The Kansas Court of Appeals has ruled that a telecommunications company is exempt from paying sales tax on electricity used to power HVAC units which maintain a constant temperature for its transmission and switching equipment. The company provides telecommunications services by operating transmission and switching equipment to produce a communication signal. If the equipment overheats, it stops transmitting signals. Excessive heat renders the equipment inoperable, resulting in a complete system failure in as little as two hours. To prevent transmission loss, the company installed dedicated HVAC units to maintain a constant temperature for the equipment. Kansas tax law provides an exemption for sales tax on electricity that is consumed in providing telecommunications services. The Kansas Department of Revenue (DOR) had previously approved a sales tax refund for sales tax the company paid on electricity to power the transmission equipment but denied the company’s sales tax refund request on electricity for the HVAC units. The DOR found that the HVAC units merely maintained the switching and transmission equipment and that the pertinent regulations distinguished maintenance functions from essential functions.
The DOR contended that the electricity powering the HVAC units is taxable since they are distinct and separate from the equipment creating the telecommunications signals. The Kansas Board of Tax Appeals disagreed with the DOR’s assessment, finding that the electricity powering the dedicated HVAC units was “essential and necessary” and “used in the actual process of and consumed” in the providing of telecommunications services. The Board of Tax Appeals determined that without the dedicated HVAC units, the company would not be able to continuously transmit telecommunications signals. The Court of Appeals ruled that although the HVAC units and transmission and switching equipment are different apparatuses, they form a system that makes the telecommunications services possible. The equipment depends on the HVAC units to produce an uninterrupted signal. Therefore, the electricity powering the HVAC units is “essential and necessary to” and “used in the actual process of” providing telecommunications services. Accordingly, the Court of Appeals affirmed the Board of Tax Appeals decision, ruling that the electricity to power the HVAC units is exempt from sales tax. (In the Matter of Southwestern Bell Telephone Co. LLC, case number 120167, Kansas Court of Appeals)