For a company's 'procurement process management services,' which parts are taxable business management services and which qualify for Connecticut's outsourced computer-and-data-processing exemption?

Plain-English summary

A company offered customers what it called "procurement process management services" — taking over most of the customers' purchasing operations using its own computers, software, and staff. It bundled four kinds of work: (1) supplier selection and monitoring (choosing suppliers, negotiating and reviewing supplier agreements, recommending which to keep or drop), (2) procurement (processing and tracking requisitions, maintaining databases, resolving supplier disputes), (3) accounts payable (receiving and processing supplier invoices, authorizing payments, moving data between the company's system and the customer's accounting system), and (4) support (helping customer staff with the company's software and keeping a procedures manual). The customers had previously done all of this themselves.

Connecticut taxes two different enumerated services that were both in play here: computer and data processing services (Conn. Gen. Stat. § 12-407(2)(i)(A)) and business management services (§ 12-407(2)(i)(J)). DRS split the bundle:

• Accounts payable and support = computer and data processing services. Viewed on their own, these functions are mostly about using computers to process invoices, authorize payments, transfer data, and troubleshoot systems. So they're enumerated data processing services — but because the company takes them over from customers that formerly performed them for their own use, they qualify for the "outsourcing" exemption in § 12-412(74)(B). Result: exempt.

• Supplier selection/monitoring and procurement = business management services. Although computers are involved, these functions are much more than data processing — the company negotiates, reviews and monitors supplier agreements and resolves disputes, i.e. it manages a portion of the customer's business. So they're taxable business management services under § 12-407(2)(i)(J) to the extent they relate to the customer's core business and don't fall within a "core business" exclusion in Regs. § 12-407(2)(i)(J)-1(h).

DRS couldn't declare the management piece categorically taxable because it depends on the customer. If the company manages procurement of raw materials or office supplies for a manufacturer, that relates to the customer's core business and is taxable; if it manages procurement of janitorial or maintenance services for the customer's premises, that's excluded from "core business" under Regs. § 12-407(2)(i)(J)-1(h)(2) (plant and grounds maintenance). Because the answer varies, the company must separately state its charges: taxable business management services, non-core management services, and exempt outsourced data processing.

What this means for you

IT, BPO, and procurement-services providers

A single "process management" contract can contain both an exempt outsourced-data-processing component and a taxable business-management component. Don't assume the whole engagement is one or the other. Break the work into its real functions: pure data-processing that you took over from the customer's own in-house operations can be exempt under § 12-412(74)(B), while managing part of the customer's business is taxable under § 12-407(2)(i)(J).

The "outsourcing" exemption has conditions

The § 12-412(74)(B) exemption applies when a retailer renders computer and data processing services to a customer after acquiring the data processing operations from that customer, where the customer formerly conducted those operations for its own use. The "we took over what you used to do yourself" fact pattern is what unlocks the exemption — document it.

Whether business management is taxable depends on the customer's core business

The same procurement-management service can be taxable for one customer and exempt for another. Managing purchases of inputs to the customer's core business (a manufacturer's raw materials) is taxable; managing purchases excluded from "core business" under Regs. § 12-407(2)(i)(J)-1(h) — such as plant and grounds maintenance — is not.

Separately state your charges

Because the bundle contains taxable and exempt pieces, DRS put the burden on the provider to separately state charges for (a) taxable core-business management services, (b) non-core management services, and (c) exempt outsourced data processing. Lumped-together billing invites the whole charge to be treated as taxable.

Common questions

Q: Is "procurement process management" taxable in Connecticut?
A: Partly. The accounts-payable and support functions are computer and data processing services that qualify for the outsourcing exemption (§ 12-412(74)(B)) when taken over from the customer. The supplier-selection/monitoring and procurement functions are taxable business management services (§ 12-407(2)(i)(J)) to the extent they relate to the customer's core business.

Q: What is the "outsourcing" exemption?
A: Under § 12-412(74)(B), computer and data processing services are exempt when a retailer provides them after acquiring the data processing operations from the customer, provided the customer formerly conducted those operations for its own use.

Q: Why is procurement management taxable but data processing exempt?
A: DRS looked at what each function really is. Negotiating, reviewing, and monitoring supplier agreements and resolving disputes is managing part of the customer's business (taxable). Processing invoices, authorizing payments, and transferring data is computer and data processing (exempt when outsourced).

Q: Does managing purchasing always create a taxable service?
A: No. It's taxable only if it relates to the customer's core business. Managing procurement of a manufacturer's raw materials is core (taxable); managing procurement of janitorial or maintenance services is excluded from core business under Regs. § 12-407(2)(i)(J)-1(h)(2) (not taxable).

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(2)(i)(A) (computer and data processing services enumerated as taxable)
• Conn. Gen. Stat. § 12-412(74) / § 12-412(74)(B) (exemption for "outsourced" computer and data processing services acquired from the customer, which formerly conducted them for its own use)
• Conn. Gen. Stat. § 12-407(2)(i)(J) (enumerated taxable business analysis, business management, management consulting, and public relations services)

Regulations:

• Conn. Agencies Regs. § 12-426-27(b)(1) (definition of computer and data processing services — providing computer time, storing/filing/retrieving information, designing/implementing/converting systems)
• Conn. Agencies Regs. § 12-407(2)(i)(J)-1(e) (definition of "business management services") and -1(h) (definition of "core business activities" and the list of excluded activities, including plant and grounds maintenance under -1(h)(2))

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 98-4

Original ruling text

Ruling 98-4, Sales and Use Taxes / Computer and Data Processing Services / "Outsourcing" Exemption / Business Management Services

FACTS:

A company doing business in Connecticut (the "Company") will provide its customers with what it terms "procurement process management services." The Company will oversee most aspects of the customers’ purchases of services, supplies, raw materials for manufacturing, etc. The Company will provide all the data processing equipment, computer software and staff necessary to perform these procurement functions. The customers are currently performing their own procurement functions.

The Company’s contracts with its customers are separated into several categories, which may be generally described as follows:

(1) Supplier selection and monitoring services . The Company will select customers’ suppliers of goods and services, negotiate agreements between customers and suppliers, and recommend to customers which of their existing supplier agreements should be continued or discontinued. The Company will then monitor the performance of suppliers under the supplier contracts by establishing and maintaining records for all suppliers. Where appropriate, the Company will recommend termination of supplier contracts.

(2) Procurement services . The Company will manage the actual procurement of goods and services by processing and keeping track of requisitions from suppliers. The Company will create and maintain databases and will collect and maintain data about requisitions. When necessary, the Company will communicate with suppliers to return goods and will obtain credits and attempt to resolve disputes between customers and their suppliers.

(3) Accounts payable services . The Company will receive and process invoices from suppliers and will authorize customers to pay their suppliers. The Company will develop computer specifications for interfacing between the Company’s procurement system and customers’ accounting systems, and will collect accounting data and provide it to the customers.

(4) Support services . The Company will provide support to customers’ personnel to assist them with procurement problems involving the Company’s software, and problems with the customers’ suppliers and procurement of goods and services. Finally, the Company will create, update and maintain a manual of procedures for all phases of its operations, and will keep customer personnel informed of changes in procedures.

ISSUES:

Whether some or all of the Company’s services are computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A), and if so, whether the services qualify for the exemption from sales and use taxes in Conn. Gen. Stat. §12-412(74) for "outsourced" computer and data processing services, and

Whether some or all of the Company’s services are business management services enumerated in Conn. Gen. Stat. §12-407(2)(i)(J).

RULING:

The Company’s accounts payable services and support services are computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A), and qualify for the exemption from sales and use taxes in Conn. Gen. Stat. §12-412(74) for "outsourced" computer and data processing services.

The Company’s supplier selection and monitoring services and procurement services are business management services enumerated in Conn. Gen. Stat. §12-407(2)(i)(J) if they relate to customers’ core businesses and do not fall within one of the exclusions to "core business" in Conn. Agencies Regs. §12-407(2)(i)(J)-1(h).

DISCUSSION:

A. Relevant Law

Conn. Gen. Stat. §12-407(2)(i) enumerates services that are subject to sales and use taxes, including "(A) computer and data processing services. . . ." Conn. Agencies Regs. §12-426-27(b)(1) defines computer and data processing services to include "providing computer time, storing and filing of information, retrieving or providing access to information, [and] designing, implementing or converting systems. . . ."

Certain sales of computer and data processing services are exempt under Conn. Gen. Stat. §12-412(74), including "(B) Sales of computer and data processing services rendered to a customer by a retailer which . . . acquired the data processing operations from the customer, provided such customer formerly conducted such data processing operations for its own use."

Conn. Gen. Stat. §12-407(2)(i)(J) enumerates as taxable "business analysis, business management, management consulting and public relations services. . . ." In Conn. Agencies Regs. §12-407(2)(i)(J)-1(e), "business management services" are defined to include "the controlling or directing of . . . all or a portion of the core business activities, as defined in subsection (h) of this regulation . . . of a service recipient. . . ." Subsection (h) of the regulation defines "core business activities" to include "activities directly related to a service recipient’s lines of business involving sales of products, property, goods or services to others. . . ." The subsection lists eight types of activities that are not generally regarded as directly related to a service recipient’s core business activities. Procurement of goods and services is not specifically listed among the excluded activities.

B. Application of the Law to the Facts of this Ruling

Although the use of computers is important to the Company’s procurement management services, viewed as a whole the procurement management services involve much more than just computer and data processing services. The Company contracts to perform a comprehensive range of activities, from negotiating, reviewing and monitoring supplier agreements to resolving disputes between customers and suppliers, in addition to processing data, maintaining databases and providing computer support functions.

The Company contracts to manage a portion of the businesses of its customers; therefore, its charges are subject to sales and use taxes as business management services to the extent that the procurement functions are related to the core business activities of the customers. In particular, the supplier selection and monitoring services and procurement services described in the facts of this Ruling are potentially taxable as business management services.

Because the Company may provide these services to more than one type of customer, it is impossible to state categorically in this Ruling whether the services are taxable business management services. For example, if the Company manages the procurement of raw materials or office supplies for a manufacturer, the management of these purchases would be related to the core business of the customer. On the other hand, if the Company manages the procurement of janitorial or maintenance services for the customer’s business premises, these services would be excluded from the definition of "core business" under Conn. Agencies Regs. §12-407(2)(i)(J)-1(h)(2) as "the administration of . . . plant and grounds maintenance. . . ."

Viewed separately from the supplier selection, monitoring and procurement services, the accounts payable services and the support services do appear to be computer and data processing services. Primarily, they involve the use of computers to process invoices and authorize payments and to transfer data between the Company and its customers, and computer troubleshooting and system support. Therefore, if the Company takes over the performance of these services from its customers, the services will qualify for the exemption for "outsourced" computer and data processing services in Conn. Gen. Stat. §12-412(74)(B).

It is the Company’s responsibility to separately state charges for taxable business management services from charges for management services to other than the "core business" of its customers, and from charges for exempt "outsourced" computer and data processing services.

LEGAL DIVISION

December 14, 1998