Are satellite-based data communications services (monitoring pipelines, messaging trucks, sending distress signals, tracking cargo) taxed in Connecticut as telecommunications services, or as computer and data processing services?

Plain-English summary

A company ran a satellite network of transmitting and receiving equipment and unmanned ground stations that it called "data communications services." The communications carried no voice — they carried machine data: monitoring and remotely controlling pipelines, sending text messages to long-haul trucks, relaying emergency distress signals with positioning, and tracking the location of cargo. The company was not regulated as a telephone company or public utility. It asked DRS whether these services were taxable, and under which category.

Connecticut's sales and use tax reaches two separate service categories that could plausibly fit:

• Telecommunications services (Conn. Gen. Stat. § 12-407(2)(k), defined in § 12-407(26)) — the "interactive electromagnetic" transmission of voice, image, or data.
• Computer and data processing services (Conn. Gen. Stat. § 12-407(2)(i)(A)), which the regulations say include "retrieving or providing access to information."

DRS split the answer:

Not telecommunications. Even though the services are "interactive" (they both send and receive), DRS follows its long-standing position (stated in Ruling No. 93-25) that services provided by anyone other than a regulated telecommunications carrier are not "telecommunications services." When Connecticut moved this tax from the provider level (the old gross-earnings taxes under Chapters 210a and 211, repealed in 1989) to the consumer level, the point was to tax the same charges that carriers used to pay tax on. Because this company is not a carrier, its services don't fit that category.

Yes, computer and data processing. DRS then applied the "true object" test. It isn't enough that computers are involved; the use of computers must be the essential thing the customer is paying for. Here it plainly was — a pipeline operator wants electronic monitoring instead of sending a person to walk the line; a trucking company wants data messaging instead of drivers stopping to phone in. The satellites-versus-modems detail doesn't matter; the essence is sending, receiving, storing, and acting on computer data. DRS contrasted Ruling No. 91-11, where a provider used a computer to pull DMV driving records — there the computer was merely helpful, not the true object, so it wasn't taxable CDP. Result: taxable as computer and data processing services, sourced to where the benefit is received (generally the customer's Connecticut location).

DRS attached a NOTE that the ruling should not be relied on to the extent it conflicts with the federal Telecommunications Act of 1996. The ruling was later cited in Rulings 96-7 and 2002-5.

What this means for you

Satellite, telematics, and machine-data ("IoT") service providers

If you move machine data — remote monitoring, fleet messaging, asset tracking, SCADA-style control — and you are not a regulated telecommunications carrier, Connecticut is likely to treat your service as taxable computer and data processing, not telecom. Being outside telephone/utility regulation doesn't put you outside the tax; it just moves you into a different, still-taxable category.

Why the "carrier or not" line matters

Connecticut's telecommunications-services tax was designed to reach the charges that regulated carriers used to pay gross-earnings tax on. DRS reads it to cover only carrier-provided service. A non-carrier that transmits data avoids the telecom label — but DRS's next stop is the computer-and-data-processing category, so the practical outcome is usually still "taxable."

The true-object test decides close calls

Involving a computer is not enough to make a service taxable CDP. The question is whether the computer technology is the essence of what the customer is buying (taxable, like this satellite data service) or just a behind-the-scenes tool used to deliver some other product (not taxable CDP, like the DMV-records service in Ruling 91-11). Map your offering against that line.

Sourcing: where the benefit lands

Computer and data processing services are taxed where the benefit of the service is received. If your customer (or the customer location that benefits) is in Connecticut, the service is taxable there — the location of your servers, satellites, or ground stations doesn't control.

Common questions

Q: Is satellite data communication taxed as telecommunications in Connecticut?
A: Not when the provider is not a regulated telecommunications carrier. DRS follows Ruling 93-25: a non-carrier's transmissions are not "telecommunications services" under § 12-407(26), because that tax was meant to reach carrier charges formerly taxed at the provider level.

Q: So is it tax-free?
A: No. DRS held the same service is taxable as a computer and data processing service under § 12-407(2)(i)(A), because the true object is using computers to send and receive data.

Q: What is the "true object" test?
A: You ask what the customer is really buying. If computer technology is essential to the service — the reason the customer contracts at all — it's taxable CDP. If the computer is only a helpful internal tool (as in Ruling 91-11's DMV-records example), it isn't.

Q: Where is the tax owed?
A: Computer and data processing services are taxable where the benefit is received — generally the Connecticut location of the customer that benefits, not where the provider's equipment sits.

Q: What is the Telecommunications Act of 1996 note about?
A: DRS cautioned that the ruling shouldn't be relied on to the extent it conflicts with that federal law. This is the same caution DRS attached to related Ruling 96-7. If your facts touch internet access or interstate telecom, get current advice.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-407(2)(k) (rendering of telecommunications service enumerated as a taxable "sale")
• Conn. Gen. Stat. § 12-407(26)(a) (definition of "telecommunications service": interactive electromagnetic transmission of voice, image, data, etc.)
• Conn. Gen. Stat. § 12-407(2)(i)(A) (computer and data processing services enumerated as a taxable "sale")
• Conn. Agencies Regs. § 12-426-27(b)(1) (computer and data processing services include "retrieving or providing access to information")

Cases cited:

• Hartford Parkview Associates Limited Partnership v. Groppo, 211 Conn. 246, 558 A.2d 993 (1989) (true-object standard)
• Cummings & Lockwood v. Commissioner, Conn. Super. Ct. Tax Sess., No. CV 92-0510759 S (July 20, 1994) (on-line computer research services are taxable CDP)

Related rulings (described in prose, not linked):

• Ruling No. 93-25 (non-carrier transmissions are not "telecommunications services")
• Ruling No. 91-11 (computer used to obtain DMV records was not the true object; not taxable CDP)
• Ruling Nos. 95-2, 94-15, 94-2 (computers must be essential to the service for CDP treatment)
• Rulings 96-7 and 2002-5 (later rulings that cite this Ruling 96-1)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 96-1

Original ruling text

Ruling 96-1, Sales and Use Taxes / Telecommunications Services / Computer and Data Processing Services

Ruling 96-1

Sales and Use Taxes

Telecommunications Services

Computer and Data Processing Services

This Ruling is cited in  Rulings 96-7  and  2002-5

NOTE:  This ruling should not be relied upon to the extent it conflicts with

the Telecommunications Act of 1996, Pub. Law No. 104-104, 110 Stat. 56 (1996)

FACTS:

A company (the "Company") provides what it terms "data communications services" by means of computerized transmitting and receiving equipment, using a network of satellites and unmanned ground stations. The communications do not involve voice messages. The Company is not subject to state, federal or local regulation as a telephone company or public utility. The services fall into four general categories, described as follows:

Data communications . Data communications generally involve the transmission of selected data between transmitting and receiving equipment without human intervention or assistance. Service recipients typically have remote facilities that must be monitored and controlled from another location. For example, pipeline operators could use the Company's services to monitor and control pipelines electronically. The Company's equipment will be installed along the pipelines and programmed to transmit data about the status and functioning of the pipeline at regular intervals to a receiving station. The equipment that receives the data may, in addition to recording the data, also be programmed to send back commands to the remote locations to perform such operations as closing a pipeline valve in the event of a leak.

Commercial communications . Commercial communications generally involve the transmission of data between manned computer terminals. For example, long haul trucking companies will use the Company's terminals in trucks to receive data messages from dispatchers, eliminating the need for the truck driver to stop and telephone the dispatcher.

Emergency alert communications . Emergency alert users are expected to include government agencies, automobile and truck drivers, boat operators, private pilots and hikers, who require the ability to send distress signals and positioning information in case of an emergency. Emergency alert users will include data communications service recipients who require prompt knowledge of equipment failure or other critical information from remote or unattended locations.

Geographic positioning . Like the emergency alert and data communications service recipients, users of this service will require the tracking of assets moving over a wide area. For example, a shipping company would use geographic positioning to monitor the location and the status of cargo regularly and economically, in order to reduce cargo losses.

ISSUES:

Whether the Company's data communications services using a satellite network and computerized data transmitting and receiving equipment are subject to sales and use taxes as telecommunications services enumerated in Conn. Gen. Stat. §12-407(2)(k) and defined in §12-407(26).

Whether the Company's data communications services using a satellite network and computerized data transmitting and receiving equipment are subject to sales and use taxes as computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A).

DISCUSSION:

Conn. Gen. Stat. §12-407(2) defines "sale" and "selling" as including "(k) the rendering of telecommunications service, as defined in subsection (26) of this section, for a consideration . . . ." Subdivision (a) of subsection (26) defines "telecommunications service" as including "the transmission of any interactive electromagnetic communications including but not limited to voice, image, data and any other information, by means of but not limited to wire, cable, including fiber optic cable, microwave, radio wave or any combination of such media . . . including any form of mobile two-way communication."

Although the term "interactive" is not defined in Conn. Gen. Stat. §12-407(26), its meaning in this context appears to be "capable of both receiving and sending messages." For example, the dictionary defines "interactive terminal" as "[a] computer or data processing terminal capable of providing a source of both input and output for the computer system to which it is connected." The American Heritage Dictionary 669 (2d College Ed. 1985). At least some of the Company's services appear to be "interactive" in that they involve both the sending and receiving of data. For example, the devices on the pipelines not only send information, but can receive commands back from the devices to which the information is sent, and act on that information. Therefore, it appears that the Company's services meet the initial portion of the definition of "telecommunications service" as set forth in the previous paragraph.

However, in Ruling No. 93-25 the Department indicated that services rendered by a service provider other than a telecommunications carrier (i.e., a carrier subject to state or federal regulation as such) are not telecommunications services as defined in Conn. Gen. Stat. §12-407(26)(a). This was a reiteration of the position adopted after telecommunications services became subject to sales and use taxes and the gross receipts or earnings taxes on the providers of such services were eliminated in 1989. This position is based on the legislative purpose of the imposition of sales and use taxes on telecommunications services, which was to tax at the consumer level the same charges that had previously been subject to tax at the provider level under Chapters 210a and 211. See Ruling No. 93-25, pp. 2-3. Since the Company in this case is not a telecommunications carrier, its services are not subject to sales and use taxes as telecommunications services.

Conn. Gen. Stat. §12-407(2)(i) also defines "sale" and "selling" as including "(A) Computer and data processing services, including but not limited to, time . . . ." Conn. Agencies Regs. §12-426-27(b)(1) further defines such services as including "retrieving or providing access to information . . . ." To decide whether the Company's services are taxable as computer and data processing services, it is necessary to determine what is the true object of the services. Hartford Parkview Associates Limited Partnership v. Groppo , 211 Conn. 246, 558 A.2d 993 (1989); see also Cummings & Lockwood v. Commissioner , Conn. Super. Ct. Tax Sess., No. CV 92-0510759 S (July 20, 1994). In determining whether the "true object" standard has been met with respect to computer services, it is not enough that computer equipment is employed by the Company in transmitting and receiving data. The use of computers to transmit data must be found to be an essential aspect of the service, without which the service would not exist, or the service recipient would not have contracted with the Company. See, e.g. , Ruling Nos. 95-2, 94-15 and 94-2.

The Company provides its customers with a medium by which they may immediately transmit data to and receive data from remote locations through the use of computer equipment. That this data communication is accomplished by means of satellites rather than modems and telephone lines does not alter the fact that the essence of the Company's services is the sending and receiving of computer data and computer commands. This may vary from the sending of distress signals containing geographical information to communication back and forth between manned or unmanned computers. In all events, the use of computers to retrieve or transmit data, to store and to act on the information is essential to the services.

The Company's service recipients have chosen the Company's services as an alternative to other, less acceptable means of achieving the same ends. For example, the use of computers to monitor pipelines takes the place of using personnel to walk the pipelines, the use of computers in trucks takes the place of having the drivers stop and make telephone calls, and the use of computers in ships takes the place of more expensive ship-to-shore communications systems. However, the fact that these tasks could conceivably be accomplished by other means does not mean that the "true object" of the transaction is not computer and data processing services. Certainly the information provided by the on-line computer services in Cummings & Lockwood, supra , could theoretically have been obtained from newspapers, magazines, by telephone and by word of mouth. The legal research accomplished by computerized research services could be accomplished by human beings combing through the stacks of law libraries. Yet we recognize these as computer and data processing services because they utilize computers and computer technology to perform the services in a way that is essentially superior to alternatives, because of the greater speed, accuracy and economy achieved by the use of computers and computer technology, and because the service recipients specifically desire that such technology be used instead of other means.

In contrast, in Ruling No. 91-11, the Department examined a situation where the service provider used a computer to request driving records from the Department of Motor Vehicles on behalf of its customers. The service provider would then either electronically transmit the records to its customers, or mail the records in hard copy to its customers. We concluded that the use of the computer, while helpful to the service provider in acquiring such records, was not essential from the point of view of the service recipient, and was therefore not the true object of the contract between the two. Here, on the other hand, the use of computers is precisely what the Company's customers wish to obtain from the Company. Were the Company to offer to send its own personnel to examine a pipeline and send back the data, or to fly over an oceangoing tanker and radio the vessel's position, then the true object of the services would not be computer and data processing services, but neither would customers wish, in all likelihood, to avail themselves of the Company's services.

In Connecticut computer and data processing services are taxable where the benefit of the services is received. This generally means that if the service recipient is located in Connecticut (or, if the service recipient has more than one location, if the location that will receive the benefit of the services is in Connecticut), the services will be taxable.

RULING:

The Company's data communications services using a satellite network and computerized data transmitting and receiving equipment are not subject to sales and use taxes as telecommunications services enumerated in Conn. Gen. Stat. §12-407(2)(k) and defined in §12-407(26), because the Company is not a telecommunications carrier.

The Company's data communications services using a satellite network and computerized data transmitting and receiving equipment are subject to sales and use taxes as computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A), because the true object of the Company's transactions with its service recipients is for the service recipients to obtain data communications by means of computer equipment.

LEGAL DIVISION

February 15, 1996