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Ruling 91-16

Sales and Use Taxes
Resale of Telecommunications Service

ISSUE:

Where telecommunications service is needed by a company engaged in the business of providing computer and data processing services in order to provide such services to its customers, is the company using the telecommunications service, or is it purchasing such service for resale to its customers?

FACTS:

1.  A person [hereinafter, "the Company"] is engaged in the business of providing computer and data processing services to banks.

2. The computer and data processing services provided by the Company include:

  • on-line accounting whereby banks can get up-to-date information on banking customer accounts,
  • the preparation of periodic statements, such as loan statements and checking account statements, and
  • item processing whereby the Company sorts items, such as cancelled checks, matches them with corresponding checking account statements and mails such statements and checks to banking customers.

3. The banks enter the data that is processed by the Company at terminals that are located at the banks and linked, through the provision of telecommunications service, to the Company's computers.

4. Either a local exchange carrier or a long distance carrier [either of which is hereinafter referred to as "a Telecommunications Service Provider"] provides the telecommunications service, as defined in Conn. Gen. Stat. §12-407(26), that links the Company's computers with terminals located at the banks.

5. The Company separately states on each invoice to a bank a charge for such telecommunications service.

6. The amount so separately stated is arrived at through the use of a formula that apportions the amount that the Company is charged for such telecommunications service by a Telecommunications Service Provider among the banks. A formula is used because of the complexity involved in determining the precise charge for telecommunications service that the Company should make to each bank.

7. The aggregate amount of the separately stated charges is less than the amount that the Company is charged for such telecommunications service by a Telecommunications Service Provider.

DISCUSSION:

Sales of services that are described in any of the subdivisions of subsection (2) of Conn. Gen. Stat. §12-407 are subject to sales and use taxes if a purchaser who gives a resale certificate "makes any use of the service ... other than retention, demonstration or display while holding it for sale in the regular course of business." Conn. Gen. Stat. § 12-410(4)(a). See also Conn. Gen. Stat. §12-411(12)(a). (Conn. Gen. Stat. §§12-410(5) and 12-411(14) are not implicated because the purchase of a "service described in subdivision (i) of subsection (2) of section 12-407" is not involved. Telecommunications service is a service described in Conn. Gen. Stat. § 12-407(2)(k).) Conn. Gen. Stat. §§12-410(4)(a) and 12-411(12)(a) are statutes creating tax exemptions and must be strictly construed against a taxpayer relying thereon. White Oak Corporation v. Department of Revenue Services, 198 Conn. 413, 421, 503 A.2d 582 (1986). The law allows a taxpayer to rely on this exemption only if the services are clearly for resale rather than being "used" by the taxpayer. Id. In White Oak Corporation, supra, the Court observed:

The court must look to the intention of the parties to the contract to determine whether the items in a contract are held for resale or were purchased for a different purpose. United Aircraft Corporation v. O'Connor, 141 Conn. 530, 537-38, 107 A.2d 398 (1954). This court held in Fusco-Amatruda Co. v. Tax Commissioner, [168 Conn. 597, 601, 362 A.2d 847 (1975)] that a contractor who purchased materials for the construction of a building had used the materials. That conclusion was reached because the contractor was "not in the business of selling materials. He [was] in the business of using them to build houses...." Id., quoting G.S. Lyon & Sons Lumber & Mfg. Co. v. Department of Revenue, 23 Ill. 2d 180, 185, 177 N.E.2d 316 (1961). The plaintiff in the present case is in the business of constructing highways and bridges rather than in the business of reselling the services of watchmen, flagmen and trafficmen or flasher rentals. The services and rentals were used by the plaintiff, as were the materials in Fusco-Amatruda Co., because they were a necessary part of the process of constructing the bridges and highways. Even if the contract had not required that the plaintiff obtain these services and rentals, the plaintiff would have had to obtain similar services and rentals in order to ensure the safety of the public during the process of construction. Under these circumstances, therefore, the intention of the parties was for the plaintiff to use the services and rentals in the construction process rather than to resell them to the DOT.

Id. at 422.

In the present situation, any telecommunications service provided by the Company to banks under its contracts therewith is merely incidental to the Company's business of providing computer and data processing services. "Where the transaction is only incidental to a service performed for the purchaser, it is not considered a sale for tax purposes. United Aircraft Corporation v. O'Connor, [141 Conn. 530, 539, 107 A.2d 398 (1954)]." White Oak Corporation v. Department of Revenue Services, supra, 422.

RULING:

Where telecommunications service is needed by a company engaged in the business of providing computer and data processing services in order to provide such services to its customers, the company is using the telecommunications service, and it is not purchasing such service for resale to its customers.

LEGAL DIVISION

June 5, 1991