Taxpayers' Information Service
AUTOMATIC DATA PROCESSING SERVICES AND EQUIPMENT
This Bulletin is superseded in part by PS 92(2.1)
(a) IN GENERAL
"Automatic data processing services" are those rendered in performing all or part of a series of data processing operations through an interacting assembly of procedures, processes, methods, personnel, and automatic data processing equipment.
Automatic data processing services may be provided by manufacturers of data processing equipment, data processing centers, systems designers, consultants, software companies, etc. In addition, there are banks and other businesses which own or lease automatic data processing equipment and use it primarily for their own purposes but occasionally provide services to others. Businesses rendering automatic data processing services will be referred to herein as "service bureaus".
(b) DEFINITIONS OF TERMS
Application - The specific job performance by an automatic data processing installation is referred to as an application. For example, data processing for a payroll may be referred to as a payroll application.
Automatic Data Processing Equipment - The term includes computers and their peripheral equipment as well as punched card tabulating machines. It does not include tape-controlled automatic drilling, milling or other machinery or equipment.
Coding - The list, in computer code, of the successive computer instructions representing successive computer operations for solving a specific problem.
Input - The information or data transferred, or to be transferred, from external storage media (e.g. punched cards, punched paper tape, and magnetic tape) into the internal storage of the computer.
Keypunching (Including Encoding) - Recording information on cards, paper tape, or magnetic tape, disc or drum by punching holes in the cards, paper tape or inserting magnetic bits on magnetic tape, discs or drums, to represent letters, digits, and special characters.
Keystroke Verifying - Use of machine known as a punched card verifier or tape transcriber, which has a keyboard, to ensure that information punched on a punch card or transcribed on magnetic tape during the keypunching operation has been punched properly. The machine signals when the punched hole on the card and the depressed key disagree or when the data on magnetic tape differs from depressed keys.
Off Line - Descriptive of a system and the devices in a system in which the operation of equipment is not under the control of a computer.
On-Line -Descriptive of a system and the devices in a system in which the operation of such equipment is under the control of a computer.
Output of - The information transferred from the internal storage of the computer to an external storage media, e.g., punched cards, magnetic tape and tabulated listing.
Program - The complete plan for the solution of a problem, i.e., the complete sequence of automatic data processing equipment instructions necessary to solve a problem; include both systems and application programs and subdivisions such as assemblers, compilers, routines, generators and utility programs.
Proof Listing - A tabulated listing of input.
Service Bureau - See (a).
Source Documents - A document from which basic data is extracted (e.g., sales invoices).
(c) BASIC APPLICATIONS OF TAX
The transfer of title, for a consideration, of tangible personal property, including property on which or into which information has been recorded or incorporated, is a sale subject to tax; 7 1/2% Section 12-407 (2) (c) & (d).
Charges for a computer or data processing services are subject to the tax; 7 1/2% Section 12-407 (i) (A).
Charges for producing, fabricating, processing, printing, imprinting or otherwise physically altering, modifying or treating consumer-furnished tangible personal property (cards, tapes, etc.) including charges for recording or otherwise incorporating information on or into such tangible personal property, are subject to tax at the 7 1/2% rate.
A transfer for a consideration of the title or possession of tangible personal property which has been produced, fabricated, or imprinted to the special order of the customer, including property on which or into which information has been recorded or incorporated, is a sale subject to the tax at the 7 1/2% rate.
Charges for processing customer-furnished information (sales data, payroll data, etc.) are generally taxable services at the 7 1/2% tax rate.
Charges made for the use of automatic data processing equipment on a time sharing basis where access to the equipment is by means of remote facilities are subject to the tax at 7 1/2%.
Generally service bureaus are consumers of all tangible personal property, including cards and forms, which they use in providing their services unless a separate charge is made to customers for the materials, in which case the 7 1/2% applies to the charge made for the materials.
(d) MANIPULATING OF CUSTOMER-FURNISHED INFORMATION AS SALE OF TANGIBLE PERSONAL PROPERTY OR SALE OF SERVICE
(1) General - Generally tax applies to the conversion of customer-furnished data from one physical form of recordation to another physical form of recordation as a sale of tangible personal property. Generally tax applies as a sale of a service where original information is developed from customer-furnished data, unless the original information is incorporated into a form of tangible personal property of physical use to the customer.
(2) Keypunching and Keystroke Verifying - This section covers situations where a service bureau's agreement provides only for keypunching, keystroke verifying and proof listing of data or any combination of those operations. It does not include contracts under which these services are performed as steps in processing of customer-furnished information as discussed under (d) (5).
Agreements providing solely for keypunching; keypunching and keystroke verification; or keypunching, providing a proof list and/or verifying of data are regarded as contracts for the fabrication of punch cards and sale of proof lists. Charges therefore are taxable at the 7 1/2% rate, whether the cards are furnished by the customer or by the service bureau. Data from source documents may also be recorded directly onto magnetic tape (off-line). This operation may include keystroke verifying and/or proof listing of data and is comparable to the punch card operation. Charges for this operation are taxable whether the magnetic tape is furnished by the customer or service bureau. Tax also applies to charges for the imprinting of characters on a document to be used as the input medium in an optical character recognition system. The 7 1/2% tax application would be the same even though paper tapes or other media were used in the operation.
(3) Microfilming and Photorecording - Tax applies to charges for microfilming or photorecording at the 7 1/2% rate except, as provided in paragraph (d) (5), where the microfilming and photorecording is done under a contract for the processing of customer-furnished information. Tax (7 1/2%) applies to a contract where data on magnetic tape is converted into a combination of alphanumeric printing, curve plotting and/or line drawings, and put on microfilm or photorecording paper.
(4) "Processing of customer-furnished information" means the developing of original information from raw data furnished by the customer. Examples of automatic data processing processes which result in original information are summarizing, computing, extracting, sorting and sequencing. Such processes also include the updating of a continuous file of information maintained by the customer with the service bureau.
"Processing of customer-furnished information" does not include an agreement providing solely for the reformatting of data or for the preparation of a proof listing or the performance of an edit routine or other pre-processing, nor does the term include the using of a computer as a mere printing instrument, as in the preparation of personalized computer-printed letters, nor the mere converting of data from one medium to another.
Where a service bureau transfers to its customer the original information developed as a result of the processing of the customer-furnished information in the form of punched cards, paper tape, magnetic tape, typed or printed sheets to be used as input media in an optical character recognition system, or similar devices, tax (7 1/2%) applies to the entire charge made by the service bureau to the customer. The true object of the contract is considered to be the tangible personal property, the punched cards or coded tapes or other devices, furnished to the customer.
(5) Where a service bureau enters into a contract for the processing of customer-furnished information, by use of a computer program or through an electrical accounting machine programmed by a wire plugboard, and the output is in part or in whole transferred to the customer in tabulated listing or similar human readable form, the true object of the contract is considered to be the rendition of a service, even though some tangible personal property is incidentally transferred to the client. Such contracts usually provide that the service bureau will receive the customer's source documents, record data in machine readable form, such as on punched cards or on magnetic tape, make necessary corrections, process the information, and then provide tabulated listings or record output onto other similar media (including payroll check forms or cards or W-2 forms or tax returns). Tax does apply to such contracts at the 7 1/2% rate.
Where a service bureau enters into a contract to process customers-furnished information, tax (7 1/2%) will apply even though the computer media may be microfilm or photorecording paper, instead of a tabulated listing, whether the microfilming or photorecording is done on-line or off-line.
The furnishing of computer programs and data by the customer for processing under direction and control of service bureau personnel will not alter the application of tax notwithstanding that charges are based on computer time.
(6) Where a service bureau has entered into a contract which is regarded as a service contract under this paragraph (d) (5) and the service bureau, pursuant to the contract, transfers to its customer (1) items of tangible personal property such as punched cards, punched paper tape, or magnetic tape, disc or drums, which are to be used as input devices to actuate automatic data processing or other equipment, or (2) inventory control cards for use by the customer, membership cards for distribution by the customer, labels or similar items for use, tax (7 1/2%) applies to the charges made for such items. If no separate charge is made, tax (7 1/2%) applies to that portion of the charge made by the service bureau which the cost of the additional computer time (if any), cost of materials and labor cost to produce the items bear to the total job cost.
(7) When additional copies of records, reports, tabulation, etc. are provided, tax (7 1/2%) applies to the charged made for the additional copies. "Additional copies"are all copies in excess of those produced on multi-part carbon paper simultaneously with the production of the original and on the same printer, whether the copies are prepared by re-running the same programs, by multiple simultaneous printers, by looping a program such that the program is run continuously, by using different programs to produce the same output product, or by other means. Where additional copes are prepared, the tax (7 1/2%) will be measured by the charge made by the service bureau to the customer, If no separate charge is made for the additional copies, tax (7 1/2%) applies to that portion of the gross receipts which the cost of the additional computer time (if any), the cost of materials and labor costs to produce the additional copies bears to the total job cost. Charges for copies produced by means of photocopying, multilithing or by other means are taxable at the 7 1/2% rate.
Service bureaus provide a number of training services, such as keypunching and keystroke verifying, programming and specialized training in systems design. These services are not taxable. The service bureau is the consumer of tangible personal property which is used in training others, and the retailer of training materials, including books, which it furnishes to trainees for a separate charge.
(1) Prewritten (canned) Programs
These are programs prepared, held, or existing for general or repeated use, including programs developed for in-house use and subsequently held or offered for sale or lease. The programs may be transferred to the customer in the form of punched cards, data on magnetic tape, or by listing the program instructions on coding sheets. In some cases they are usable as written; however, in most cases it is necessary that the program be modified, adapted and tested to meet the customer's particular needs.
Tax (7 1/2%) applies to the sale of tangible personal property, including coding sheets, card or magnetic tape, or which or into which such prewritten (canned) programs have been coded, punched, or otherwise recorded.
Tax (7 1/2%) applies where title to the tape or other property upon which the program is coded, punched or otherwise recorded, passes to the customer, or the program is recorded on tape or other property furnished by the customer.
Tax (7 1/2%) applies to the entire amount charged to the customer. Where the consideration consists of license fees or royalty payments, all license fees or royalty payment, present or future, whether for a period of minimum use or for extended periods, are includable in the measure of tax.
Programming changes to a prewritten program to adapt it to a customer's equipment, including translating a program to a language compatible with a customer's equipment, are in the nature of fabrication or services that are part of the sale and, as such, are taxable at the 7 1/2% rate.
Charges for assembler, complier, utility and other prewritten programs provided to those who purchase automatic data processing equipment are subject to tax whether the charges are billed separately or are included in the purchase price of the equipment.
(2) Custom Programs
These are programs prepared to the special order of a customer. Tax (7 1/2%) applies to the sale of custom programs transferred to the customer in the form of punched cards, on tape, disc, drum, or similar form of typed or printed sheets to be used as input media in an optical character recognition system. Transfers of custom programs in the form of written procedures, such as program instructions listed on coding sheets are subject to the tax on service at 7 1/2%.
(g) MISCELLANEOUS SERVICE
The following activities consist of the development of ideas, concepts and design and are, therefore, regarded as taxable services and subject to the 7 1/2% rate.
Designing and implementing computer systems, e.g., determining equipment and personnel required and how they will be utilized.
Designing storage and data retrieval systems, e.g., determining what data communications and high-speed input-output terminals are required.
Consulting services, e.g., study of all or part of a data processing system.
Feasibility of bids, e.g., studies to determine what benefits would be derived if procedures were automated.
Evaluation of bids, e.g., studies to determine which manufacturer's proposal for computer equipment would be most beneficial.
Providing technical help, analysts and programmers, usually on an hourly basis.
(h) PICK-UP AND DELIVERY CHARGES
If the service bureau's billing is for processing of customer-furnished information, the tax (7 1/2%) will apply to pick-up and delivery charges. If pick-up and delivery charges are made in conjunction with the sale of tangible personal property or the processing of customer-furnished tangible personal property, the tax (7 1/2%) will apply to the pick-up charges. Tax will apply to the delivery charges to the extent specified in section 12-407 (8) (c).
(i) SALES OF EQUIPMENT
Tax applies to sales of automatic data processing and related equipment. Where a person sells such equipment and agrees to provide training materials to customer's personnel without making an additional charge therefore, the person will be considered to be included in the sales price of the equipment.
(j) RENTAL OF EQUIPMENT
The general rule applicable to leased tangible personal property will govern in cases where automatic data processing and related equipment, including terminal equipment, is leased. Since rental is included in the measure of the tax, the tax (7 1/2%) is due based on the periodic charge for the equipment of the lessor.
Where programs are leased the same rules would apply.
A lease does not include a contract whereby a person secures access, by means of telephone or other lines, to equipment which is not on his premises, if the person or his employees operate the equipment or direct and control its operation by means of remote access facilities. This is time sharing and taxable at 7 1/2%.
(k) SERVICES A PART OF THE SALE OF EQUIPMENT
Where services, such as programming, training or maintenance services, are provided to those who purchase automatic data processing and related equipment, on a mandatory basis as an inseparable part of the sale or taxable lease of equipment, charges for the furnishing of the services are includable in the measure of tax from the sale or lease of the equipment whether the charges are separately stated or not. Where the purchaser or lessee has the option to acquire the equipment either with the services or without the services, charges for the service may be excluded from the measure of tax from the sale of the equipment and taxed at the 7 1/2% rate.