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AN 94(10.2)

Rulings Relating To Computer And Data Processing
Services Obsolete By Court Decision

PURPOSE: The purpose of this Announcement is to clarify AN 94(10.1), Rulings Relating to Computer and Data Processing Services Obsolete by Court Decision, which was issued on January 6, 1995, and to clarify AN 94(10) which was issued on August 11, 1994.

BACKGROUND: AN 94(10) identified certain 1989 rulings that were obsolete by Northeast Data com, Inc. v. City of Wallingford, 212 Conn. 639, 563 A.2d 688 (1989), to the extent that those rulings pertained to custom software. AN 94(10.1) clarified AN 94(10) by identifying Northeast Data com as a case involving property taxation, and by identifying rulings currently in force in which the Department's position that the sale of prewritten ("canned") software is subject to sales and use taxes is enunciated.

EFFECTIVE DATE: All changes announced in AN 94(10), AN 94(10.1) and this Announcement are effective August 15, 1989, the date Northeast Data com was released.

CLARIFICATION: AN 94(10.1) did not distinguish between the Department's position regarding the taxation of the fee for a mere license to use custom or customized software on the one hand, and the fee for a license to use canned software on the other. The Announcement also did not specify the effective date of the changes resulting from the Northeast Data com decision.

Commerce Clearing House, in the October 17, 1994 issue of State Tax Review, its weekly publication, reported that the Department had issued AN 94(10). The State Tax Review article also characterized Northeast Data com as holding "that computer software, both canned and customized, was not subject to tax because it was intangible property, rather than tangible personal property." Similarly to the Announcement, the State Tax Review article did not identify Northeast Data com as a property tax case or identify rulings currently in force that conclude that the sale of canned software is subject to sales and use taxes as the sale of tangible personal property and that the processes of creating custom software or modifying existing software ("customizing") are taxable as computer and data processing services.

Following publication of the State Tax Review article, many tax practitioners and taxpayers have inquired whether the sale of canned software remains subject to sales and use taxes. The purpose of this Announcement is to indicate, as explained in Ruling Nos. 93-1 and 94-3, that the sale of canned software has been and remains subject to sales and use taxes and the processes of creating, designing and developing custom software or of adapting existing software to the particular needs of a customer are taxable as computer and data processing services. As these rulings also indicate, the fee for a mere license to use custom or customized software is not taxable, provided that the fee for the license is stated separately from the charge for any taxable services. The fee for a license to use canned software remains taxable as the leasing or rental of tangible personal property.

EFFECT OF THIS DOCUMENT: An Announcement is a document that alerts taxpayers to important information. Such information may involve new Department administrative policies and procedures.

EFFECT ON OTHER DOCUMENTS: AN 94(10) and AN 94(10.1) are clarified.


FOR FURTHER INFORMATION: To order forms and publications or for further information, call the Department of Revenue Services at 860-297-5962 (Hartford area or out-of-state) or 1-800-382-9463 (in-state). Forms and publications may be ordered through voice-mail 24-hours a day by choosing Option 3 on your touch tone telephone.

Electronic Delivery Options: You can also obtain tax forms and publications 24-hours a day from our Website.

Telecommunications Device for the Deaf (TDD/TT) users only call 860-297-4911 during business hours.

AN 94(10.2)
Sales and use taxes
Issued: 3/24/95