A California appeals court recently held that a taxpayer’s purchased goods did not qualify for an exclusion from the definition of tangible personal property subject to sales and use tax. The exclusion at issue applied to "telephone and telegraph lines, electrical transmission and distribution lines, and the poles, towers, or conduit by which they are supported or in which they are contained." The taxpayer at issue, a large telecommunications company, purchased telephone cables, conduit, and telephone poles for use in its business. None of the items purchased required further assembly or construction. The taxpayer used the purchased conduit and telephone poles to install the purchased telephone cables for use in its telecommunications network. The taxpayer requested a refund of the use taxes paid on the items on the basis that they were not taxable tangible personal property. After the California Department of Tax and Fee Administration (CDTFA) and a trial court denied the refund, the taxpayer appealed.
The appeals court noted at the outset that it had to determine the meaning of the term "lines" in the statutory provision excluding "telephone and telegraph lines" from sales and use tax. The taxpayer, among other things, argued that the term "lines" was synonymous with "cables" and, as a result, a "line" (i.e., cable) existed regardless of whether that line has been installed into an integrated system. The CDTFA, on the other hand, argued that a "line" denoted a complete telephone or telegraph system and that the exclusion did not apply to the pre-installation component parts of any such system. Under a dictionary in publication in 1965 (the date the exclusion statute was enacted), "line" was defined as a "wire or pair of wires connecting one telegraph or telephone station with another, or the whole of a system of such wires. In the court’s view, this definition “made clear” that a comprehensive and completed system must be in place for a telephone or telegraph line to exist. A wire or pair of wires could not connect multiple telephone or telegraph stations unless the system was already installed. Nor could "a system of such wires" exist prior to installation. Although the taxpayer proffered an alternative definition of a line from a 1964 dictionary edition (defining a “line” as a cable or wire), the court concluded this definition was silent on the critical question of whether the cable or wire must be installed. The court further observed that its construction of the term “line” as constituting a completed installed system was consistent with other court decisions. Please contact Gina Rodriquez at 916-551-3132 with questions on MCI Communications Services, Inc. v. California Department of Tax and Fee Administration.