Ruling 96-8, Sales and Use Taxes / Computer and Data Processing Services / "Outsourcing Exemption"
FACTS:
A company engaged in manufacturing (the "Company") has an information technology division ("the Computer Division") to support its computer-related needs. The Computer Division uses an array of computer hardware and software and other equipment such as printers and scanners, and employs a staff of computer programmers, technicians and end-user support personnel.
The Company intends to transfer all of the functions of the Computer Division, together with most of the Computer Division's personnel, to an outside computer and data processing service provider (the "Service Provider"), which will then provide the Company with the computer and data processing services previously provided internally by the Computer Division. Neither the Company nor the Service Provider is a "related person," as that term is defined in Conn. Gen. Stat. §12-217m(7), with respect to the other.
At the commencement of the agreement between the Company and the Service Provider, the Company will sell certain assets to the Service Provider, which the Service Provider will use to perform its services for the Company. These assets will consist of computer hardware and prewritten software and related data processing equipment, such as printers and scanners. The Service Provider will also use other assets of the Company that the Company will continue to own or lease (as lessee). These assets will consist of computer hardware and prewritten software.
The Service Provider will replace, upgrade and provide additional equipment as may be necessary for the performance of its services. The Service Provider will purchase this additional equipment as agent for the Company, and title to the equipment will vest in the Company. The Service Provider will also purchase materials and supplies other than computers and data processing equipment for its own use in fulfilling its contract with the Company, title to which will vest in the Service Provider.
ISSUES:
Whether the computer and data processing services provided by the Service Provider to the Company will be exempt from sales and use taxes under Conn. Gen. Stat. §12-412(74), as amended by 1995 Conn. Pub. Acts 160, §45;
Whether the computers and data processing equipment purchased by the Service Provider, either from the Company or elsewhere, will be exempt from sales and use taxes under Conn. Gen. Stat. §12-412(74), as amended by 1995 Conn. Pub. Acts 160, §45; and
Whether the equipment purchased by the Service Provider as agent for the Company will be subject to sales and use taxes.
DISCUSSION:
Conn. Gen. Stat. §12-412(74), as amended by 1995 Conn. Pub. Acts 160, §45, exempts the following:
(A) Sales of computer and data processing services rendered to a customer (i) by a retailer which, on or after July 1, 1991, acquired the operations of a data processing facility from the customer, provided such customer operated the facility for its own use or (ii) by a retailer which, on or after July 1, 1993, acquired the operations of the data processing facility from the retailer described in subparagraph (A)(i) of this subsection, provided such customer formerly operated the facility for its own use. (B) Sales of computer and data processing services rendered to a customer by a retailer which, on or after July 1, 1995, acquired the data processing operations from the customer, provided such customer formerly conducted such data processing operations for its own use. Sales of and the storage, use or other consumption of computers or data processing equipment, when sold to the retailer described in this subparagraph and used by such retailer to provide the services described in this subparagraph. The provisions in this subparagraph shall not apply if the retailer is a related person, as defined in section 12-217m, with respect to the customer or the customer is a related person, as defined therein, with respect to the retailer.
In Ruling No. 95-9 the Department applied the provisions of subparagraph (A)(i) of this exemption to the outsourcing of computer and data processing operations previously performed internally by banks. On page 3, the Ruling concluded that "to 'acquire the operations of a data processing facility' means to take over all of the data processing functions formerly conducted by a service recipient at a specific location of the service recipient's business premises where such computer and data processing functions were performed." However, at approximately the same time as the Department issued Ruling No. 95-9, the General Assembly amended Conn. Gen. Stat. §12-412(74) by adding subparagraph (B), which extended the scope of the exemption to computer and data processing services where the retailer "acquired the data processing operations from the customer " on or after July 1, 1995. The effect of this amendment, for data processing outsourcing begun on or after that date, is to eliminate the requirement that the service provider must take over all of the functions previously conducted by the service recipient at a specific location. Instead, all or any portion of the data processing operations formerly conducted by the service recipient that are taken over by the new service provider are exempt. Although the services to be provided by the Service Provider to the Company may be exempt under the requirements of subparagraph (A)(i) of the statute, they will unquestionably be so under the requirements of subparagraph (B).
The exemption in Conn. Gen. Stat. §12-412(74), as amended by 1995 Conn. Pub. Acts 160, §45, also applies to sales of "computers or data processing equipment," when sold to a retailer, such as the Service Provider, that is providing the type of exempt outsourced computer and data processing services described in subparagraph (B) of the statute, when the data processing operations were acquired on or after July 1, 1995 and when the items are "used by such retailer to provide the services described in this subparagraph . . . ." To the extent that the Service Provider purchases any computer hardware, prewritten software, printers, scanners or similar data processing equipment for use in providing its services to the Company, whether it purchases the items from the Company or from anyone else, those purchases will be exempt from sales and use taxes under this provision. The statute does not require that the computers and data processing equipment be purchased from the customer (the service recipient), nor does it require that they be used exclusively to perform the exempt outsourced computer and data processing services described in §12-412(74)(B). (The purchase of the Company's assets by the Service Provider at the commencement of the agreement will also be exempt from sales and use taxes as a casual sale, since it will be a sale of used items by an owner that is not engaged in the selling of such items as a business. See Conn. Agencies Regs. §12-426-17(c)(5); see also Ruling No. 94-11.)
The equipment the Service Provider purchases as the agent of the Company will not be exempt from sales and use taxes. The exemption for purchases of computers and data processing equipment in Conn. Gen. Stat. §12-412(74)(B) applies only when those items are sold "to the retailer" of the exempt services-- here the Service Provider--and not when they are sold to anyone else, including the Company. When a person makes purchases as the agent of another, it makes those purchases not in its own capacity, but in that of its principal. In Rich-Taubman Associates v. Commissioner of Revenue Services, 236 Conn. 613, ----A.2d ---- (1996), the Connecticut Supreme Court held that the plaintiff, acting as agent for a municipality exempt from sales and use taxes on its purchases, acquired the tax-exempt status of its principal:
Section 12-412(1) should not be read to impose use tax liability on purchases that would otherwise be exempt from taxation merely because the city, in the interest of economy and efficiency, has appointed an agent to procure the materials and services necessary to ensure the successful and efficient operation of its parking garage.
Id., at 620.
Conversely, if purchases made directly by a principal would not be exempt from sales and use taxes, then purchases made by a person acting as the principal's agent would also not be exempt, even though the agent, were it acting on its own behalf, would be able to make the purchases exempt.
RULING:
The computer and data processing services provided by the Service Provider to the Company will be exempt from sales and use taxes under Conn. Gen. Stat. §12-412(74), as amended by 1995 Conn. Pub. Acts 160, §45.
The computers and data processing equipment purchased by the Service Provider, either from the Company or elsewhere, will be exempt from sales and use taxes under Conn. Gen. Stat. 12-412(74), as amended by 1995 Conn. Pub. Acts 160, 45.
The equipment purchased by the Service Provider as agent for the Company will be subject to sales and use taxes.
This Ruling amplifies and distinguishes Ruling No. 95-9.
LEGAL DIVISION
JULY 16, 1996