Ruling 93-8
Sales and Use Taxes
Computer and Data Processing Services
Advertising Services
This Ruling is cited in Rulings 93-11, 94-2, 94-22, 95-2
FACTS:
An out-of-state company (hereinafter referred to as "the Company") provides information electronically to subscribers (hereinafter referred to as "the Subscribers"), some of whom are in Connecticut. The information, which is designed for farmers, is provided around the clock and consists of marketing information, such as opening market calls on grain and livestock, future and option quotes from the major exchanges, daily updates of livestock auctions, and radar weather maps plus forecasts, as well as video-text commentary and news, all of which are updated throughout the day. The information is sent one way (from or through the Company to each Subscriber) via a satellite link.
The Company provides Subscribers with data receiving equipment which receives the data from the satellite and converts it into video-text on a monitor. The data receiving equipment has controls that allow the Subscribers to select from an index a page of information to be viewed. The Company retains ownership of the data receiving equipment at all times. If a Subscriber cancels the contract, the equipment must be returned to the Company in good operating condition. Subscribers are held responsible for damaged or destroyed equipment, and must obtain insurance coverage for it. Subscribers may not attempt to repair or modify the equipment. The equipment is made available as part of the contract, without a separate charge.
The Company provides four different options, two of which are offered to Subscribers and two of which are offered to information providers (hereinafter referred to as "Information Providers"):
(1) The first two options are the "basic information package" and the "additional services package," for which Subscribers pay a one-time initiation fee and then monthly fees for the subscription. Each of these packages is identical for all Subscribers.
(2) The remaining options, "electronic mail" and "electronic message," allow an Information Provider to contract with the Company to send information to the Subscribers selected by the Information Provider. The information sent by electronic mail and electronic message includes, for example, updates on market prices at a cooperative, notices of upcoming meetings or events, or advertising of sales or discounts on farm equipment or supplies.
Subscribers cannot receive the Information Provider's electronic mail or electronic message unless the Information Provider selects them to receive it. Electronic mail is the same for each Subscriber who is selected by the Information Provider, whereas the electronic message is unique for each Subscriber who is selected by the Information Provider. The Company charges the Information Providers a fixed monthly fee for transmitting electronic mail and a fee based on the number and length of the electronic messages for transmitting such messages. The Subscriber receiving the electronic mail or electronic message is not charged for it.
ISSUES:
Whether the true object of the contract between the Company and Subscribers, in which the Company transmits electronic information via satellite to data receiving equipment that is provided by the Company to the Subscribers, is the provision by the Company of computer and data processing services that are subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(A).
Whether the services offered by the Company to Information Providers are advertising services described in Conn. Gen. Stat. § 12-407(2)(i)(W) and, if so, whether such services may be excluded from sales and use taxes as media advertising.
Whether the provision of electronic information by the Company to Connecticut Subscribers through data receiving equipment that is owned by the Company and used by such Subscribers constitutes sufficient nexus to require the Company to collect and remit Connecticut sales and use taxes from Connecticut Subscribers.
Whether the Company is leasing the data receiving equipment to Connecticut Subscribers or is itself using the equipment in Connecticut.
DISCUSSION:
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 between the Company and Subscribers is that computer and data processing services be provided to Subscribers. Hartford Parkview Associates Limited Partnership v. Groppo, 211 Conn. 246, 558 A.2d 993 (1989); see also Ruling No. 91-11. 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 transmitting, and by the Subscribers in receiving, the information. Id. at 250. Instead, the use of the computer must be found to be essential to the provision of the services, and not "merely incidental" to it. Id. at 253.
The services being offered by the Company under the contract provide a means by which the Subscribers can gain immediate access to data from a variety of sources. The Company itself is not the originator of the data, but merely collects it from the various sources and reformats it into an easily accessible database which it then transmits electronically to the Subscribers. In Ruling No. 91-11, the service provider requested driving records from the Department of Motor Vehicles ("DMV") on behalf of the service provider's customers. The requests were transmitted to the DMV on magnetic tape on a daily basis, and the responses were received by the service provider on magnetic tape on the next day. The service provider would then either electronically transmit the records to its customers' computers or mail the records in hard copy to its customers. Ruling No. 91-11 concluded that the use of a computer by the service provider, while helpful, was not essential to the provision of the service of providing driving records to its customers.
In the instant case, unlike the facts in Ruling No. 91-11, the Company provides the Subscribers with immediate access to a continually updated database. If it were not for the Company's transmissions, the Subscribers would have to rely on a wide array of other sources for the same information, such as radio, television, newspapers or ticker tape. The true object of the Subscribers in contracting with the Company is to gain the convenience and accuracy possible only through immediate access to a database maintained by the Company, which, rather than being "merely incidental" to the service, is the very reason that the Subscribers choose to avail themselves of the Company's services. Such services constitute taxable computer and data processing services when provided to Connecticut Subscribers.
Conn. Gen. Stat. § 12-407(2)(i)(W) includes in the definition of "sale" and "selling" "advertising or public relations services ... not related to the development of media advertising..." As with the issue of whether the services provided by the Company to the Subscribers are taxable computer and data processing services, the issue of whether the services provided by the Company to the Information Providers are advertising services requires the identification of the true object of the contract. See Hartford Parkview, supra.
The Company promotes its electronic information service to Information Providers as a cost-effective method of reaching customers, i.e., the Subscribers. The Company's method of charging Information Providers for using its electronic information service is similar to the method of charging used by the electronic or print media for broadcasting advertisements thereon: e.g., the electronic message service is charged based on the number and length of the messages transmitted by the Company. Thus, the true object of the contract between the Company and the Information Providers is the dissemination by the Company of advertisements prepared by the Information Providers to the Subscribers.
In June 1990, the Department released TSSN-30 (Sales and Use Taxes on Advertising and Public Relations Services). "Media advertising" was defined in TSSN-30 as "advertisements in newspapers and magazines and on radio, television and cable television stations. Media advertising also includes advertisements placed on billboards, buses or taxicabs." The scope of services qualifying for the exclusion for media advertising from taxable advertising services has expanded since then.
Ruling No. 91-18 held that the term "media advertising," as used in Conn. Gen. Stat. § 12-407(2)(i)(W), included advertisements placed on the sides of trailer-trucks that are either used on, or stationed in public view along, public thoroughfares.
Ruling No. 92-1 held that the term "media advertising" included advertisements placed in a trade directory that was distributed to architects and contractors.
A general rule for determining whether advertising is "media advertising" has developed: there must be (i) a sale of time or space (ii) in or on a preexisting medium (iii) for broadcast or dissemination to all or a segment of the public. The preexisting medium is no longer required to be one of the traditional media enumerated in TSSN-30. A medium could be a campus directory, road map, restaurant placemat or even the back of a cash register tape as long as the medium is disseminated to all or a segment of the public.
The Company's sales of advertising services to the Information Providers have these characteristics: the Company (i) sells time (ii) on its electronic information database (iii) for transmission to the Subscribers. Therefore, the Company's sales to Information Providers may be excluded from sales and use taxes as advertising services related to the development of media advertising.
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 its customers who use the services in Connecticut. Conn. Gen. Stat. § § 12-411(3) and (8). "Engaged in business" is defined in Conn. Gen. Stat. § 12-407(15)(c) to include "rendering in this state any service described in any of the subdivisions of [§ 12-407(2)] ..." In Connecticut, computer and data processing services are deemed taxable at the location where they are delivered or intended for use. See Conn. Agencies Regs. § 12-426-27(d), which provides that computer and data processing services "are usually rendered in the form of a report by the service agency to its customer. Such reports are taxable, whether given in written, oral or any other form, if delivered to or intended for use in the State of Connecticut." Therefore, with respect to any of the Subscribers who are located in Connecticut, the Company is "engaged in business" here, as that term is used in the Sales and Use Taxes Act. Furthermore, the presence of the data receiving equipment in Connecticut on an ongoing basis establishes the Company's presence in this 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 Co. v. Groppo, 214 Conn. 292, 572 A.2d 302, cert. denied, 112 L. Ed. 2d 50 (1990) and SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220, 585 A.2d 666, cert. denied, 115 L. Ed. 2d 1008 (1991), and recently affirmed by the United States Supreme Court in Quill Corporation v. North Dakota, 504 U.S. , 119 L. Ed. 2d 91 (1992).
"Sale" and "selling" are defined in Conn. Gen. Stat. § 12-407(2)(j) as including "the leasing or rental of tangible personal property of any kind whatsoever." A tax is imposed by Conn. Gen. Stat. § 12-411 on the storage, acceptance, consumption or any other use in Connecticut of tangible personal property purchased from any retailer for storage, acceptance, consumption or any other use in this state. "Use" is defined in Conn. Gen. Stat. § 12-407(5) as including "the exercise of any right or power over tangible personal property incident to the ownership of that property, except that it does not include the sale of that property in the regular course of business."
In considering whether tangible personal property is being leased by the Company to the Subscribers or is used by the Company in rendering services to the Subscribers, the true object of the contract between the Company and the Subscribers must be determined. American Totalisator Co. v. Dubno, 210 Conn. 401, 555 A.2d 414 (1989). The Company retains ownership of the data receiving equipment that it provides to the Subscribers, prohibits the Subscribers from repairing or modifying it, and requires the equipment to be returned in good operating condition upon termination of the subscription contract. Nowhere in the Company's form contract are the terms "rental" or "lease" mentioned, nor is a separate charge for the data receiving equipment made. Instead, the Company's charges are based on a combination of the fee for the type of service being subscribed for and the fee for the type of equipment being used by the Subscriber. The primary function and purpose of the Company is to provide services and the ownership, use and maintenance of the data receiving equipment is necessary to enable the Company to render its services; therefore, the Company, not the Subscribers, is the ultimate user or consumer of the equipment within the meaning of the Sales and Use Taxes Act. See American Totalisator at 410. Under the broad statutory definition of "use," the Company is "using" the equipment in Connecticut.
RULING:
The true object of the contract between the Company and the Subscribers is the provision by the Company of computer and data processing services that are subject to sales and use taxes under Conn. Gen. Stat. § 12-407(2)(i)(A). The Company must collect sales and use taxes on the initiation fee and the monthly fees for its services from Connecticut Subscribers.
The services provided by the Company to the Information Providers are "media advertising" as that term is used in Conn. Gen. Stat. § 12-407(2)(i)(W), and are not subject to the sales and use taxes that are imposed on advertising services.
Because of the services that the Company renders to Connecticut Subscribers, and the presence in Connecticut of its data receiving equipment, the Company has contacts with Connecticut that are sufficient under National Bellas Hess, supra, to require it to collect sales and use taxes from Connecticut Subscribers.
Pursuant to Conn. Gen. Stat. § 12-411, the Company must pay use tax on the purchase price of the data receiving equipment that it purchased for use in providing services to Connecticut Subscribers.
LEGAL DIVISION
May 19, 1993