A colocation center’s separately-stated charges for access to underground fiber optic cable to connect customers’ equipment to Internet service providers, or to establish connections between customers within a colocation center, constitute charges for the rental of real property and are not subject to Texas sales and use tax.

In Private Letter Ruling No. 201709001L (September 7, 2017), the taxpayer operated a carrier-neutral colocation center. Customers leased space in the colocation center for their computer equipment, and contracted with the taxpayer for the provision of cross-connects. Cross-connects are established by connecting the customer’s computer equipment to underground fiber optic cables, which allows the customers to connect to an Internet service provider. Charges for cross-connects are separately stated on the taxpayer’s invoices.

The sale or lease of real property is not the sale of a taxable item in Texas, and is not subject to Texas sales and use tax. The Comptroller has held that the installation of fiber optic cable is an improvement to real property. See STAR No. 200308205L (August 12, 2003). Fiber optic cables located in underground conduits or in overhead trays within the colocation’s facilities are permanently affixed to real property. As a result, separately-stated cross-connect charges are charges for the rental of real property, and are not subject to Texas sales and use tax.

The Comptroller’s ruling is limited to cross-connect charges for fiber optic cables permanently incorporated into or affixed to real property.