Sales and Use Taxes
Computer and Data Processing Services
An out-of-state company (hereinafter referred to as "the Company") offers two auto parts locater services to Connecticut customers. The first service permits insurance companies and salvage yards to access the Company's mainframe computer via personal computers and a modem link. The insurance companies and salvage yards enter auto parts requests or responses on their personal computers. The requests or responses are retrieved from the Company's mainframe and viewed by other customers of the Company on their personal computers, and replies are entered into the Company's mainframe through their personal computers. The Company does not sell the auto parts, but only acts as a link between the insurance companies and the salvage yards. In addition, the Company leases computer equipment if it is needed by a customer. The Company bills the insurance companies and the salvage yards on a monthly basis for a fixed access fee and a rental fee, if applicable.
The Company's second service allows Connecticut insurance companies to use an "800" telephone line to make verbal requests to Company representatives for auto parts. Company representatives both enter the requests onto the Company's mainframe computer and contact salvage yards over the telephone to locate the parts requested. The representatives then enter the replies onto the mainframe. The customers telephone via an "800" telephone line to retrieve the responses through a voice synthesized unit. The synthesized voice requests information from the caller, who enters the responses on the telephone keypad. The unit retrieves the information from the Company's computer and gives the response via the voice synthesizer. The Company charges a per-request fee for this service.
Whether the Company's auto parts locator services are computer and data processing services subject to sales and use taxes under Conn. Gen. Stat. § 12-407(2)(i)(A).
Conn. Gen. Stat. § 12-407(2)(i)(A) defines "sale" and "selling" as including computer and data processing services. Conn. Agencies Regs. § 12-426-27(b)(1) defines such services as including, among others, "providing computer time, storing and filing information, and retrieving or providing access to information." The Connecticut Supreme Court has stated that "legislative ratification of a ... regulation supports the position that the regulation is consistent with the general statutory scheme that the regulation was designed to implement." Texaco Refining & Marketing Co. v. Commissioner of Revenue Services, 202 Conn. 583, 600, 522 A.2d 771 (1987).
In analyzing whether the Company's services are taxable computer and data processing services, a determination must be made as to whether the true object of the contract is computer and data processing services. Hartford Parkview Hilton Associates Limited Partnership v. Groppo, 211 Conn. 246, 558 A.2d 993 (1989); see also Ruling No. 91-11. In determining whether the "true object" standard articulated in Hartford Parkview has been met with respect to computer and data processing services, it is not enough that computer equipment is employed by the Company in transmitting, and by the subscribers in receiving, the information. Id. at 250. Instead, the use of the computer must be found to be essential to the provision of the services, and not "merely incidental" to it. Id., at 253.
The Company provides its customers with a medium by which they can locate sellers and purchasers of auto parts, as the case may be, with a minimum of time and effort. The Company is not itself the gatherer of information about the location of auto parts, but instead acts as a link for its customers to acquire such information themselves by using the medium provided by the Company. This medium consists of a continually-updated database maintained by the Company to which its customers are granted immediate access by making on-line inquiries. In Ruling No. 91-11, the service provider requested driving records from the Department of Motor Vehicles ("DMV") on behalf of the service provider's customers. The requests were transmitted to the DMV on magnetic tape on a daily basis, and the responses were received by the service provider on magnetic tape on the next day. The service provider would then either electronically transmit the records to its customers' computers or mail the records in hard copy to its customers. The Department's conclusion in Ruling No. 91-11 was that the use of a computer by the service provider, while helpful, was not essential to the provision of the service of providing driving records to its customers. See also Ruling No. 93-6.
In the instant case, unlike the facts in Ruling No. 91-11, the Company provides its customers with immediate access to a continually updated database, both to receive up-to-the-minute information and to input the customers' own requests. In the absence of the Company's auto parts locater service, its customers would have to rely on direct telephone contact around the state (or even outside Connecticut) in order to locate auto parts. The true object of the subscribers in contracting with the Company is to gain the convenience and accuracy possible only through immediate access to a database maintained by the Company, which, rather than being "merely incidental" to the services, is the very reason the subscribers choose to avail themselves of the Company's services. Such services constitute taxable computer and data processing services when provided to Connecticut customers. See Ruling No. 93-8.
The fact that some of the Company's customers contact it over the telephone instead of by personal computer does not change the nature of the services being rendered to such customers. Whether the customers access the Company's mainframe through their own computers, or access the mainframe indirectly through a representative or a voice synthesizer unit, the services being offered by the Company and accepted by the customer are computer and data processing services.
In Connecticut, computer and data processing services are deemed taxable at the location where they are delivered or intended for use. See Ruling No. 93-8. An out-of-state service provider engaged in business in this state is required to register to collect and remit use tax to Connecticut on behalf of its customers who receive and use services in Connecticut. Conn. Gen. Stat. § § 12-411(3) and (8). "Engaged in business" is defined in Conn. Gen. Stat. § 12-407(15)(c) to include "rendering in this state any service described in any of the subdivisions of [§ 12-407(2)] ...." Therefore, with respect to any of the Company's subscribers who are located in Connecticut, the Company is "engaged in business" here, as that term is used in the Sales and Use Taxes Act. Furthermore, the presence of the leased computer equipment in Connecticut on an ongoing basis establishes the Company's presence in this state, as required by National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, 18 L. Ed. 2d 505 (1967), for purposes of requiring the Company to collect and remit use tax on sales to its Connecticut customers. This physical presence "nexus" requirement has been acknowledged and adhered to by the Supreme Court of this state in Cally Curtis Company v. Groppo, 214 Conn. 292, 572 A.2d 302, cert. denied, 112 L. Ed. 2d 50 (1990) and SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220, 585 A.2d 666, cert. denied, 115 L. Ed. 2d 1008 (1991), and recently affirmed by the United States Supreme Court in Quill Corporation v. North Dakota, 504 U.S. , 119 L. Ed. 2d 91 (1992).
The Company's services, whether accessed directly through a computer or over a telephone, constitute taxable computer and data processing services under Conn. Gen. Stat. § 12-407(2)(i)(A). The Company must collect and remit Connecticut use tax on the sale of such services and the rental of computer equipment to customers located within Connecticut.
May 25, 1993