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Ezel / Tax Rulings / CT
CT Ruling 96-7 Sales and Use Taxes 1996-07-12

Are a company's computer-link services -- routing credit-card authorizations between merchants and card issuers, and connecting PC users to Internet service providers -- taxable Connecticut computer and data processing services?

Short answer: Yes, both are taxable. A company that uses computers to link merchants' card-authorization devices to card-issuing banks, and to link PC users to an Internet/computer service provider, is providing taxable computer and data processing services under Conn. Gen. Stat. § 12-407(2)(i)(A). Both services 'retrieve or provide access to information' by computer; computers are essential and the 'true object' is the computer link (the Company doesn't itself authorize the charge). The service is taxable where its benefit is received -- i.e., where the merchant's device or the user's PC is located in Connecticut. NOTE: DRS itself flagged that this ruling should not be relied on to the extent it conflicts with the federal Telecommunications Act of 1996, which bears on the Internet-access piece.

Apply this to your situation

This page answers the general question as of 1996. Ezel answers yours, under current Connecticut tax law, with citations.

Currency note: this ruling is from 1996
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Ruling of the Connecticut Department of Revenue Services (DRS), typically issued to a specific taxpayer in response to that taxpayer's request and based on the specific facts presented and the Connecticut tax law in effect when it was issued. The ruling itself carries a DRS note that it should not be relied upon to the extent it conflicts with the federal Telecommunications Act of 1996 (Pub. L. No. 104-104), which is especially relevant to the Internet-access service; later federal law (e.g., the Internet Tax Freedom Act) further limits taxation of Internet access. DRS also later cited this ruling in Ruling No. 2002-5, and may declare a Ruling obsolete or supersede it, so a taxpayer with different facts should not assume it still applies. Taxpayer-identifying details are redacted. Connecticut imposes its sales and use tax solely at the state level: there are no local or municipal sales taxes. This summary is informational only and is not legal or tax advice. Consult a licensed Connecticut tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.
View original ruling (PDF)

Plain-English summary

Connecticut taxes computer and data processing services (Conn. Gen. Stat. § 12-407(2)(i)(A)), which the regulation defines broadly to include "retrieving or providing access to information" (Regs. § 12-426-27(b)(1)). This ruling applies that definition to two network-link services.

The company ran two services. First, it linked merchants' card-authorization devices to the banks that issued the credit cards: a merchant swipes a card, the device sends data to the company's computers, which forward it to the issuing bank, which returns an approve/decline that the company relays back to the merchant. Second, it linked personal-computer users to an ultimate Internet/computer service provider (e.g., Prodigy, CompuServe), completing the user's connection.

DRS ruled both are taxable computer and data processing services. In each, the company is "retrieving or providing access to information" by computer — and it doesn't matter that the information/network belongs to a third party rather than the company (following Ruling No. 95-2, and like the data-transmission provider in Ruling No. 96-1). The key limiting test is the "true object": computers must be essential, and the true object must be to provide computer/data processing. Here computers are unquestionably essential, and the true object of the first service is the computer link — not credit-card authorization, since the bank, not the company, actually authorizes the charge.

On where the tax applies: Connecticut computer and data processing services are taxable where the benefit is received — i.e., where the recipient's computer device sits. So the first service is taxable here if the merchant's authorization device is in Connecticut, and the second if the user's PC is in Connecticut.

Two important caveats DRS itself flagged. The ruling carries a note that it should not be relied upon to the extent it conflicts with the federal Telecommunications Act of 1996 — significant for the Internet-access service, where federal law has since sharply limited state taxation of Internet access (see also the federal Internet Tax Freedom Act). And DRS later cited this ruling in Ruling No. 2002-5. Both are described here in prose, not linked.

What this means for you

Payment processors and network-link providers

Routing transaction data between two other parties by computer — such as connecting merchants to card issuers — is generally a taxable computer and data processing service in Connecticut, even though you don't own the destination system and don't yourself make the decision (the authorization). The true object is the computer link, and that's what's taxed.

Internet-access and connectivity providers — mind federal preemption

DRS treated linking a PC user to an ISP as a taxable data processing service but expressly cautioned that the ruling yields to the federal Telecommunications Act of 1996. Federal law has since substantially restricted state taxation of Internet access. Don't rely on the internet-access holding without checking current federal limits and DRS's current guidance.

Sourcing — where is the benefit received?

The service is taxable where the recipient's device is located. For card authorization, that's the merchant's terminal; for connectivity, it's the user's computer. Track device location to source these services correctly.

Accountants and tax professionals

The controlling definition is "retrieving or providing access to information" (Regs. § 12-426-27(b)(1)), gated by the true-object/essential-use test (Ruling Nos. 95-2, 96-1). Access to a third party's information still qualifies. Layer the federal Telecommunications Act / Internet Tax Freedom Act analysis over any Internet-access component before treating it as taxable.

Common questions

Q: Why is a credit-card-authorization link taxable?
A: Because the company uses computers to retrieve/provide access to information, and the true object is the computer link between merchant and bank — not the authorization itself, which the bank performs. That makes it a taxable computer and data processing service.

Q: Does it matter that the data goes to someone else's system?
A: No. DRS held it isn't necessary that the provider give access to its own database or network; providing a computer link to a third party's information still qualifies (Ruling No. 95-2).

Q: Where is the service taxed?
A: Where the benefit is received — where the recipient's computer device is located. If the merchant's terminal or the user's PC is in Connecticut, the service is taxable here.

Q: Is Internet access really taxable under this ruling?
A: Treat that part cautiously. DRS itself noted the ruling shouldn't be relied on where it conflicts with the federal Telecommunications Act of 1996, and later federal law (the Internet Tax Freedom Act) further limits taxing Internet access. Check current law.

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) (definition of computer and data processing services — including retrieving or providing access to information)

Federal law referenced by the ruling's note:

  • Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996) (ruling not to be relied on to the extent it conflicts)

Related rulings:

  • Ruling No. 95-2 (providing a computer link to a third party's database is computer and data processing)
  • Ruling No. 96-1 (data-transmission service; essential-use / true-object test)
  • Ruling No. 2002-5 (later ruling that cites this one)

Source

Original ruling text

Ruling 96-7, Sales and Use Taxes / Computer and Data Processing Services

Ruling 96-7

Sales and Use Taxes

Computer and Data Processing Services

This Ruling is cited in  Ruling 2002-5

NOTE:  T his 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 two kinds of services that link personal computer and computer equipment users to data bases or computer networks. In the first service, the Company links the computer equipment of merchants to the computers and data bases of financial institutions that issue credit cards. When a consumer wishes to make a purchase using a credit card, the merchant swipes the consumer's credit card on a computerized authorization device and the device transmits data to the Company's computers. The Company's computers forward the data to the financial institution that issued the credit card to the consumer. The financial institution then returns data either authorizing or declining the charge, which the Company transmits back to the merchant's authorization device. The Company bills the merchant on a per minute or per hour basis for this service.

In the second service, the Company links personal computer Internet users to an ultimate computer service provider (such as Prodigy or CompuServe). The personal computer user signs on to the system and the Company receives the signal from the personal computer user's computer and forwards the signal via computers to the ultimate computer service provider, completing the connection to the Internet. The Company bills the personal computer user for this service.

ISSUE:

Whether the Company's service that links, by means of computers, the computer equipment of merchants with the computers and data bases of financial institutions for purposes of authorizing credit card purchases is a taxable computer and data processing service enumerated in Conn. Gen. Stat. §12-407(2)(i)(A), and whether the Company's service that links personal computer Internet users with other service providers by means of computers is a taxable computer and data processing service enumerated in Conn. Gen. Stat. §12-407(2)(i)(A).

DISCUSSION:

Computer and data processing services are enumerated as taxable in Conn. Gen. Stat. §12-407(2)(i)(A). In Conn. Agencies Regs. §12-426-27(b)(1), "computer and data processing services" are defined to 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. . . . In both kinds of services provided by the Company, the Company is "retrieving or providing access to information," as that phrase is used in the regulation, by means of computers and computer equipment. When "providing access to information," it is not necessary that the Company provide access to its own data base or computer network. See, e.g., Ruling No. 95-2, where the service provider provided customers with a link between their computers and the data base of a third party. Like the data transmission service provider in Ruling No. 96-1, the Company "provides its customers with a medium by which they may immediately transmit data to and retrieve data from . . . locations through the use of computer equipment." Id., p. 3. However, it is not enough that computers are involved in the service; the use of computers must be found to be essential, and the "true object" must be to provide computer and data processing services. Id. The use of computers is, without question, essential to the performance of both the Company's services. Moreover, in the first service, the true object of the service provided by the Company is not credit card authorization, since the Company provides no such authorization. Instead the true object of the Company's service is to provide a computer link to the financial institutions, which then perform the credit card purchase authorizations.

In Connecticut, computer and data processing services are taxable where the benefit of the services is received. The benefit of the services is considered received in Connecticut if the computer terminal or other computer device at which the service recipient receives the services is in Connecticut. In the first service provided by the Company, if the merchant's authorization device is in Connecticut, the service will be taxable here. In the second service provided by the Company, if the service recipient's personal computer is in Connecticut, the service will be taxable here.

RULING:

The Company's service that links, by means of computers, the computer equipment of merchants with the computers of financial institutions for purposes of authorization of credit card purchases is a taxable computer and data processing service enumerated in Conn. Gen. Stat. §12-407(2)(i)(A). The Company's service that links personal computer Internet users with other service providers by means of computers is a taxable computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A).

LEGAL DIVISION

JULY 12, 1996

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