In Nationwide Mutual Insurance Company v. McClean (Nationwide),¹ the Ohio Board of Tax Appeals (BTA) held that the taxpayer is entitled to refunds of sales/use tax paid on its purchases of communications lines that were incorporated into real estate.

The Nationwide decision departs from a BTA decision issued in 1998 and suggests that taxpayers may be entitled to refunds on purchases of communication lines depending on their facts and circumstances.

Background

The taxpayer, an insurance company, undertook a rehabilitation of its corporate headquarters and engaged construction contractors to install communication lines. These communications lines were standard CAT-5 or CAT-6 cabling and were installed underneath floors, above ceilings, and in the walls of the buildings in the same manner as telephone and electric lines. The taxpayer applied for a refund of the sales/use tax paid on the cabling and its installation labor, claiming that the installation constituted an improvement to real property generally exempt from Ohio sales tax. The Ohio Department of Taxation (Department) denied the taxpayer's claim on the ground that the cabling constituted tangible personal property under the BTA's decision in Newcome Corp. v. Tracy (Newcome).²

Under Ohio law, when an item of tangible personal property is incorporated into real property under a construction contract, the contractor is the consumer of the tangible personal property and is responsible for the tax on its purchase.³ Real property is defined to include land, buildings, structures, improvements, and fixtures on the land.⁴ However, Ohio Rev. Code  Section 5701.03(B) excludes business fixtures from the definition of real property. A "business fixture" is defined in this provision as an item of tangible personal property that has become permanently attached or affixed to real property and that primarily benefits the business conducted by the occupant on the premises. A business fixture does not include fixtures common to buildings, including " … electrical and communication lines, and other fixtures that primarily benefit the realty and not the business conducted by the occupant on the premises."

Further, under Ohio law, a contractor installing a business fixture is considered a vendor of tangible personal property and must collect sales/use tax on the business fixture, including its installation labor.⁵ In the 1998 Newcome decision, the BTA concluded that communications cabling was a business fixture because it primarily benefitted the business occupant and was not a fixture common to buildings. The BTA observed, at that time, that the cabling was designed to meet the technical requirements of the individual business consumer and would not be found in every building or be usable by other building occupants. In response to Newcome and other cases, such as Funtime, Inc. v. Wilkins,⁶ the Department adopted an expansive application of the "business fixture" rule when auditing taxpayers.

BTA departs from its prior ruling

In Nationwide, the BTA concluded that the cabling at issue did not constitute a business fixture. Important to this conclusion are the BTA's findings that any business relocating into the building could use the lines for its communication needs and the lines were not designed to meet the taxpayer's specific requirements. According to the BTA, such lines are as "common to commercial property as telephone lines and coaxial cables were in the past." The BTA concluded that the installation of the lines constituted a construction contract and not a retail sale of tangible personal property, so the taxpayer is entitled to a refund of the sales/use tax paid.

Implications

It is unknown whether the Department will appeal this BTA decision. The decision suggests that taxpayers may be entitled to refunds of tax paid, or assessed, on similar purchases. The decision indicates that the taxability determination will turn on whether the communication lines are part of a specialized network designed to meet the requirements of a specific business consumer or could be used by subsequent occupants of the realty. Taxpayers with similar facts should consider filing protective refund claims within the four-year statute of limitations on refunds.

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ENDNOTES

¹ Nationwide Mutual Insurance Company v. McClain¸ BTA Case Nos. 2018-313, 2018-315, 2018-316, 2018-318, 2018-318 (Ohio Bd. Tax App. Oct. 22, 2019).

² Newcome Corp. v. Tracy, BTA No. 97-M-320 (Ohio Bd. Tax App. Dec. 11, 1998) (unreported).

³ Ohio Rev. Code § 5739.01(B)(5).

⁴ Ohio Rev. Code § 5701.02(A).

⁵ Ohio Rev. Code § 5739.01(B)(3)(b).

⁶ Funtime, Inc. v. Wilkins, 105 Ohio St.3d 74, 2004-Ohio-6890.