DRS: PS 98(3), Sales and Use Taxes on Computer-Related Services and Sales of Tangible Personal Property

 

STATE OF CONNECTICUT
DEPARTMENT OF REVENUE SERVICES

25 Sigourney Street
Hartford CT 06106-5032
 
 
 
 
 
 

 
 

This Policy Statement has been cited in PS 98(8) and IP 2000(26).  
This publication has been modified and superseded by PS 2003(3)

A correction was made to page 5 of this document on 04/13/98. If you have previously downloaded PS 98(3) please use the corrected version.

See alert notice on computer and data processing phase out.

PS 98(3)

Sales and Use Taxes on Computer-Related Services
and Sales of Tangible Personal Property


PURPOSE: This Policy Statement describes the Department’s current policies regarding the application of certain sales and use tax statutes and regulations to purchases of computer and data processing services, other enumerated services and sales of tangible personal property. It also provides the tax rate schedule for computer and data processing services, reflecting the phase out of the tax.


EFFECTIVE DATE: This Policy Statement is applicable to all open tax periods, except as specifically noted. The rates of tax for computer and data processing services are effective as indicated below.


STATUTORY AND REGULATORY AUTHORITY: Conn. Gen. Stat. §12-407(2)(a); §12-407(2)(i)(A), as amended by 1997 Conn. Pub. Acts 316, §6; §12-407(2)(i)(C); §12-407(2)(i)(H); §12-407(2)(i)(J); §12-407(2)(i)(Q); §12-407(2)(i)(DD); §12-407(8) and (9), as amended by 1997 Conn. Pub. Acts 243, §13; §12-408(1); §12-411(1), as amended by 1997 Conn. Pub. Acts 243, §19; and Conn. Agencies Regs. §§12-426-25 and 12-426-27.


TAX RATE SCHEDULE FOR COMPUTER AND DATA PROCESSING SERVICES: Effective July 1, 1997, the sales and use tax rate for computer and data processing services is being reduced in annual increments, as follows:

ALERT:  The repeal of the sales and use tax on computer and data processing that was scheduled for July 1, 2002, has been delayed for two years.The 1% sales and use tax on computer and data processing services will remain in effect through June 30, 2004.

Sales of services occurring:

on or after through rate
July 1, 1997 June 30, 1998 5%
July 1, 1998 June 30, 1999 4%
July 1, 1999 June 30, 2000 3%
July 1, 2000 June 30, 2001 2%
July 1, 2001 June 30, 2002 1%
 July 1, 2002 June 30, 2004  1%
 

COMPUTER AND DATA PROCESSING SERVICES DEFINED:

Computer and data processing services are defined in Conn. Agencies Regs. §12-426-27(b)(1) to mean and include:

providing computer time, storing and filing of information, retrieving or providing access to information, designing, implementing or converting systems[,] providing consulting services, and conducting feasibility studies.

The list of services in the regulation does not exclude other services otherwise within the meaning of computer and data processing services. (See Conn. Agencies Regs. §12-426-27(k)). Computer programming, data scanning, customizing software, creating custom software, computer training and on-line access to information are among the services that are within the scope of taxable computer and data processing services. Computer and data processing services are subject to tax in Connecticut if the benefit of the services is received in this state.


EXCLUSIONS FROM SALES AND USE TAX ON COMPUTER AND DATA PROCESSING SERVICES: Under Conn. Gen. Stat. §12-407(2)(i)(A), as amended by 1997 Conn. Pub. Acts 316, §6, taxable computer and data processing services do not include:

services rendered in connection with the creation, development, hosting or maintenance of all or part of a web site which is part of the graphical, hypertext portion of the Internet, commonly referred to as the World Wide Web.

This exclusion applies to all computer and data processing services (such as programming, data entry, scanning, computerized graphic design, software installation, software maintenance and hosting fees), when such services are provided to a service recipient in connection with the service recipient’s web site. The exclusion is effective for sales of services occurring on or after July 1, 1997.

The exclusion from tax does not apply to charges for access to web sites maintained by others. The sale of prewritten (canned) software necessary to create a web site is taxable at the rate of 6% when tangible personal property is provided to the purchaser by the retailer, and is taxable at the current rate for computer and data processing services when no tangible personal property is provided to the purchaser by the retailer and the software is delivered electronically. (See Tax Rate Schedule for Computer and Data Processing Services)


CHARGES TO BE SEPARATELY STATED: Charges for computer hardware and prewritten computer software, as well as charges for enumerated services such as business management consulting and job-related personnel training, may sometimes be combined in a single contract price with charges for computer and data processing services. The Department will presume that the higher applicable rate of tax applies to an entire contract, unless the charges for each component of the contract are separately stated, and reasonably allocated.

It is the responsibility of retailers of such items and services as computer hardware, computer software, software installation, maintenance, support, upgrades, computer training and other enumerated services to separately state the charges for tangible personal property, computer and data processing services other enumerated services, and nontaxable charges, and to collect and remit the correct amount of tax on such charges.

Purchasers that self-assess use tax must be prepared to show, through receipts or other written records, that they have remitted the correct amount of tax on such charges.


SALE, INSTALLATION, MAINTENANCE AND REPAIR OF COMPUTER HARDWARE: The sale or lease of computer hardware, including but not limited to mainframes, personal computers, hard drives, monitors, printers and scanners, is the sale of tangible personal property, and remains subject to sales and use taxes at the rate of 6%.

Charges for installation of computer hardware that is sold, as opposed to leased, are subject to sales and use taxes at the rate of 6% if such installation services are not separately stated. If installation charges are separately stated, they are not subject to tax, pursuant to Conn. Gen. Stat. §12-407(8)(B)(iv) and (9)(B)(iv). However, charges for installation of leased computer hardware are subject to tax at the rate of 6%, pursuant to Conn. Agencies Regs. §12-426-25(c), whether or not such amounts are separately stated. Installation of computer hardware normally includes unpacking, setup, wiring and initial testing of the equipment, but does not include installation of software.

The repair and maintenance of computer hardware is the repair and maintenance of tangible personal property, enumerated in Conn. Gen. Stat. §12-407(2)(i)(DD) (or the repair of electrical or electronic devices, enumerated in §12-407(2)(i)(Q)), and remains subject to tax at the rate of 6%. Maintenance, repair or warranty contracts for computer hardware are also taxable at the rate of 6%. (See PS 94(2), Maintenance, Repair and Warranty Contracts.)


SALES OF COMPUTER SOFTWARE: The sales and use tax rate for charges for sales of computer software will vary, depending on whether the software is prewritten or packaged (canned), or custom or customized.

Prewritten software. Prewritten computer software is tangible personal property, and the sale, leasing or licensing of such software remains taxable at the rate of 6%. Prewritten software is software (including upgrades) that has been created for a general class of users and that needs only modifications that do not substantially alter the purpose or functions of its program in order to run on a customer’s computer.

Custom or customized software. The processes of designing, creating and developing custom software, or of adapting or modifying existing software to the particular needs of a customer, are computer and data processing services, taxable at the current rate for such services. (See Tax Rate Schedule for Computer and Data Processing Services) Custom software is software that has been specifically created for the customer. Customized software is software that has had substantial modifications to its functions or the purpose of its program, so that the software has been changed to such a degree that it bears little resemblance to any but the most basic functions of the prewritten software on which it was based. Charges for upgrades of custom software are charges for computer and data processing services.

Because custom and customized software are not tangible personal property, any charges (such as license fees) for the mere use and possession of such software, stated separately from charges for taxable computer and data processing services or prewritten software, are not subject to tax.

For a discussion of computer software purchased in connection with exempt machinery, see SN 97(2), Exemption From Sales and Use Taxes for Items Used Directly in the Biotechnology Industry; SN 93(1.1), The Manufacturing Recovery Act of 1992 Exemption for Purchases of Property Used in Manufacturing, Processing and Fabricating; or PS 95(4), Purchases of Machinery, Equipment, Tools, Materials and Supplies by Commercial Printers and Publishers, or other related publications from this Department.

Example 1: A company purchases prewritten software and provides it to a customer, then makes minor modifications to the software so that it will run on the customer’s system. The modifications are not substantial enough to be considered customization. The company then charges separate monthly license fees to the customer for the software. The company separately states the initial charge for the prewritten software program, the charges for the modifications, and the license fees. The initial charge for the prewritten software is taxable at 6%, the charges for the modifications are taxable at the current rate for computer and data processing services, and the license fees are taxable at the rate of 6%, because the license is for prewritten, not customized or custom, software. The company may purchase the prewritten software on resale.

Example 2: A company purchases prewritten software and provides it to a customer, then makes sufficiently substantial modifications to the functions or the purpose of the software program, so that it is considered to have been customized. The company then charges separate monthly license fees to the customer for the software. The company separately states the initial charge for the prewritten software program, the charges for the modifications, and the license fees. The initial charge for the prewritten software is taxable at 6%, the charges for the modifications are taxable at the current rate for computer and data processing services, and the license fees are not taxable, because they are for customized software. (If the license fees for the customized software were not separately stated, they would be taxable at the current rate for computer and data processing services.) The company may purchase the prewritten software on resale.

Example 3: A company contracts with a customer to create and deliver a customized software product to the customer. The company purchases prewritten software, which it uses as the base for the customized software. When the company delivers the customized software to the customer, it makes an initial charge for the customized software, then charges separate monthly license fees to the customer. The company does not make a separate charge for the prewritten software on which the customized software was based. The charge for the customized software is subject to tax at the current rate for computer and data processing services, and the license fees are not taxable, because they are for customized software. (If the license fees for the customized software were not separately stated, they would be taxable at the current rate for computer and data processing services.) Because the company is the consumer of the prewritten software it uses to create the customized software, and must pay 6% tax on its purchase price, it may not purchase the prewritten software on resale.

Example 4: Company A provides prewritten software to a customer for an initial charge, then charges the customer a monthly license fee for the prewritten software. The customer hires Company B to perform modifications to the software so that it will run on the customer’s system. All the charges from Company A are subject to tax at 6%, regardless of whether Company B’s modifications constitute customization of the software, because the customer is paying Company A for prewritten software. The charges from Company B for the modifications are subject to tax at the current rate for computer and data processing services. Company A may purchase the prewritten software on resale.


SOFTWARE INSTALLATION, MAINTENANCE, SUPPORT AND UPGRADES: The installation of computer software typically involves the application of the service provider’s expertise about computers and computer programming, and about implementing computer systems. Software installation is a computer and data processing service, taxable at the current rate for such services, whether the installation is of prewritten, custom or customized software.

Maintenance of computer software is a computer and data processing service, taxable at the current rate for such services, whether the software is prewritten, custom or customized. Maintenance of computer software typically includes consulting with the service recipient in the form of technical support, software support, user support or telephone support. Software warranty contracts for the provision of services in connection with software are similarly subject to tax as computer and data processing services.

Charges for upgrades of prewritten software, involving the replacement of software with upgraded software, remain subject to tax as the sale of tangible personal property, at the rate of 6%, when tangible personal property is provided to the purchaser by the retailer. When no tangible personal property is provided to the purchaser by the retailer and the software is delivered electronically, charges for software upgrades are taxable at the current rate for computer and data processing services. (See Tax Rate Schedule for Computer and Data Processing Services)

Software maintenance contracts or warranty contracts that provide for computer and data processing services, such as telephone support and other services, and include upgrades of prewritten software where tangible personal property is provided to the purchaser, will be presumed to be contracts for the sale of tangible personal property taxable at 6%, unless the charges for services are separately stated from the charges for software upgrades.


COMPUTER TRAINING: In some cases, computer training and software training may be taxable as business management consulting services (personnel training) under Conn. Agencies Regs. §12-407(2)(i)(J)-1(i)(1) and Conn. Gen. Stat. §12-407(2)(i)(J), at the rate of 6%. Computer training and software training are taxable as personnel training consulting services when the service provider is engaged and paid by an employer to provide job-related training to personnel whose primary workplace is located in Connecticut. Job related training means training directly related to teaching, maintaining, upgrading or improving the specific skills required in the employee’s day-to-day job performance. See PS 92(2.1), Sales and Use Taxes on Charges for Personnel Training Services.

When computer training and software training are not job-related, or are not contracted and paid for by an employer, they are computer and data processing services, taxable at the current rate for such services, whether or not the training is rendered in connection with the sale or lease of software.

Computer training courses open to the general public that are offered by accredited colleges, universities and graduate centers are not taxable as personnel training under Conn. Gen. Stat. §12-407(2)(i)(J), except when such entities are directly engaged and paid by an employer to provide training for employees. Computer training courses open to the general public that are offered by accredited colleges, universities and graduate centers are not taxable as computer and data processing services under §12-407(2)(i)(A).

Example 1: A law firm engages and pays a service provider to train its secretarial personnel in connection with a new word processing software product the personnel will use in their jobs. Charges for this training are taxable at 6%, because the training is directly related to maintaining, upgrading or improving the specific job skills of the secretaries.

Example 2: A law firm engages and pays a service provider to conduct a class for its attorneys on the use of e-mail to facilitate interoffice communications. Charges for this training are taxable at the current rate for computer and data processing services, because the training is not directly related to the specific job skills of the attorneys.


PERSONNEL SERVICES: Sometimes employees who perform computer and data processing functions may be provided to a service recipient by a service provider that provides personnel services enumerated in Conn. Gen. Stat. §12-407(2)(i)(C), and the charges for such personnel services will be taxable at the rate of 6%, rather than at the reduced rate for computer and data processing services.

Two elements are necessary for a service to be considered a personnel service: (1) a service provider must provide its own employees to a service recipient, to perform temporary or part-time work; and (2) while the employees are with the service recipient, the service recipient must have control over the work the employee is to do and how the work is to be done.

To determine whether a service involving an employee who performs computer-related functions is a personnel service or a computer and data processing service, it is necessary to examine how much control the service recipient has over what the employee will do and how it is to be done. Although there are no invariable guidelines in this area, typically, the more control the service recipient has over the service provider’s employee while the employee is with the service recipient, and the less that employee’s duties are related to a predetermined task or project, the more likely the services are to be personnel services. Conversely, the more the duties to be performed by the employee are in fulfillment of a project or task predetermined by the service provider and the service recipient, and the more control the service provider has over the employee’s duties while the employee is with the service recipient, the more likely the service is to be a computer and data processing service. See PS 93(3.2), Taxation of Services by Employment Agencies and Agencies Providing Personnel Services.

If the service provider is an independent contractor and not an employee of an agency that provides its own employees to the service recipient, the services are never personnel services.

Example 1: A bank hires a service provider to provide temporary personnel to fill in for absent employees or to supplement the workforce in its data processing department. The bank will have control over the work the employees are to do and how they are to do it. The bank is receiving personnel services, taxable at 6%.

Example 2: A bank contracts with a service provider for the provider to perform a project. The project will consist of the service provider merging two computer software systems by converting all the files of an old system into files of the new system. The scope of this project has been predetermined by the bank and the service provider. The service provider places several of its employees at the bank to perform the conversion project. These employees work alongside the bank’s employees, work the same hours as the bank’s employees and often take their breaks and lunch periods with the bank’s employees, but their duties have been prearranged by the bank and the agency. The bank is receiving computer and data processing services, taxable at the current rate for such services.

Example 3: A bank hires several independent contractors to do routine data processing functions in its data processing department. The bank is purchasing computer and data processing services from the independent contractors, because they are not employees of an agency.


BUSINESS MANAGEMENT CONSULTING: Some service providers may provide consulting relating to computers and computer systems as part of comprehensive, multifaceted business management consulting contracts. Business management consulting services, enumerated in Conn. Gen. Stat. §12-407(2)(i)(J), are taxable at the rate of 6%.

Business management consulting includes only services directly related to the core business of the service recipient. Depending on the service recipient’s business and the use to which the service recipient’s computers are put, computer consulting may not be directly related to the core business of the service recipient. (See Conn. Agencies Regs. §12-407(2)(i)(J)-1(h).)

It is the service provider’s responsibility to separately state charges for computer consulting and to show that such charges are not related to the recipient’s core business. Charges for computer consulting services that are not stated separately from charges for business management consulting services will be taxable at 6%.


STENOGRAPHIC SERVICES: Some service providers who perform routine typing and data entry on word processing equipment may be providing stenographic services, enumerated in Conn. Gen. Stat. §12-407(2)(i)(H), taxable at the rate of 6%.

Conn. Agencies Regs. §12-426-27(b)(9) defines stenographic services to include "typing, taking shorthand, and taking and transcribing dictation for others for a consideration." If a service provider’s duties are confined to routine typing or transcription of text, even if the typing and transcription are performed on word processing equipment, and even though such typing may be referred as data entry, the services are stenographic services, and not computer and data processing services.


EFFECT ON OTHER DOCUMENTS: None affected.


EFFECT OF THIS DOCUMENT: A Policy Statement (PS) is a document that explains in depth a current Department policy or practice affecting the liability of taxpayers.


FOR FURTHER INFORMATION: If you have questions about Connecticut taxes, please call the Department of Revenue Services during business hours, Monday through Friday:

  • 860-297-5962 (Hartford area or from out-of-state); or
  • 1-800-382-9463 (toll-free from within Connecticut)

Telecommunications Device for the Deaf (TDD/TT) users only, please call 860-297-4911 during business hours.


FORMS AND PUBLICATIONS:

You may obtain forms and publications at any hour, seven days a week:

  • Telephone: use the phone numbers listed above and select Option 3 from a touch-tone phone;
  • Internet: preview and download forms from the DRS Web Site: http://www.ct.gov/drs.

PS 98(3)
Sales and use taxes
Issued: 4/1/98