Are fees for premium content on restaurant table tablets taxable, is the vendor's device charge a taxable lease, and must the out-of-state vendor register in Connecticut?

Plain-English summary

A restaurant chain puts touchscreen tablets on its tables so customers can browse the menu, order, and pay. An out-of-state vendor supplies the tablets (plus the servers and Wi-Fi gear that make them work) and offers "premium content" — news, sports, social media, music selection, and games — that the restaurant sells to customers for extra fees. The vendor charges the restaurant a monthly fee (and sometimes takes a cut of the premium-content revenue instead of or on top of the fee). The chain asked three questions, and got a "yes" to each.

1. Premium-content fees to customers are taxable computer and data processing services. Providing access to news, sports, games, and other digital content is "retrieving or providing access to information," which Connecticut taxes as a computer and data processing service under Conn. Gen. Stat. § 12-407(a)(37)(A). (Connecticut taxes computer and data processing services at its reduced 1% rate.)

2. What the restaurant pays the vendor for the devices is a taxable lease. Even though the contract labels the monthly charge a "Service Fee," it is really consideration for the right to possess and use the tablets — i.e., a lease of tangible personal property, which is a taxable sale under § 12-407(a)(2)(J). The taxable lease amount (gross receipts) includes both the monthly fee and any share of premium-content revenue the restaurant hands over to the vendor.

3. The out-of-state vendor must register and collect the tax. The vendor has a physical presence — its tablets and equipment sit in Connecticut restaurants — so it is a retailer with Connecticut nexus. It must obtain a Connecticut Sales and Use Tax Permit and collect tax on the device-lease charges.

What this means for you

Restaurants and hospitality operators using in-venue tech

If you resell digital content (news, games, streaming, music) to your guests, expect those charges to be taxable computer and data processing services. And look past the label on your vendor contract: a "service fee" or "SaaS fee" that is really paying for the use of hardware placed in your restaurant is a taxable equipment lease. Make sure your vendor is charging Connecticut tax correctly on the device charges.

Technology and equipment vendors placing hardware in Connecticut

Putting your devices in a Connecticut customer's location gives you physical-presence nexus, even if you're based out of state. That obligates you to register for a Connecticut Sales and Use Tax Permit and collect tax on the taxable lease of those devices — including any revenue-share you receive that is really part of the lease consideration.

Accountants and tax professionals

Three distinct doctrines stack up here: (1) computer and data processing services under Conn. Gen. Stat. § 12-407(a)(37)(A) and Conn. Agencies Regs. § 12-426-27(b)(1) ("providing access to information"), taxed at Connecticut's reduced 1% rate; (2) substance-over-form lease characterization under § 12-407(a)(2)(J) and the lease definition in § 42-2A-102(a)(17), with gross receipts under Conn. Agencies Regs. § 12-426-25(c) capturing the monthly fee plus revenue-share; and (3) physical-presence nexus from tangible property located in-state. The Department noted this treatment is consistent with its earlier Ruling No. 2015-5 and Policy Statements 2004(2) and 2006(8).

Common questions

Q: Is charging customers for digital content (games, news, music) taxable in Connecticut?
A: Yes — it's a computer and data processing service (providing access to information), taxable under § 12-407(a)(37)(A) at Connecticut's reduced 1% rate.

Q: Our vendor calls it a "service fee," not rent — is it still a taxable lease?
A: Yes. Connecticut looks at substance: if the charge is really for the right to possess and use hardware placed in your location, it's a taxable lease of tangible personal property regardless of the contract label.

Q: Does revenue we share with the vendor get taxed too?
A: Yes. The taxable lease amount includes the monthly fee plus any share of premium-content revenue you pay to the vendor, because that is also consideration for the devices.

Q: We're an out-of-state vendor — do we have to register in Connecticut?
A: If your devices or equipment are physically located in Connecticut, you have nexus and must register for a Connecticut Sales and Use Tax Permit and collect the tax on the taxable lease.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407 (services taxed only if enumerated)
• Conn. Gen. Stat. § 12-407(a)(37)(A) (computer and data processing services)
• Conn. Gen. Stat. § 12-407(a)(2)(J) (leasing of tangible personal property is a taxable sale)
• Conn. Gen. Stat. § 42-2A-102(a)(17) (definition of "lease")

Regulations and guidance:

• Conn. Agencies Regs. § 12-426-27(b)(1) (computer and data processing includes providing access to information)
• Conn. Agencies Regs. § 12-426-25(c) (gross receipts from leasing tangible personal property)
• Policy Statement 2004(2) (internet access and online sales); Policy Statement 2006(8) (computer-related services); Informational Publication 2015(12), Getting Started in Business
• Consistent with the Department's earlier Ruling No. 2015-5

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2017-6

Original ruling text

Ruling 2017-6 - Sales and Use Taxes - Computer and Data Processing Services - Leasing and Rental

FACTS:

A restaurant chain with locations in Connecticut (the “Company”) provides its customers with mobile point-of-sale devices (the “Devices”). The Devices are tablets with a touch screen interface that the Company places at each table to provide pictures and detailed descriptions of menu items.   Customers can use the Devices to place orders and pay for them with credit, debit or gift cards.

The out-of-state vendor of the Devices (the “Vendor”) provides the Company with the option to enhance the customer experience by allowing access to premium content on the Devices, such as news, sports, social media, the ability to select music to be played on the restaurant's playlist, and interactive games that are installed on each Device.   The Company charges separate fees to its customers to access the premium content.

The Vendor charges the Company a monthly fee for the use of the Devices (including servers, Wi-Fi controllers, and other tangible personal property provided to make the Devices function at each restaurant). In an alternative arrangement, the Company may pay all or a portion of the revenue it collects from the premium content to the Vendor, either in addition to or instead of the monthly fee.

ISSUES:

1.      Are the fees the Company charges to its customers for the premium content subject to sales and use taxes?

2.      Is the consideration for the Devices that the Company pays to the Vendor, including the monthly fee plus any portion of the revenues the Company collected from its customers for the premium content, subject to sales and use taxes?

3.      If the consideration for the Devices is subject to sales and use taxes, must the Vendor register as a retailer with the Department and collect the tax due on such consideration?

RULINGS:

1.      The fees the Company charges to its customers for the premium content are taxable as computer and data processing services.

2.      The consideration for the Devices that the Vendor charges the Company, which consists of the monthly fee plus any portion of the revenues the Company remits from fees charged to its customers for the premium content, is taxable as the rental or leasing of tangible personal property.

3.      The Vendor must register with the Department and collect tax on all consideration the Company pays to the Vendor for leasing the Devices.

DISCUSSION:

Connecticut generally imposes sales tax on retail sales of tangible personal property, whereas sales of services are not subject to sales tax unless specifically enumerated as taxable in Conn. Gen. Stat. § 12-407.

Computer and data processing services are specifically enumerated as subject to sales and use tax.  Conn. Gen. Stat. § 12-407(a)(37)(A).  Computer and data processing services include “retrieving or providing access to information.”  Conn. Agencies Regs. § 12-426-27(b)(1).  Therefore, charges to the Company's customers for the premium content on the Devices are charges for providing access to digital information and content, and are taxable as computer and data processing services. See Ruling No. 2015-5 , Policy Statement 2004(2) , Sales and Use Taxes on Internet Access Services and On-Line Sales of Goods and Services , and Policy Statement 2006(8) , Sales and Use Taxes on Computer-Related Services and Sales of Tangible Personal Property .

The rental or leasing of tangible personal property is considered a sale that is subject to sales and use taxes. Conn. Gen. Stat. § 12-407(a)(2)(J). “Lease” means the transfer of the right to possession and use of goods for a period in return for consideration. Conn. Gen. Stat. § 42-2A-102(a)(17).  Even though the monthly fee the Vendor charges to the Company is referred to in the contract as the “Service Fee,” it is actually for the lease of the Devices that are placed in the Company’s restaurants. “Gross receipts” from renting or leasing tangible personal property include the total amount of payment, royalties or periodic payments received for the leasing or rental of tangible personal property. Conn. Agencies Regs. § 12-426-25(c). The gross receipts that the Vendor receives from the Company is from the lease of the Devices and includes both the monthly fee plus any revenue from the premium content fees that the Company pays to the Vendor.

A business that has any physical presence in Connecticut must register to collect Connecticut sales tax on sales to Connecticut customers and must obtain a Connecticut Sales and Use Tax Permit .   Examples of such a physical presence include owning or leasing real or tangible personal property, maintaining an office, or having employees or agents present in this state. Informational Publication 2015(12) , Getting Started in Business , p. 10. The Vendor has physical presence in Connecticut because of its Devices that are in the Company’s restaurants within Connecticut. Thus, the Vendor is a retailer who must register with the Department and collect the tax that is imposed upon the gross receipts from the leasing of the Devices. See Conn. Agencies Regs. §12-425-25(a).

LEGAL DIVISION

September 21, 2017