of the statute itself, to the legislative history and circumstances surrounding its enactment, to the legislative policy it was designed to implement, and to its relationship to existing legislation.” Petco Insulation Co., Inc.  v. Crystal, 231 Conn. 315, 321, 649 A.2d 790 (1994). “It is settled that statutes must be construed consistently with other relevant statutes because the legislature is presumed to have created a coherent body of law.” Id., at 323-324.

1989 Conn. Pub. Acts 251, §§12 and 14 added the references to “fabrication of a finished product to be sold” and “industrial manufacturing plant” to both Conn. Gen. Stat. §12-412(3)(A) and (16). These terms were already familiar to the General Assembly because they are also used in Conn. Gen. Stat. §12-412(18). In the same Public Act, the General Assembly imposed sales and use taxes on the provision of telecommunications services. Conn. Gen. Stat. §12-407(a)(2) distinguishes between sales or leases of tangible personal property and sales of services. Petco Insulation, 231 Conn. at 321-322. Similarly, Conn. Gen. Stat. §12-412 distinguishes between exempt sales or leases of tangible personal property and exempt sales of services. “[W]hen the legislature intended to exempt tangible personal property, services or both, it clearly provided for that specific exemption. We assume the legislature recognized and intended the distinctions it incorporated in the provisions of §§12-407(2) and 12-412.” Petco Insulation, 231 Conn. at 325. Because the sale of telecommunications services is subject to sales and use taxes as a sale of services, telecommunications services cannot be a “finished product” that is the end result of “fabrication” as those terms are used in Conn. Gen. Stat. §12-412(3)(A). Therefore, the sale of electricity used to provide wireless telecommunications services is not exempt under Conn. Gen. Stat. §12-412(3)(A). 

Other states have made the same distinction and concluded that rendering telecommunications service is not the production of tangible personal property.  The Appellate Division of the New York Supreme Court has upheld that the New York statutory distinction between tangible personal property and telecommunications services in concluding that an exemption for electricity used or consumed directly and exclusively in the production of tangible personal property did not apply to electricity used and consumed in producing telecommunications service; In the Matter of XO New York, Inc. v. Commissioner of Taxation and Finance, 856 N.Y.S.2d 310 (2008). The Court of Appeals of Tennessee has also upheld a statutory distinction between telecommunications services and tangible personal property in concluding that equipment used to fabricate and process telecommunications signals did not qualify for an exemption for industrial machinery; AT&T Corp. v. Chumley, 190 S.W.3d 652 (Tenn. App. 2005). The Kansas Board of Tax Appeals held that, because telecommunications are defined by law as a service, machinery and equipment used to “engineer a telecommunications product” or to control or measure the telecommunications process did not qualify for exemption as being used in the manufacture of tangible personal property; In the Matter of the Appeal of Sprint Communications Company, L.P. from an Order of the Division of Taxation for a Refund of Sales and Use Tax, 278 Kan. 690, 101 P.3d 1239 (2004). The Texas Comptroller of Public Accounts has ruled that an exemption for tangible personal property used or consumed in manufacturing, processing or fabricating tangible personal property for sale applied only to the production of tangible personal property and not to intangible products or services, and thus the exemption was not available for network equipment used by a telecommunications provider to provide voice telecommunications and information processing and transmission; Texas Comptrollers Decision No. 43,999 (03/26/2004).

In the same Public Act, the generation of electricity was manufacturing for purposes of this subsection, for a consideration on or income-producing real property to machinery and production equipment at an industrial plant under Conn. Agencies Regs. §12-426-26 (repealed effective July 1, 1991 when it was superseded by Conn. Agencies Regs. §12-407(2)(i)(I)-1). The court concluded that, “[w]hile the generation of electricity may in some sense be a ‘manufacturing’ process, we conclude that the legislature did not intend to exempt businesses engaged in the generation of electricity for public consumption from the tax on services rendered to machinery and production equipment . . . .” United Illuminating, 220 Conn. at 755. Given that an electric generating plant is neither a place where finished products are fabricated nor an industrial manufacturing plant, a wireless telecommunications cell site, for much the same reason, is neither a place where finished products are fabricated nor an industrial manufacturing plant.

Conn. Gen. Stat. §12-412(112) provides an exemption for sales of equipment to a telecommunications company or community antenna television company, as defined under Conn. Gen. Stat. §16-1, that is used to provide telecommunications, high-speed data transmission or broad-band Internet services which offer the capability to transmit information at a rate that is not less than two hundred kilobits per second in at least one direction.  The company’s argument to the contrary notwithstanding, this exemption does not extend to sales of electricity used to power such equipment.

LEGAL DIVISION

December 15, 2008