Ruling 94-15, Sales and Use Taxes / Computer and Data Processing Services / Business Management Services
A company located in Connecticut (the "Company") provides optical scanning ("document imaging") and document indexing services to a large manufacturing company (the "Customer") located in Connecticut. Employees of the Company run paper documents belonging to the Customer through the Company's scanning device at the customer's premises, creating electronic images that can be viewed on a computer screen and stored on magnetic tape. As each document is scanned, the Company's employees review its electronic image for quality, enhancing the image of or re-scanning documents the scanned image of which was of poor quality.
Magnetic tapes containing the scanned images are taken to the Company's headquarters where the imaged documents are indexed by Company employees according to the classifications chosen by the Customer which include such information as the date of the document, document type (letter, memo, report, etc.), recipient and author. Once this process is completed, the indexing information is transferred to magnetic tape. The original magnetic tape, along with any back-up copies made during the scanning and indexing processes, are delivered to the Customer.
The Company also intends to expand the services it offers to include furnishing personnel to supervise the quality of document scanning or indexing performed by its Customer's employees at the Customer's premises, with the scanning equipment either being furnished by the Company or belonging to the Customer.
Whether the Company's document imaging and indexing services are subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(A) as computer and data processing services.
Whether the Company renders taxable business analysis, management, management consulting or public relations services under Conn. Gen. Stat. §12-407(2)(i)(J) by supervising its Customer's employees as they scan documents to create electronic images and index the electronic images.
Conn. Gen. Stat. §12-407(2)(i)(A) includes in the definition of "sale" and "selling" the rendering of 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 of 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 determining whether the Company's services are taxable as computer and data processing services, an analysis must be made as to whether the true object of the contract is for the Company to render computer and data processing services to the Customer. Hartford Parkview Associates Limited Partnership v. Groppo, 211 Conn. 246, 558 A.2d 993 (1989); see also Ruling Nos. 93-6, 93-8, 93-11 and 94-2. 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 document scanning and imaging. Id. at 250. Instead, the use of the computer must be found to be essential to the provision of the service, and not "merely incidental" to it. Id. at 253.
The true object of the Customer in contracting with the Company is to have the form in which information is stored converted from paper to an electronic medium, including being provided with a means of later retrieving the information through the use of an electronic index. Such processes cannot take place without the use of a computer. These services are "storing and filing of information" and "providing access to information," and are taxable computer and data processing services as described in Conn. Agencies Regs. §12-426-27(b)(1).
Conn. Gen. Stat. §12-407(2)(i)(J) includes in the definition of "sale" and "selling" business analysis, management, management consulting and public relations services. Conn. Agencies Regs. §12-407(2)(i)(J)-1 provides in pertinent part that the term "business management services" means "the controlling or directing of ... all or a portion of the core business activities ... of a service recipient." The term "core business activities" is defined in subsection (h) of the regulation as "activities directly related to a service recipient's lines of business involving sales of products, property, goods or services to others, its capital structure, its budgeting and its short-range, long-range or strategic planning." The core business of the Customer, a large manufacturing company, is not document scanning and imaging. Therefore, the Company is not rendering taxable business analysis, management, management consulting or public relations services.
The Company's document imaging and indexing services are subject to sales and use taxes as computer and data processing services under Conn. Gen. Stat. §12-407(2)(i)(A).
The Company does not render taxable business analysis, management, management consulting or public relations services under Conn. Gen. Stat. §12-407(2)(i)J) when it provides personnel to supervise its Customer's employees in scanning and indexing electronic images of documents.
Issued: August 3, 1994