Is document scanning and indexing a taxable computer and data processing service in Connecticut, and is supervising a customer's own scanning staff taxable business management?

Plain-English summary

A company provided document imaging to a large Connecticut manufacturer: its employees ran the manufacturer's paper documents through a scanner, created electronic images (checking quality and re-scanning poor ones), indexed the images by date, type, author, and recipient, and delivered the results on magnetic tape. It also planned to expand into just supervising the manufacturer's own employees as they scanned and indexed. DRS was asked to classify both.

Document imaging and indexing → taxable computer and data processing (§ 12-407(2)(i)(A)). DRS applied the "true object" test (Hartford Parkview v. Groppo): a computer being involved isn't enough — its use must be essential, not "merely incidental." Here the customer's true object is to convert information from paper into an electronic medium and be able to retrieve it through an electronic index. That's "storing and filing of information" and "providing access to information" under the regulation (§ 12-426-27(b)(1)), and it "cannot take place without the use of a computer." So the service is taxable data processing.

Supervising the customer's own staff → not taxable business management (§ 12-407(2)(i)(J)). "Business management services" mean controlling or directing all or part of a service recipient's "core business activities" (§ 12-407(2)(i)(J)-1(h)) — activities directly related to its lines of business, capital structure, budgeting, and planning. The customer is a manufacturer; document scanning is not its core business. So supervising the customer's employees at that task isn't managing its core business, and it isn't taxable business management.

DRS's reasoning here — that the computer is essential to imaging/indexing — was later cited in Rulings 95-1 and 96-1, part of the line of true-object data-processing rulings.

What this means for you

Document imaging, scanning, and data-conversion providers

Converting paper records into indexed, retrievable electronic form is taxable computer and data processing in Connecticut. The computer is the whole point — you're delivering "stored, filed, and accessible" information — so charge and remit tax on the imaging/indexing service.

Supervising vs. doing — and whose core business it is

If you merely supervise a customer's own employees at a task, whether that's taxable "business management" turns on whether the task is the customer's core business. Managing a peripheral function (scanning, for a manufacturer) isn't managing core business, so it isn't taxable under (J). The same supervision for a company whose core business is that function could come out differently.

The true-object test again

Ask what the customer is really buying. If it's the electronic conversion and retrieval of information (impossible without a computer), that's taxable data processing. This ruling sits alongside the DMV-access ruling (95-2) and against the phone-parts-locating ruling (95-1) on the essential-vs-incidental line.

Delivery medium doesn't change the answer

The output arriving on magnetic tape didn't make this a sale of tangible personal property. The service — imaging and indexing — was the taxable event as computer and data processing.

Common questions

Q: Is document scanning and indexing taxable in Connecticut?
A: Yes, as a computer and data processing service under § 12-407(2)(i)(A). Converting paper into indexed, retrievable electronic form is "storing and filing" and "providing access to" information, and requires a computer, so it's taxable.

Q: Is supervising a customer's own scanning staff taxable business management?
A: Not here. Business management services must involve the customer's core business activities. For a manufacturer, document scanning isn't core business, so supervising that work isn't taxable under § 12-407(2)(i)(J).

Q: Does it matter that the results come on magnetic tape?
A: No. The taxable event is the imaging/indexing service, not the delivery medium. It's taxed as computer and data processing, not as a sale of the tape.

Q: What's the "true object" test?
A: You ask whether the computer is essential to what the customer is buying. Here it is — the customer wants electronic conversion and retrieval — so the service is taxable data processing.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-407(2)(i)(A) (computer and data processing services enumerated as taxable)
• Conn. Agencies Regs. § 12-426-27(b)(1) (defines computer and data processing services — storing/filing information, retrieving/providing access to information)
• Conn. Gen. Stat. § 12-407(2)(i)(J) (business analysis, management, management consulting and public relations services)
• Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h) (definition of "core business activities")

Cases cited:

• Hartford Parkview Associates Limited Partnership v. Groppo, 211 Conn. 246, 558 A.2d 993 (1989) (true-object standard)
• Texaco Refining & Marketing Co. v. Commissioner of Revenue Services, 202 Conn. 583, 522 A.2d 771 (1987) (legislative ratification of a regulation)

Related rulings (described in prose, not linked):

• Ruling Nos. 93-6, 93-8, 93-11, 94-2 (true-object data-processing analyses)
• Rulings 95-1 and 96-1 (later rulings citing this Ruling 94-15)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 94-15

Original ruling text

Ruling 94-15, Sales and Use Taxes / Computer and Data Processing Services / Business Management Services

This Ruling is cited in Rulings 95-1 , 96-1

FACTS:

A company located in Connecticut (the "Company") provides optical scanning ("document imaging") and document indexing services to a large manufacturing company (the "Customer") located in Connecticut. Employees of the Company run paper documents belonging to the Customer through the Company's scanning device at the customer's premises, creating electronic images that can be viewed on a computer screen and stored on magnetic tape. As each document is scanned, the Company's employees review its electronic image for quality, enhancing the image of or re-scanning documents the scanned image of which was of poor quality.

Magnetic tapes containing the scanned images are taken to the Company's headquarters where the imaged documents are indexed by Company employees according to the classifications chosen by the Customer which include such information as the date of the document, document type (letter, memo, report, etc.), recipient and author. Once this process is completed, the indexing information is transferred to magnetic tape. The original magnetic tape, along with any back-up copies made during the scanning and indexing processes, are delivered to the Customer.

The Company also intends to expand the services it offers to include furnishing personnel to supervise the quality of document scanning or indexing performed by its Customer's employees at the Customer's premises, with the scanning equipment either being furnished by the Company or belonging to the Customer.

ISSUES:

Whether the Company's document imaging and indexing services are subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(A) as computer and data processing services.

Whether the Company renders taxable business analysis, management, management consulting or public relations services under Conn. Gen. Stat. §12-407(2)(i)(J) by supervising its Customer's employees as they scan documents to create electronic images and index the electronic images.

DISCUSSION:

Conn. Gen. Stat. §12-407(2)(i)(A) includes in the definition of "sale" and "selling" the rendering of computer and data processing services. Conn. Agencies Regs. §12-426-27(b)(1) defines such services as including, among others, "providing computer time, storing and filing of information, [and] retrieving or providing access to information." The Connecticut Supreme Court has stated that "legislative ratification of a ... regulation supports the position that the regulation is consistent with the general statutory scheme that the regulation was designed to implement." Texaco Refining & Marketing Co. v. Commissioner of Revenue Services, 202 Conn. 583, 600, 522 A.2d 771 (1987).

In determining whether the Company's services are taxable as computer and data processing services, an analysis must be made as to whether the true object of the contract is for the Company to render computer and data processing services to the Customer. Hartford Parkview Associates Limited Partnership v. Groppo , 211 Conn. 246, 558 A.2d 993 (1989); see a lso Ruling Nos. 93-6, 93-8, 93-11 and 94-2 . In determining whether the "true object" standard articulated in Hartford Parkview has been met with respect to computer and data processing services, it is not enough that computer equipment is employed by the Company in document scanning and imaging. Id. at 250. Instead, the use of the computer must be found to be essential to the provision of the service, and not "merely incidental" to it. Id. at 253.

The true object of the Customer in contracting with the Company is to have the form in which information is stored converted from paper to an electronic medium, including being provided with a means of later retrieving the information through the use of an electronic index. Such processes cannot take place without the use of a computer. These services are "storing and filing of information" and "providing access to information," and are taxable computer and data processing services as described in Conn. Agencies Regs. §12-426-27(b)(1).

Conn. Gen. Stat. §12-407(2)(i)(J) includes in the definition of "sale" and "selling" business analysis, management, management consulting and public relations services. Conn. Agencies Regs. §12-407(2)(i)(J)-1 provides in pertinent part that the term "business management services" means "the controlling or directing of ... all or a portion of the core business activities ... of a service recipient." The term "core business activities" is defined in subsection (h) of the regulation as "activities directly related to a service recipient's lines of business involving sales of products, property, goods or services to others, its capital structure, its budgeting and its short-range, long-range or strategic planning." The core business of the Customer, a large manufacturing company, is not document scanning and imaging. Therefore, the Company is not rendering taxable business analysis, management, management consulting or public relations services.

RULING:

The Company's document imaging and indexing services are subject to sales and use taxes as computer and data processing services under Conn. Gen. Stat. §12-407(2)(i)(A).

The Company does not render taxable business analysis, management, management consulting or public relations services under Conn. Gen. Stat. §12-407(2)(i)J) when it provides personnel to supervise its Customer's employees in scanning and indexing electronic images of documents.

LEGAL DIVISION

Issued: August 3, 1994