Ruling 93-1, Sales and Use Taxes / Computer and Data Processing Services
A business located outside Connecticut (hereinafter "the Company") designs and markets a computer software product (hereinafter "the Software Product"). The Software Product is intended to be used in the process of developing custom software in midrange computers.
The Company analyzes a customer's requirements and makes necessary program adaptations to facilitate the customer's use of the Software Product on the customer's central processing unit. The Company conveys the Software Product to the customer under a licensing agreement. This licensing agreement restricts the customer from duplicating, licensing, sublicensing or transferring the Software Product to a third party. The Software Product is to be destroyed or returned to the Company upon termination of the license period.
The Company also offers an optional maintenance agreement with the Software Product. The maintenance provided includes telephone support, user group conferences, software upgrades and general support and assistance in response to temporary difficulties with the Software Product.
Although the Company does not maintain an office in Connecticut, it sends personnel into Connecticut from its regional office to solicit orders for the Software Product, to analyze the customer's individual requirements and to conduct training sessions.
Whether any or all of the Company's charges for its activities with respect to its Connecticut customers are subject to sales and use taxes.
The Sales and Use Taxes Act, Conn. Gen. Stat. §12-406 et seq., imposes sales and use taxes, inter alia, on certain enumerated services. Conn. Gen. Stat. §12-407 provides in pertinent part:
(2) "Sale" and "selling" mean and include: . . . (i) the rendering of certain services for a consideration, exclusive of such services rendered by an employee for his employer, as follows: (A) Computer and data processing services, including but not limited to, time . . .
Conn Agencies Regs. §12-426-27(b)(1) defines computer and data processing services as follows:
Such services mean and include providing computer time, storing and filing of information, retrieving or providing access to information, designing, implementing or converting systems, providing consulting services, and conducting feasibility studies. The transfer of dominion and control of computer hardware and software for a consideration does not come within the purview of this section, since such transfer shall constitute a lease or rental of tangible personal property and be subject to tax under Section 12-426-25.
The list of services provided in the regulatory definition is meant to be illustrative, but not all-inclusive. As is noted elsewhere in the regulation:
The term "includes" when used in a definition contained in this regulation shall not be deemed to exclude other things otherwise within the meaning of the term defined.
Conn. Agencies Regs. §12-426-27(b)(11)(k). See also AirKaman, Inc. v. Groppo, 221 Conn. 751, 759 (1992).
The Company's analysis of its customers' requirements and the making of the necessary program adaptations, as well as any training that it provides to its customers, fall within the definitional language in the regulation of "designing, implementing or converting systems," and "providing consulting services," and are taxable computer and data processing services. All of the features provided under the maintenance agreement, including telephone support, user group conferences, software upgrades and general support and assistance in response to temporary difficulties, are taxable computer and data processing services as well.
The Company's licensing agreement, including as it does restrictions on duplication, licensing, sublicensing or transferring of the Software Product by the customer, and the requirement that the Software Product be destroyed or returned to the Company upon termination of the licensing period, does not confer sufficient indicia of ownership of or title to the Software Product upon the customer to rise to the level of a sale.
Black's Law Dictionary, 5th Ed., defines a "sale" as
[a] contract whereby property is transferred from one person to another for a consideration of value, implying the passing of the general and absolute title, as distinguished from a special interest falling short of complete ownership.
Id., at 1200.
The licensing arrangement between the Company and its customers is merely permission to use the Software Product for a limited duration, with restrictions on its alienation, and is a "special interest falling short of complete ownership." Id. Therefore, a "sale" of the Software Product has not taken place.
The question remains whether this licensing of custom software is taxable, either as a lease of tangible personal property or as a computer and data processing service. If the license were construed as a lease or rental of the Software Product, it would only be taxable if the software is considered "tangible," since Conn. Gen. Stat. §12-407(2)(j) imposes sales and use taxes upon "the leasing or rental of tangible personal property of any kind whatsoever . . ." Such is not the case. Notwithstanding the last sentence of Conn. Agencies Regs. §12-426-27(b)(1), supra, the courts of this state in Northeast Datacom, Inc, et al. v. City of Wallingford, 212 Conn. 639 (1989), and more recently in Grolier Enterprises, Inc. v. Groppo, No. CV 87-0331744S (Super. Ct. February 26, 1992), have held that custom computer software is intangible personal property.
As previously indicated, the processes of creating, designing and developing custom software, or of adapting existing software to the particular needs of a customer, including analysis of a customer's needs and consultation and training in the use of software, are considered to be taxable computer and data processing services. However, a fee for a mere license to use and possess software, without more, is not taxable, to the extent that such fee can be stated separately from the charge for clearly taxable services. But if a licensing fee includes taxable services, and the charges are not so separated, then the entire charge is presumed to be taxable, subject to the taxpayer's ability to rebut the presumption.
In Connecticut, computer and data processing services are deemed taxable at the location where they are delivered or intended for use. 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 customers who receive and use services in this state; Conn. Gen. Stat. §12-411(3) and (8). "Engaged in business" is defined to include "rendering in this state any service described in any of the subdivisions of [§12-407(2)] . . ."; Conn. Gen. Stat. §12-407(15)(c). Therefore, with respect to any of the Company's customers who are located in Connecticut, the Company is "engaged in business" here, as that term is used in the statutes. Further, the presence of the Company's employees in Connecticut for the purpose of selling its services and products and training or otherwise contributing to its services firmly establishes the Company's physical presence in the state, as required by National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, 18 L.Ed.2d 505 (1967). 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 (1990) and SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220 (1991), and recently affirmed by the U.S. Supreme Court in Quill Corporation v. North Dakota, 504 U.S. ---, 119 L.Ed.2d 91 (1992).
The fees for the analysis of a customer's needs and any necessary program adaptations to facilitate a customer's use of a computer software product, and for consultation with and training of the customer in the use of the product, as well as for maintenance of the software product through the use of telephone support service, user group conferences, software upgrades and support and assistance with difficulties with the software are all taxable as "computer and data processing services" pursuant to Conn. Gen. Stat. §12-407(2)(i)(A) and Conn. Agencies Regs. §12-426-27(b)(1), if the benefit of the services is received in Connecticut. Licensing fees, if they are for the mere use and possession of custom computer software, are not subject to tax, either as a sale or lease of property or as a service, provided such fees can be stated separately from charges for taxable computer and data processing services.
April 6, 1993