Ruling 98-4, Sales and Use Taxes / Computer and Data Processing Services / "Outsourcing" Exemption / Business Management Services
FACTS:
A company doing business in Connecticut (the "Company") will provide its customers with what it terms "procurement process management services." The Company will oversee most aspects of the customers’ purchases of services, supplies, raw materials for manufacturing, etc. The Company will provide all the data processing equipment, computer software and staff necessary to perform these procurement functions. The customers are currently performing their own procurement functions.
The Company’s contracts with its customers are separated into several categories, which may be generally described as follows:
(1) Supplier selection and monitoring services. The Company will select customers’ suppliers of goods and services, negotiate agreements between customers and suppliers, and recommend to customers which of their existing supplier agreements should be continued or discontinued. The Company will then monitor the performance of suppliers under the supplier contracts by establishing and maintaining records for all suppliers. Where appropriate, the Company will recommend termination of supplier contracts.
(2) Procurement services. The Company will manage the actual procurement of goods and services by processing and keeping track of requisitions from suppliers. The Company will create and maintain databases and will collect and maintain data about requisitions. When necessary, the Company will communicate with suppliers to return goods and will obtain credits and attempt to resolve disputes between customers and their suppliers.
(3) Accounts payable services. The Company will receive and process invoices from suppliers and will authorize customers to pay their suppliers. The Company will develop computer specifications for interfacing between the Company’s procurement system and customers’ accounting systems, and will collect accounting data and provide it to the customers.
(4) Support services. The Company will provide support to customers’ personnel to assist them with procurement problems involving the Company’s software, and problems with the customers’ suppliers and procurement of goods and services. Finally, the Company will create, update and maintain a manual of procedures for all phases of its operations, and will keep customer personnel informed of changes in procedures.
ISSUES:
Whether some or all of the Company’s services are computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A), and if so, whether the services qualify for the exemption from sales and use taxes in Conn. Gen. Stat. §12-412(74) for "outsourced" computer and data processing services, and
Whether some or all of the Company’s services are business management services enumerated in Conn. Gen. Stat. §12-407(2)(i)(J).
RULING:
The Company’s accounts payable services and support services are computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A), and qualify for the exemption from sales and use taxes in Conn. Gen. Stat. §12-412(74) for "outsourced" computer and data processing services.
The Company’s supplier selection and monitoring services and procurement services are business management services enumerated in Conn. Gen. Stat. §12-407(2)(i)(J) if they relate to customers’ core businesses and do not fall within one of the exclusions to "core business" in Conn. Agencies Regs. §12-407(2)(i)(J)-1(h).
DISCUSSION:
Conn. Gen. Stat. §12-407(2)(i) enumerates services that are subject to sales and use taxes, including "(A) computer and data processing services. . . ." Conn. Agencies Regs. §12-426-27(b)(1) defines computer and data processing services to include "providing computer time, storing and filing of information, retrieving or providing access to information, [and] designing, implementing or converting systems. . . ."
Certain sales of computer and data processing services are exempt under Conn. Gen. Stat. §12-412(74), including "(B) Sales of computer and data processing services rendered to a customer by a retailer which . . . acquired the data processing operations from the customer, provided such customer formerly conducted such data processing operations for its own use."
Conn. Gen. Stat. §12-407(2)(i)(J) enumerates as taxable "business analysis, business management, management consulting and public relations services. . . ." In Conn. Agencies Regs. §12-407(2)(i)(J)-1(e), "business management services" are defined to include "the controlling or directing of . . . all or a portion of the core business activities, as defined in subsection (h) of this regulation . . . of a service recipient. . . ." Subsection (h) of the regulation defines "core business activities" to include "activities directly related to a service recipient’s lines of business involving sales of products, property, goods or services to others. . . ." The subsection lists eight types of activities that are not generally regarded as directly related to a service recipient’s core business activities. Procurement of goods and services is not specifically listed among the excluded activities.
B. Application of the Law to the Facts of this Ruling
Although the use of computers is important to the Company’s procurement management services, viewed as a whole the procurement management services involve much more than just computer and data processing services. The Company contracts to perform a comprehensive range of activities, from negotiating, reviewing and monitoring supplier agreements to resolving disputes between customers and suppliers, in addition to processing data, maintaining databases and providing computer support functions.
The Company contracts to manage a portion of the businesses of its customers; therefore, its charges are subject to sales and use taxes as business management services to the extent that the procurement functions are related to the core business activities of the customers. In particular, the supplier selection and monitoring services and procurement services described in the facts of this Ruling are potentially taxable as business management services.
Because the Company may provide these services to more than one type of customer, it is impossible to state categorically in this Ruling whether the services are taxable business management services. For example, if the Company manages the procurement of raw materials or office supplies for a manufacturer, the management of these purchases would be related to the core business of the customer. On the other hand, if the Company manages the procurement of janitorial or maintenance services for the customer’s business premises, these services would be excluded from the definition of "core business" under Conn. Agencies Regs. §12-407(2)(i)(J)-1(h)(2) as "the administration of . . . plant and grounds maintenance. . . ."
Viewed separately from the supplier selection, monitoring and procurement services, the accounts payable services and the support services do appear to be computer and data processing services. Primarily, they involve the use of computers to process invoices and authorize payments and to transfer data between the Company and its customers, and computer troubleshooting and system support. Therefore, if the Company takes over the performance of these services from its customers, the services will qualify for the exemption for "outsourced" computer and data processing services in Conn. Gen. Stat. §12-412(74)(B).
It is the Company’s responsibility to separately state charges for taxable business management services from charges for management services to other than the "core business" of its customers, and from charges for exempt "outsourced" computer and data processing services.
LEGAL DIVISION
December 14, 1998