Is a service that retrieves motor vehicle records for customers -- using computers to match and transmit the data -- a taxable computer and data processing service in Connecticut?

Plain-English summary

A company was in the business of getting people their motor vehicle driving records. A customer would send a request (by mail or over a computer link); once a day the company passed the batch of requests to an independent service bureau, which put them on magnetic tape and delivered them to the Connecticut Department of Motor Vehicles (DMV); the DMV processed them and returned its answers on tape; and the company then printed or electronically transmitted each DMV report back to the customer. The company billed per request and kept no database of its own — it gave customers no direct access to the DMV's databases.

The question: is that a taxable computer and data processing (CDP) service under Conn. Gen. Stat. § 12-407(2)(i)(A)?

DRS said no — and the reasoning is the important part, because this ruling became a cornerstone of how Connecticut decides these cases. Whether a service is taxable CDP "depend[s] upon a determination of the true object of the underlying transaction." As the Connecticut Supreme Court put it in Hartford Parkview Associates v. Groppo, "the fact [that] a computer is used in connection with [the] services cannot alone be a basis for the tax."

Applying that test, DRS found the customer's true object was to obtain a motor vehicle report, not to buy computer services. The tells that would point to a taxable computer service were all absent: there was no immediate access to stored information, no maintenance of a database, and no on-line inquiry ability. The computers only facilitated delivering the reports. DRS contrasted CCH Computax v. Dubno, where a service bureau's programmed calculations for accounting firms were the true object (real computer processing sold to firms that then resold tax-preparation to their own clients). This company's service "do[es] not rise to the level of data processing found in CCH Computax." So it was ruled not a CDP service under § 12-407(2)(i)(A).

What this means for you

"A computer was involved" is never enough — look at the true object

This is the rule Connecticut keeps returning to. Using computers, modems, or magnetic tape to deliver a service does not make the service a taxable computer and data processing service. The question is what the customer is really buying. If the true object is a report, an answer, or a result — and the computer is just how it gets produced or delivered — it is not taxed as CDP.

The features that flip it to taxable

DRS flagged the signals that would make a service taxable CDP: immediate access to stored information, maintaining a database, or on-line inquiry ability. If your customers can query a database you keep, or get real-time access to stored data, you are much closer to a taxable computer service. Selling a finished lookup with none of those features (as here) points the other way.

It's a fact-by-fact analysis

DRS stressed the true-object test is applied "in terms of the particular facts and circumstances of each case." Small changes — giving customers direct database access, or selling the processing itself rather than a report — can change the answer. And because the treatment and rate of CDP services have changed since 1991, confirm the current rules for your service.

Common questions

Q: Does using computers to deliver a service make it taxable in Connecticut?
A: No. Under this ruling (and Hartford Parkview v. Groppo), the fact that a computer is used cannot by itself be the basis for the tax. What matters is the true object of the transaction.

Q: Why weren't the DMV-record lookups a taxable computer service?
A: Because the customer's true object was to get a motor vehicle report, not computer processing. The company kept no database, gave no immediate access to stored information, and offered no on-line inquiry — the computers merely helped deliver the reports.

Q: What would have made it taxable?
A: Signs that the true object is the computer service itself — immediate access to stored information, maintaining a database, or on-line inquiry ability. DRS said the presence of any of those would indicate a taxable computer service.

Q: How is this different from CCH Computax v. Dubno?
A: In CCH Computax the true object really was the computer and data processing (programmed calculations sold to accounting firms). Here the true object was a report, and the computing was incidental — so the two cases came out differently.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(2)(i)(A) — the rendering of computer and data processing services is a taxable "sale"

Case law (as cited by the ruling):

• Hartford Parkview Associates Ltd. Partnership v. Groppo, 211 Conn. 246 (1989) — computer use "cannot alone be a basis for the tax"; taxability turns on the true object
• CCH Computax, Inc. v. Dubno, Conn. Super. Ct. No. 302006 (1988) — true object was the purchase of computer and data processing services

The ruling also quotes out-of-state definitions of "data processing" for comparison (Texas Rule 34 TAC § 3.342; D.C. § 47-2001(N)(A)(i); Ohio Rule 5703-9-46).

Related DRS guidance:

• This Ruling was later cited in Rulings 93-6, 93-8, 93-11, 95-1, 95-2 and 96-1 — the line of Connecticut CDP "true object" rulings that build on it.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 91-11

Original ruling text

Ruling 91-11, Computer and Data Processing Services

Ruling 91-11

Computer and Data Processing Services

This Ruling has been cited in Rulings   93-6 ,  93-8 ,  93-11 ,  95-1 ,  95-2 , and   96-1

FACTS:

The ruling request, as amended, summarizes the Company's business as follows: a customer seeking motor vehicle driving records contacts the Company by mail or over a computer link. Once a day, the Company transmits the request to an independent service bureau in Hartford which stores the request on a magnetic tape and then sends the tape to the Connecticut Department of Motor Vehicles ("DMV"). The DMV processes the requests and returns its response on magnetic tape via the service bureau to the Company on the next day. The Company prints onto hard copy and mails or electronically transmits the DMV response to the customer. Usually, the Company's customers make their requests via computer and receive the response via a computer which stores the response on disk or prints it out on an office printer. The Company bills its customers on the basis of the number of requests made, without reference to the method used to convey the information to the Company or to send the information to the customer.

The Company does not maintain or provide access to a database of its own, nor does it provide direct access for its customers to the DMV databases.

RULING:

Whether taxable computer and/or data processing services have been provided by this taxpayer will depend upon a determination of the true object of the underlying transaction. Hartford Parkview Associates Limited Partnership v. Groppo , 211 Conn 246 (1989). The Supreme Court in determining the taxability of hotel reservation services in the above case observed that "[the fact [that] a computer is used in connection with [the] services cannot alone be a basis for the tax." Hartford Parkview at 251.

Computers are used in the services provided by this company in two ways. First, the data from the Department of Motor Vehicles is matched with the company's client's data. Second, once the match is made, the resulting information may be transmitted to the client by using a computer modem. (It may also be transmitted as a hard copy report.)

In analyzing whether the above transaction is a taxable computer and/or data processing service, a determination must be made as to whether the object of the client's purchase is a computer or data processing service. While the client is aware, no doubt, that computers will be used to match data, the fundamental purpose of the transaction for the client is to obtain a report of a given individual's motor vehicle record. In this regard, there is no immediate access to stored information, no maintenance of a database, and no on-line inquiry ability. The presence of any of the above would indicate that the true object of the transaction was to purchase computer services.

Data processing services have been variably defined as:

"processing, reformatting, or manipulation of data provided by the customer." Texas Rule 34 TAC Sec. 3.342.

"the processing of information for the compilation and production of records of transactions..." District of Columbia Sec. 47-2001 (N)(A)(i).

"the processing of others' data including all processes incident to processing of data such as keypunching, keystroke verification, rearranging, or sorting of previously documented data for the purpose of data entry or automatic processing..." Ohio Rule 5703-9-46.

"(1) the preparation of information for processing by computers; (2) the storing or processing of raw data by a computer" CCH Computax, Inc. v. Dubno , CT Superior Ct. No. 302006 (1988).

The question of whether a taxable data processing service occurs will depend upon an analysis of the true object of the transaction in terms of the particular facts and circumstances of each case. The court in CCH Computax, Inc. v. Dubno determined that the computers were programmed to make complicated calculations and offered both a tremendous savings of time and more accuracy to the accounting firms that consumed the computer and data processing services in the preparation of tax returns for their clients. Because of these and other factors the court determined that the true object of the transactions between CCH Computax and the accounting firms was the purchase of computer and data processing services and not tax return preparation services.

The services rendered in the instant case do not rise to the level of data processing found in CCH Computax, nor is the relationship between the parties the same. Although the matching of names and the transmission of information is accomplished by means of computers, this use of computers and data processing merely facilitates the Company's provision of the motor vehicle reports to the customer. Moreover, in the instant case, the service recipient is the customer initiating the request for the motor vehicle reports, whereas in CCH Computax the service recipients were accounting firms that were in turn providing yet another service, tax preparation, to their customers. The true object of the transaction between the Company and its customer is the providing of motor vehicle reports; the use of computers and data processing is incidental to that true object.

In addition, it should be noted that this company and the Department have previously agreed, by Superior Court stipulation, as to whether taxable services were being rendered by the taxpayer. Although the agreement does not specifically address computer and data processing services, a review of the manner in which the taxpayer has conducted its business both during the Court stipulated period and more recent periods does not indicate a significant change to render that stipulated agreement inapplicable to the present inquiry.

For the foregoing reasons, it is ruled that this company is not providing computer and data processing services pursuant to §12-407(2)(i)(A) of the Connecticut General Statutes.

LEGAL DIVISION

April 12, 1991