Ruling 95-9
Sales and Use Taxes
Computer and Data Processing Services
"Outsourcing Exemption"
This Ruling is amplified and distinguished by Ruling 96-8
FACTS:
A company (the "Company") is engaged in the business of providing computer and data processing services to banks, which services consist of inputting, verifying, sorting, balancing and reporting of data from checks and other items written by a bank's customers and accepted by the bank, and producing bank statements for customers, all by means of computers. These services are known as "item processing."
Two banks, which previously performed such item processing operations at their own data centers, "outsourced" their item processing operations to the Company after July 1, 1991. In each case, the Company took over all of the item processing activities which the bank had performed at an individual physical location. Pursuant to its contract with one of the banks, the Company initially occupied the bank's data processing facility and utilized all of the bank's equipment. The Company offered positions to all of the bank's data processing employees, and most accepted and became employees of the Company. Several months later, the Company moved this item processing operation away from the bank's location to the Company's own location in another town, and purchased some of the bank's equipment. Half of the original bank employees remained with the Company. Pursuant to its contract with the other bank the Company did not initially occupy the bank's data processing facility, but instead used the Company's own location. Only a few of the bank's employees were hired by the Company. Some, but not all, of the bank's equipment was utilized by the Company.
ISSUE:
Whether the computer and data processing services performed by the Company for the banks are exempt from sales and use taxes under Conn. Gen. Stat. §12-412(74) as computer and data processing services rendered by a retailer who has acquired the operations of its customers' data processing facilities.
DISCUSSION:
Conn. Gen. Stat. §12-412(74), as amended by 1993 Conn. Pub. Acts 332, §23, exempts the following:
Sales of computer and data processing services rendered to a customer (A) by a retailer which, on or after July 1, 1991, acquired the operations of a data processing facility from the customer, provided such customer operated the facility for its own use or (B) by a retailer which, on or after July 1, 1993, acquired the operations of the data processing facility from the retailer described in subdivision (A) of this subsection, provided such customer formerly operated the facility for its own use.
The item processing services that the Company renders for the banks are computer and data processing services described in Conn. Gen. Stat. §12-407(2)(i)(A) which are taxable unless the exemption under Conn. Gen. Stat. §12-412(74) applies. (See Conn. Agencies Regs. §12-426-27(b)(1), which defines such services as including, among others, "providing computer time, storing and filing information, and retrieving or providing access to information.") After July 1, 1991, the Company began performing the services for the banks, which had formerly operated data processing facilities for their own use.
The Department has not previously had occasion to construe the exemption in Conn. Gen. Stat. §12-412(74). At issue is the scope of the phrase "acquired the operations of a data processing facility from the customer," as it is used in the statute. At one extreme, the phrase could be construed to mean that a service provider must do nothing more than perform some of the data processing operations the service recipient previously performed for itself at a particular location. In that case, a service recipient might outsource the operations of one facility to several different service providers, each of which could claim to have "acquired" the particular operation or operations it performs. At the other extreme, the phrase could be construed to mean that a single service provider must replace the service recipient as the operator of the same, unchanged data processing facility previously operated by the service recipient, remaining at the same physical location and using the same equipment and employees.
Viewed as a whole, the phrase "acquired the operations of a data processing facility" appears to require that an entire facility and all the operations performed at that facility must be taken over by a single service provider. If not, the General Assembly could as easily have drafted the subsection to exempt data processing services "performed by a service provider for a service recipient which had previously performed such services for itself," or words to that effect. In using the verb "acquire" the General Assembly apparently meant that the service provider must have obtained something previously belonging to the service recipient, not merely that it should have begun to provide some services previously done "in-house" by the service recipient. The phrase "the operations of a data processing facility" underscores the apparent intention of the General Assembly that what is to be acquired is a specific operation or set of operations performed at a specific location. However, to require that a service provider continue to use exactly the same equipment, employees and location as that of its service recipient to perform the operations would not be consistent with the purpose of outsourcing itself, which generally involves the realization of cost savings by the service recipient by allowing reduced personnel costs and sometimes also the advantage of the economies of scale available to a specialized service provider with its own equipment and its own physical location.
Therefore, for purposes of Conn. Gen. Stat. §12-412(74), to "acquire the operations of a data processing facility" means to take over all of the data processing functions formerly conducted by a service recipient at a specific location of the service recipient's business premises where such computer and data processing functions were performed. Depending upon individual circumstances, a service recipient may or may not continue to perform other data processing functions for itself at other locations. The intention of the parties that all of the data processing functions of the service recipient at a particular location will be taken over by the service provider must be manifest in the language of the contract between them from the outset of the performance of the services, in order for the services to be exempt. Absent such evidence, it must be presumed that the services are taxable. The service provider may, but need not, utilize the service recipient's premises, employees or equipment in performing its services after the acquisition of the operations of the service recipient's data processing facility.
The item processing operations "outsourced" by the banks to the Company are all of the data processing functions formerly conducted by the banks in a particular location of their business premises, and the contracts between the Company and the banks so indicate. Therefore, the Company has "acquired the operations of a data processing facility" in each case, and the computer and data processing services rendered by the Company to the banks are exempt from sales and use taxes.
RULING:
The item processing services provided by the Company to the two banks are exempt under Conn. Gen. Stat. §12-412(74) as computer and data processing services rendered by a retailer which acquired the operations of a data processing facility from customers now receiving the Company's services.
LEGAL DIVISION
July 19, 1995