Ruling 96-1
Sales and Use Taxes
Telecommunications Services
Computer and Data Processing Services
This Ruling is cited in Rulings 96-7 and 2002-5
NOTE: This ruling should not be relied upon to the extent it conflicts with
the Telecommunications Act of 1996, Pub. Law No. 104-104, 110 Stat. 56 (1996)
FACTS:
A company (the "Company") provides what it terms "data communications services" by means of computerized transmitting and receiving equipment, using a network of satellites and unmanned ground stations. The communications do not involve voice messages. The Company is not subject to state, federal or local regulation as a telephone company or public utility. The services fall into four general categories, described as follows:
Data communications. Data communications generally involve the transmission of selected data between transmitting and receiving equipment without human intervention or assistance. Service recipients typically have remote facilities that must be monitored and controlled from another location. For example, pipeline operators could use the Company's services to monitor and control pipelines electronically. The Company's equipment will be installed along the pipelines and programmed to transmit data about the status and functioning of the pipeline at regular intervals to a receiving station. The equipment that receives the data may, in addition to recording the data, also be programmed to send back commands to the remote locations to perform such operations as closing a pipeline valve in the event of a leak.
Commercial communications. Commercial communications generally involve the transmission of data between manned computer terminals. For example, long haul trucking companies will use the Company's terminals in trucks to receive data messages from dispatchers, eliminating the need for the truck driver to stop and telephone the dispatcher.
Emergency alert communications. Emergency alert users are expected to include government agencies, automobile and truck drivers, boat operators, private pilots and hikers, who require the ability to send distress signals and positioning information in case of an emergency. Emergency alert users will include data communications service recipients who require prompt knowledge of equipment failure or other critical information from remote or unattended locations.
Geographic positioning. Like the emergency alert and data communications service recipients, users of this service will require the tracking of assets moving over a wide area. For example, a shipping company would use geographic positioning to monitor the location and the status of cargo regularly and economically, in order to reduce cargo losses.
ISSUES:
Whether the Company's data communications services using a satellite network and computerized data transmitting and receiving equipment are subject to sales and use taxes as telecommunications services enumerated in Conn. Gen. Stat. §12-407(2)(k) and defined in §12-407(26).
Whether the Company's data communications services using a satellite network and computerized data transmitting and receiving equipment are subject to sales and use taxes as computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A).
DISCUSSION:
Conn. Gen. Stat. §12-407(2) defines "sale" and "selling" as including "(k) the rendering of telecommunications service, as defined in subsection (26) of this section, for a consideration . . . ." Subdivision (a) of subsection (26) defines "telecommunications service" as including "the transmission of any interactive electromagnetic communications including but not limited to voice, image, data and any other information, by means of but not limited to wire, cable, including fiber optic cable, microwave, radio wave or any combination of such media . . . including any form of mobile two-way communication."
Although the term "interactive" is not defined in Conn. Gen. Stat. §12-407(26), its meaning in this context appears to be "capable of both receiving and sending messages." For example, the dictionary defines "interactive terminal" as "[a] computer or data processing terminal capable of providing a source of both input and output for the computer system to which it is connected." The American Heritage Dictionary 669 (2d College Ed. 1985). At least some of the Company's services appear to be "interactive" in that they involve both the sending and receiving of data. For example, the devices on the pipelines not only send information, but can receive commands back from the devices to which the information is sent, and act on that information. Therefore, it appears that the Company's services meet the initial portion of the definition of "telecommunications service" as set forth in the previous paragraph.
However, in Ruling No. 93-25 the Department indicated that services rendered by a service provider other than a telecommunications carrier (i.e., a carrier subject to state or federal regulation as such) are not telecommunications services as defined in Conn. Gen. Stat. §12-407(26)(a). This was a reiteration of the position adopted after telecommunications services became subject to sales and use taxes and the gross receipts or earnings taxes on the providers of such services were eliminated in 1989. This position is based on the legislative purpose of the imposition of sales and use taxes on telecommunications services, which was to tax at the consumer level the same charges that had previously been subject to tax at the provider level under Chapters 210a and 211. See Ruling No. 93-25, pp. 2-3. Since the Company in this case is not a telecommunications carrier, its services are not subject to sales and use taxes as telecommunications services.
Conn. Gen. Stat. §12-407(2)(i) also defines "sale" and "selling" as including "(A) Computer and data processing services, including but not limited to, time . . . ." Conn. Agencies Regs. §12-426-27(b)(1) further defines such services as including "retrieving or providing access to information . . . ." To decide whether the Company's services are taxable as computer and data processing services, it is necessary to determine what is the true object of the services. Hartford Parkview Associates Limited Partnership v. Groppo, 211 Conn. 246, 558 A.2d 993 (1989); see also Cummings & Lockwood v. Commissioner, Conn. Super. Ct. Tax Sess., No. CV 92-0510759 S (July 20, 1994). In determining whether the "true object" standard has been met with respect to computer services, it is not enough that computer equipment is employed by the Company in transmitting and receiving data. The use of computers to transmit data must be found to be an essential aspect of the service, without which the service would not exist, or the service recipient would not have contracted with the Company. See, e.g., Ruling Nos. 95-2, 94-15 and 94-2.
The Company provides its customers with a medium by which they may immediately transmit data to and receive data from remote locations through the use of computer equipment. That this data communication is accomplished by means of satellites rather than modems and telephone lines does not alter the fact that the essence of the Company's services is the sending and receiving of computer data and computer commands. This may vary from the sending of distress signals containing geographical information to communication back and forth between manned or unmanned computers. In all events, the use of computers to retrieve or transmit data, to store and to act on the information is essential to the services.
The Company's service recipients have chosen the Company's services as an alternative to other, less acceptable means of achieving the same ends. For example, the use of computers to monitor pipelines takes the place of using personnel to walk the pipelines, the use of computers in trucks takes the place of having the drivers stop and make telephone calls, and the use of computers in ships takes the place of more expensive ship-to-shore communications systems. However, the fact that these tasks could conceivably be accomplished by other means does not mean that the "true object" of the transaction is not computer and data processing services. Certainly the information provided by the on-line computer services in Cummings & Lockwood, supra, could theoretically have been obtained from newspapers, magazines, by telephone and by word of mouth. The legal research accomplished by computerized research services could be accomplished by human beings combing through the stacks of law libraries. Yet we recognize these as computer and data processing services because they utilize computers and computer technology to perform the services in a way that is essentially superior to alternatives, because of the greater speed, accuracy and economy achieved by the use of computers and computer technology, and because the service recipients specifically desire that such technology be used instead of other means.
In contrast, in Ruling No. 91-11, the Department examined a situation where the service provider used a computer to request driving records from the Department of Motor Vehicles on behalf of its customers. The service provider would then either electronically transmit the records to its customers, or mail the records in hard copy to its customers. We concluded that the use of the computer, while helpful to the service provider in acquiring such records, was not essential from the point of view of the service recipient, and was therefore not the true object of the contract between the two. Here, on the other hand, the use of computers is precisely what the Company's customers wish to obtain from the Company. Were the Company to offer to send its own personnel to examine a pipeline and send back the data, or to fly over an oceangoing tanker and radio the vessel's position, then the true object of the services would not be computer and data processing services, but neither would customers wish, in all likelihood, to avail themselves of the Company's services.
In Connecticut computer and data processing services are taxable where the benefit of the services is received. This generally means that if the service recipient is located in Connecticut (or, if the service recipient has more than one location, if the location that will receive the benefit of the services is in Connecticut), the services will be taxable.
RULING:
The Company's data communications services using a satellite network and computerized data transmitting and receiving equipment are not subject to sales and use taxes as telecommunications services enumerated in Conn. Gen. Stat. §12-407(2)(k) and defined in §12-407(26), because the Company is not a telecommunications carrier.
The Company's data communications services using a satellite network and computerized data transmitting and receiving equipment are subject to sales and use taxes as computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A), because the true object of the Company's transactions with its service recipients is for the service recipients to obtain data communications by means of computer equipment.
LEGAL DIVISION
February 15, 1996