In Ohio, Communications Lines Are Incorporated into Real Property

On October 22, 2019, the Ohio Board of Tax Appeals (Board) held that a taxpayer was entitled to a refund on sales tax paid on the installation of communications lines. In Nationwide Mutual Insurance Company v. McClean, the Board, departing from a prior decision, determined the installed communications cables were incorporated into real property. 

While renovating its headquarters, Nationwide Mutual Insurance Company (Nationwide) employed contractors to install communications lines to equip its office building for Voice over Internet Protocol (VoIP) and internet services. The contractors affixed the cables into the walls, under the floors and above the ceilings in the same manner as installing electric and telephone lines. 

Nationwide applied for a sales tax refund relating to the installation of the cables on the basis that it was an improvement to real property. The Ohio Department of Revenue (Department) denied the refund. Relying on the Board’s 1998 decision in Newcome Corp. v. Tracy (Newcome), the Department classified the communications cables as business fixtures instead of improvements to real property. Nationwide appealed to the Board. 

On appeal, Nationwide argued the lines were incorporated into the real property under a construction contract and thus not subject to sales tax. The Department contended the cables were business fixtures and the installation was subject to sales tax. 

In Newcome, the Board held that communications cables were business fixtures because the wiring benefited the specific business and not the building itself. The Board determined the communication cables weren’t common to buildings and therefore fell within the definition of business fixtures. After the Newcome decision, the commissioner issued an Information Release adopting the Board’s classification of computer cabling as a business fixture. 

In the present case, the Board determined the cabling wasn’t a business fixture but instead was incorporated into the real property. The Board stated that VoIP and internet lines are common to commercial property and any business relocating to that building would be able to use the communications lines. Therefore, because the communication cables benefited the property and not Nationwide’s specific needs, the cables were incorporated into real property and didn’t constitute as business fixtures. The Board emphasized that all installed industry-standard communications cabling is incorporated into real property; however, a specialized network of computer cabling benefiting a specific business could still be considered a business fixture depending on the facts. The Board ultimately agreed with Nationwide that the installation constituted a construction contract and reversed the Department’s final denial of the refund. 

It’s unclear whether the Department will appeal the Board’s decision. However, the decision suggests that taxpayers with similar facts may be entitled to refunds. The determination likely turns on whether the communications lines meet a business’s specific needs or benefit the property and its future occupants. For more information, reach out to your BKD Trusted Advisoror use the Contact Us form below. 

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