00-009

Response August 29, 2000

REQUEST LETTER

March 7, 2000

Subject: Letter Ruling Request

Dear Mr. Chapman:

We respectfully request written guidance from the Utah State Tax Commission (the "Commission") clarifying the tax implications off the facts outlined below.

I. Facts

Company X (hereinafter referred to as Athe Company@) owns or leases communication sites located in all fifty states. The Company does not provide communication services. Rather, the Company grants wireless communication companies (hereinafter referred to as the ACompany=s customers@)[1] the right to operate their communication systems at these sites in exchange for a monthly fee. These communication systems typically consist of ground based radio frequency transmission and reception equipment that is connected by coaxial cable to antennas mounted on either a communication tower or a building rooftop. Other than as specified below, the Company's customers maintain ownership of these Systems and are responsible for installing, removing, repairing, or maintaining all system equipment.

The configuration of a particular communication site can vary depending on whether the site is located on the ground (hereinafter referred to as a Atower site@) or on the top of a building (hereinafter referred to as a Arooftop site@). A communication tower[2] is located at each tower site. These towers are steel structures averaging 200‑250 feet in height (with some exceeding 400 feet in height). In constructing a typical tower, a concrete foundation (the 'pad") is poured, dried, and steel spikes or plates are embedded. The tower is then constructed on the pad from the ground up with the base bolted to the embedded steel spikes or plate. Where guy wires are necessary to secure the tower, a substantial amount of land may be required. An equipment building that is located next to the tower houses the transmission and reception equipment referenced above. These buildings are generally constructed of brick, concrete block, or wood/metal with siding and range in size from approximately 8' x 10' to 20' x 40'. They are also equipped with electric and telephone service and are climate controlled.

Where the site is a rooftop site,[3] the antennas are usually attached to a grid,[4] which is a steel structure that generally lies horizontally across, and has been bolted to, a building rooftop. The transmission and reception equipment is housed in either a fiberglass equipment building located on the rooftop or in a specified equipment room located inside the building.

A grid typically holds between twenty and thirty antennas. However, where there is insufficient antenna space on a grid, the Company's customers can still gain access to the site if the Company has a Master Antenna System in place. The Master Antenna System permits several communication providers to transmit and receive signals through use of a single "master" antenna. Under this system, a customer's transmission and reception equipment is connected by cables to a distribution hub that is also located in the shelter. The distribution hub, which is attached by cables to the master antenna, not only transmits signals that it receives, but also is able to sort incoming signals and relays them to the correct piece of equipment. Thus, with the Master Antenna System, a customer no longer needs to attach its own antennas to the grid; rather, these customers use the Company=s master antenna. [5]

The Company typically owns the communications towers and the grids located at the sites. However, the Company leases the underlying realty at over half of the tower sites. In addition, the Company has entered into leasing arrangements with owners of the buildings where the rooftop sits are located.[6] Some of these tower site and rooftop site leases are long‑term arrangements, but most have 10‑15 year terms, with options for the Company to renew for one or two additional terms. Other leases permit the Company to enter into month‑to‑month or year‑to‑year arrangements once the initial term expires. Although the leases generally provide that the lessee may remove its property and equipment from the site at the end of the lease term, for the following reasons, it is the Company's intention that the towers will remain indefinitely:

- It would take approximately one week to dismantle a tower site at a cost of almost $30,000, while it would take the Company almost two weeks at a cost of $20,000 to dismantle a rooftop site. In the event that a tower site or a rooftop site would ever be dismantled,[7] the Company would not rebuild or construct a new site using the same grids or tower beams because of concerns about the structural integrity of these materials after they were removed from their original location. Rather, these materials would be scrapped.

‑ To construct a new tower site, it would take between one and two months and cost between $150,000 and $225,000. To construct a new rooftop site, it would take one month and cost between $40,000 and $50,000.

‑ The Federal Communications Commission ("FCC") generally licenses transmitters only for a specific location. Thus, in order to remove a tower or grid and construct anew one elsewhere (even one located close by), each transmitter located at that site may need to be relicensed by the FCC. The FCC does not provide expedited approval for relicensing transmitters that must be moved merely because the site has been relocated; thus, the process of obtaining a license for anew site would take three months to three years to complete. Additionally, for certain tower sites, the approval of the Federal Aviation Administration may be required.

‑ Each Company customer develops a network plan whereby communication equipment is strategically placed at sites in order to provide adequate signal coverage throughout a specific geographic area. Removal of this equipment from a site would not only be costly, but could require the revision of the network plan to avoid gaps in signal coverage.

‑ It is now extremely difficult to obtain zoning approval to construct a site in most communities in the United States. The process can take from six months to two years. In many communities, new sites can no longer be built; however, existing locations are generally grandfathered.

II. Questions Presented

A. Part One: For Utah sales tax purposes, are the Company's communication towers (as described on page 2 in footnote 2) and equipment buildings located at the tower sites considered real property or tangible personal property when these assets are affixed to real estate: (a) that the Company owns; or (b) that the Company leases?

Part Two: For Utah sales tax purposes, are the grids and the equipment buildings located on the building rooftops considered real property or tangible personal property when: (a) the Company owns these assets and affixes them to building rooftops that it leases from building owners; or (b) the building owners own these assets and affix them to their own rooftops?

B. If the assets described in Part One or Part Two of Question A are considered tangible personal property under (a) or (b) of either part, will ongoing, monthly payments received from the Company's customers (as described on page 1 in footnote 1) for the right to attach their antennas to the towers or grids and place their equipment in the equipment buildings be subject to the sales tax? Will the answers change if the customer's equipment that is located in an equipment building is attached to the Company's Master Antenna System rather than to its own antenna?

III. Rulings Requested

A. The assets described in Part One and Part Two of Question A are considered real property when these assets: (1) are affixed to real estate regardless of whether the Company owns or leases the underlying realty; and (2) are affixed to building rooftops regardless of whether these assets are owned or affixed to the rooftop by the Company or the building owner.

B. If the assets described in Part One or Part Two of Question A are considered tangible personal property under (a) or (b) of either part, the ongoing, monthly payments received from the Company's customers (as described on page 1 in footnote 1) for the right to attach their antennas to the towers and/or grids and place the equipment in the equipment buildings are not subject to sales tax. This conclusion will not change if the customer's equipment that is located in an equipment building is attached to the Company's Master Antenna System rather than to its own antenna.

IV. Analysis

A. The assets described in Part One and Part Two of Question A are considered real properly when these assets: (1) are affixed to real estate regardless of whether the Company owns or leases the underlying realty; and (2) are affixed to building rooftops regardless of whether these assets are owned or affixed to the rooftop by the Company or the building owner.

Utah imposes sales tax on retail sales of tangible personal properly made within the state. Utah Code Ann. ' 59‑12‑103(1). "Tangible personal property" includes all tangible and corporeal things and substances that are dealt in or capable of being possessed or exchanged. See id. However, real estate, or any interest or improvements in real estate do not fall within the definition of this term. Utah Code Arm. ' 59‑12‑102(27). For sales tax purposes, the Utah Supreme Court has defined "improvements" as "real estate and includes all buildings, structures, fixtures, fences and improvements erected upon or affixed to land, whether title has been acquired to the land or not." Great Salt Lake Minerals & Chems. Corp. v. State Tax Comm'n, 573 P.2d 337, 339 (Utah 1977) (citing Utah Code Ann. ' 59‑3‑1(3) (1953)). In a later sales tax case, the Utah Supreme Court, noting the fact sensitivity of distinguishing tangible personal property from real property, held that steel storage tanks, not readily removable, nor intended to be removed, were real property once they were attached to the realty. See Chicago Bridge & Iron Co. v. State Tax Comm'n, 839 P.2d 303, 307 (Utah 1992). In a third case, the Utah Court of Appeals, affirming the Utah State Tax Commission's ruling, agreed that modular homes could only be classified as real property once Athey were combined with other units by nailing and bolting, connecting plumbing and wiring, seaming and finishing walls, and were secured to the foundation." See Valgardson Housing Sys. v. State Tax Comm'n, 849 P.2d 618 (Utah Ct. of Appeals 1993). Thus, tangible personal property can only be characterized as an improvement to real estate once affixed to realty. See id.

Personal property becomes affixed to the realty when it is annexed or attached to real property in such a way that it becomes indistinguishable from the underlying realty. The communication towers located at the tower sites are generally large steel structures averaging 200‑250 feet in height. In constructing a typical tower, a concrete foundation (the "pad") is poured, dried, and steel spikes or plates are embedded. The tower is then constructed on the pad from the ground up with the base bolted to the embedded steel spikes or plate. The equipment building that is located next to the tower at these sites is generally constructed of brick, concrete block, or wood/metal with siding and is constructed on site. At the rooftop sites, the grids are steel structures that lie horizontally across, and have been bolted to, building rooftops. The equipment shelters (if located on the rooftop rather than inside the building) are also securely bolted to the rooftop. Thus, all of these assets are sufficiently attached so that they have become indistinguishable from the underlying realty.

Removal of the assets would significantly damage the underlying estate. Unbolting the lower beams of the tower would cause substantial damage to the concrete foundations (which have clearly become part of the premises) on which the towers stand. Additionally, the rooftop grids are bolted to the rooftops in such a way that to remove them without restoring the roof to its original condition would likely render the rooftop unsuitable for any other purpose (other than, of course, to cover the building). Furthermore, in the event that a tower site or a rooftop site would ever be dismantled, the Company would not rebuild or construct a new site using the same grids or tower beams because of concerns about the structural integrity of these materials after they were removed from their original location. Rather, these materials would be scrapped. Consequently, no one, whether it be the Company, the Company's customers, or the lessors of the land or buildings expects that a communication site will be dismantled and relocated. Even on the leased sites where certain provisions in the leases permit the Company to remove the towers, grids, and equipment buildings at the end of the lease term, there are powerful incentives for the Company to continue to renew these leases or to purchase these properties so that the removal of these assets are seldom, if ever, necessary:

‑ It would take approximately one week to dismantle a tower site at a cost of almost $30,000, while it would take the Company almost two weeks at a cost of $20,000 to dismantle a rooftop site.

‑ The Federal Communications Commission ("FCC") generally licenses transmitters only for a specific location. Thus, in order to remove a tower or grid and construct a new one elsewhere (even one located close by), each transmitter located at that site may need to be relicensed by the FCC. The FCC does not provide expedited approval for relicensing transmitters that must be moved merely because the site has been relocated; thus, the process of obtaining a license for a new site would take three months to three years to complete. Additionally, for certain tower sites, the approval of the Federal Aviation Administration may be required.

As a result of these constraints, it is not economically plausible or practical to relocate existing communication sites. Consequently, the towers, grids, and equipment buildings annexed to real property that is leased should be classified as improvements to realty regardless of whether they are attached to real property that the Company owns or leases. Such result makes sense. As wireless communications providers are turning more and more to third parties for their communication site needs, the tower management industry has grown rapidly and is quickly becoming a national, competitive market. Having the taxation of the arrangements with the Company's customers depend on whether the tower or a grid is attached to realty (whether land or a building rooftop) that is owned or leased will introduce substantial distortions and inequities into this market as wireless providers will seek out companies who have purchased, rather than leased, the underlying real estate. Drawing such distinction would place certain companies at a significant disadvantage as customers would select communication sites based upon favorable tax results, and would violate one of the cardinal principles of tax policy, i.e. tax neutrality. Uniform classification of the towers, grids, and equipment building as fixtures is sound tax policy and is wholly justified by the fact that, In reality, these assets are almost never removed.

B. If the assets described in Part One or Part Two of Question A are considered tangible personal property, the ongoing, monthly payments received from the Company's customers (as described on page 1 in footnote I) for the right to attach their antennas to the towers and/or grids and place the equipment in the equipment buildings are not subject to the Utah sales tax. This conclusion will not change if the customer's equipment that is located in an equipment building is attached to the Company's Master Antenna System rather than to its own antenna.

Utah imposes a tax on the amount paid or charged for "leases and rentals of tangible personal property." Utah Code Ann. ' 59‑12‑103(l)(k). The legal attributes of a "lease@ are well established. "Lease" is defined as "a transfer of the right to possession and use of goods for a term in return for consideration." Utah Code Ann. ' 70A‑2a‑103(j). The requirement that there must be a Atransfer of the right to possession and use" of the property for a transaction to constitute a lease clearly applies for sales tax purposes. Tax Commission Advisory Opinion 96‑010DJ. In Snarr Advertising Inc. v. Utah State Tax Commission, the Utah Supreme Court stated: "We think the Legislature meant to tax those pieces of personal property the possession or use of which was given over to the lessee." See Snarr Advertising Inc. v. Utah State Tax Commission, 432 P.2d 882 (1967). Likewise, U.A.C. R865‑19S‑32(A) states that the sales tax applies "[w]hen a lessee has the right to possession, operation, or use of tangible personal property." Utah Admin. Code R865‑19S‑32(A). In Snarr, rental payments received under a long‑term lease of an advertising billboard were not subject to sales tax, since possession of the tangible property involved (the billboard) is not transferred to the lessee. In exchange for a monthly fee, the Company's customers are permitted to attach their antennas to the towers and/or grids and place the equipment in the equipment buildings that are located at each site. Such arrangement is not the lease of tangible personal property because the Company is not transferring anything tangible to its customer. Rather, the Company is merely granting its customer an intangible right to attach their equipment, not the right to continuous possession; a transaction that is not subject to the Utah sales tax. This conclusion will not change if the customer's equipment that is located in an equipment building is attached to the Company's Master Antenna System rather than to its own antenna.

If the Commission intends to render an unfavorable opinion, we respectfully request a conference to discuss the issues in more detail. Thank you in advance for your consideration of this request. If you would like to discuss this matter further or if you require any additional information, please call me at #####.

RESPONSE LETTER

August 29, 2000

RE: Advisory Opinion Request on Leasing Communication Towers, Grids, and Antennas

Dear NAME,

You have asked the Commission to issue an advisory opinion on whether certain communication towers, grids, equipment building, and antennas that the ACompany@ leases to other companies are considered part of the realty or remain personal property after installation. Should these items become part of the realty, the lease payments on these structures would not be subject to the Utah sales tax because the lease of real property is a nontaxable transaction. However, should the structures remain personal property after their installation, you propose that leasing them is still a nontaxable transaction because the lessees would not obtain Acontrol@ over the personal property. We will first address the issue of whether the structures are real or personal property after installation. Next, for those structures that are personal property, we address whether the personal property leases are taxable.

I. Real Property or Personal Property

A. Tower Sites. The Commission has previously found that cellular phone towers affixed to concrete pads are considered real property upon their attachment to the realty. Utah State Tax Commission Advisory Opinion 99-018. We have also determined that other similar structures, such as power transmission towers and telephone poles, are considered real property after their installation for sales tax purposes. Accordingly, the various towers you describe in footnote 2 of your letter, when attached to the realty in the manner you describe, are considered to be part of the realty for sales tax purposes.

The equipment buildings located at the tower sites are described as generally constructed of brick, concrete block, or wood/metal with siding, ranging in size from approximately 8' x 10' to 20' x 40'. They are equipped with electric and telephone service and are climate controlled. Though not described as to how they are attached to the realty, they are characterized as being sufficiently attached to have become indistinguishable from the underlying realty. Because of the construction materials, it is likely the buildings may be sufficiently attached to be considered part of the realty. If the buildings are attached in a manner similar to that by which the towers and the grids are attached, we would consider them part of the realty after their installation. If not, our response might be different, depending upon the actual installation process.

B. Rooftop Sites. The grids placed on rooftop sites are steel structures lying horizontally across and bolted to a building=s rooftop. You state that the grids could not be used again if they are removed. It follows that the grids are sufficiently attached to the underlying real property so that, for sales tax purposes, they become part of the realty upon their installation.

Equipment shelters located on the rooftop sites are made of fiberglass. From this description, we assume that the buildings are precast structures that can easily be moved from site to site. While you do not mention whether these buildings may be used at successive sites, you do point out that they are securely bolted to the rooftop. You also indicate that they are sufficiently attached so that they have become indistinguishable from the underlying realty. We will assume for purposes of this opinion that you are correct. If so, we would consider the buildings part of the realty after their installation. Should the facts indicate otherwise, our response may be different, depending upon the nature of the structures and the method of their attachment.

C. Master Antenna Systems. You also mention that the Company may provide a Master Antenna System for its customers to use, permitting several communication providers to transmit and receive signals through use of a single Amaster antenna.@ Under this system, a customer's transmission and reception equipment is connected by cables to a Adistribution hub@ located in an equipment shelter. The distribution hub receives incoming signals from the master antenna, then sorts and transmits them to the correct piece of equipment. It appears, then, that the Company=s lease to its customers would include both the master antenna and whatever equipment comprises the distribution hub.

You do not describe how the master antenna is attached to the site, nor do you describe the distribution hub or how it is attached. If the master antenna is attached in a manner similar to the antennas located at the tower sites, we would consider it part of the realty. If not, our conclusion may be different.

As to the distribution hub, we can only assume by the description of the cable connections that the hub consists of equipment that retains its personal property characteristics after its connection to the other equipment. Of course, should the facts be different, so may our response.

It appears then that the Company=s lease of sites to customers would include use of both the master antenna and equipment comprising the distribution hub. As the customer has no exclusive use to any part of the property, the customer is not considered to have leased property for purposes of Utah=s sales and use tax.

II: Lease of Personal Property Where Lessee has no Access to that Property

Some of the property discussed above may remain personal property even after its installation. Although leases of tangible personal property are usually subject to taxation in Utah under Utah Code Ann. '59-12-103(1)(k), you assert that leases involving the specific personal property at issue are not taxable because the lessees will not take possession or control of the personal property. Under such circumstances, you contend that Utah sales tax may not be imposed.

Section 59-12-103(1)(k) imposes a sales tax on Aleases and rentals of tangible personal property if the property situs is in this state, if the lessee took possession in this state, or if the property is stored, used, or otherwise consumed in this state[.]@ Furthermore, Utah Code Ann. '59-12-102(24) defines, for sales tax purposes, a Asale@ to include Aany transaction under which right to possession, operation, or use of any article of tangible personal property is granted under a lease or contract and the transfer of possession would be taxable if an outright sale were made.@

The Utah Supreme Court addressed whether the lease of an outdoor advertising billboard was subject to taxation in Snarr Advertising, Inc. v. Utah State Tax Commission, 20 Utah 2d 55, 58, 432 P.2d 882, 885 (1967). In that case, the lessee neither owned the property where the billboard was located nor had the right to access the billboard. Under these circumstances, the Court concluded that A[w]e think the Legislature meant to tax those pieces of personal property the possession or use of which was given over to the lessee@ and found the lease of the billboard not to be subject to taxation.

From your description of the leases into which the Company will enter, we assume that the lessee will neither own the property where the leased personal property is located nor have the ability or right to access or control the personal property that is leased. Should this be the case, the Company=s lease of tangible personal property will not be subject to Utah sales tax. If the circumstances be different, however, our answer may also be different.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

[1] The Company=s customers included those that provide the following services: cellular telephone, paging, electronic data transmission, PCS/digital telephone transmission, short-wave and two way radio transmission, marine radio transmission, VHF and UHF television broadcasting, an FM radio broadcasting.

[2] The Company owns a variety of tower types that differ in construction, cost, height and structure. These tower types include monopole towers, guyed wire towers, self‑supporting towers, and wooden poles. Monopole towers are approximately 120 feet in height and are attached to a concrete foundation by a ring of bolts bolted to a circular steel base plate. Guyed wire towers are approximately 330 feet in height and are usually pinned to a steel base plate bolted to a concrete foundation. These towers are further anchored to the ground through the use of steel guy wires that run from the tower to concrete buckles that are located around the towers base. Self‑supporting towers are approximately 250 feet in height and the steel legs are bolted to a concrete foundation. Wooden poles are approximately 60 feet in height and are embedded in either soil or concrete.

[3] A rooftop site can also be located on top of a water tower.

[4] At certain rooftop sites, the antennas are attached to the side of the building rather than on a grid.

[5] The Master Antenna System is not restricted to the Company=s rooftop sites. The system is also used at certain tower sites.

[6] At certain rooftop sits, the building owner has attached the grid to its own rooftop. In these instances, the Company has leased the building rooftop and the grid.

[7] To date, the Company has only dismantled a few tower sites. The Company has never dismantled a rooftop site.