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Ruling 2017-6 - Sales and Use Taxes - Computer and Data Processing Services - Leasing and Rental

FACTS:

A restaurant chain with locations in Connecticut (the “Company”) provides its customers with mobile point-of-sale devices (the “Devices”). The Devices are tablets with a touch screen interface that the Company places at each table to provide pictures and detailed descriptions of menu items.  Customers can use the Devices to place orders and pay for them with credit, debit or gift cards.

The out-of-state vendor of the Devices (the “Vendor”) provides the Company with the option to enhance the customer experience by allowing access to premium content on the Devices, such as news, sports, social media, the ability to select music to be played on the restaurant's playlist, and interactive games that are installed on each Device.  The Company charges separate fees to its customers to access the premium content.

The Vendor charges the Company a monthly fee for the use of the Devices (including servers, Wi-Fi controllers, and other tangible personal property provided to make the Devices function at each restaurant). In an alternative arrangement, the Company may pay all or a portion of the revenue it collects from the premium content to the Vendor, either in addition to or instead of the monthly fee.

ISSUES:

1.      Are the fees the Company charges to its customers for the premium content subject to sales and use taxes?

2.      Is the consideration for the Devices that the Company pays to the Vendor, including the monthly fee plus any portion of the revenues the Company collected from its customers for the premium content, subject to sales and use taxes?

3.      If the consideration for the Devices is subject to sales and use taxes, must the Vendor register as a retailer with the Department and collect the tax due on such consideration?

RULINGS:

1.      The fees the Company charges to its customers for the premium content are taxable as computer and data processing services.

2.      The consideration for the Devices that the Vendor charges the Company, which consists of the monthly fee plus any portion of the revenues the Company remits from fees charged to its customers for the premium content, is taxable as the rental or leasing of tangible personal property. 

3.      The Vendor must register with the Department and collect tax on all consideration the Company pays to the Vendor for leasing the Devices.

DISCUSSION:

Connecticut generally imposes sales tax on retail sales of tangible personal property, whereas sales of services are not subject to sales tax unless specifically enumerated as taxable in Conn. Gen. Stat. § 12-407. 

Computer and data processing services are specifically enumerated as subject to sales and use tax.  Conn. Gen. Stat. § 12-407(a)(37)(A).  Computer and data processing services include “retrieving or providing access to information.”  Conn. Agencies Regs. § 12-426-27(b)(1).  Therefore, charges to the Company's customers for the premium content on the Devices are charges for providing access to digital information and content, and are taxable as computer and data processing services. See Ruling No. 2015-5, Policy Statement 2004(2), Sales and Use Taxes on Internet Access Services and On-Line Sales of Goods and Services, and Policy Statement 2006(8), Sales and Use Taxes on Computer-Related Services and Sales of Tangible Personal Property.

The rental or leasing of tangible personal property is considered a sale that is subject to sales and use taxes. Conn. Gen. Stat. § 12-407(a)(2)(J). “Lease” means the transfer of the right to possession and use of goods for a period in return for consideration. Conn. Gen. Stat. § 42-2A-102(a)(17).  Even though the monthly fee the Vendor charges to the Company is referred to in the contract as the “Service Fee,” it is actually for the lease of the Devices that are placed in the Company’s restaurants. “Gross receipts” from renting or leasing tangible personal property include the total amount of payment, royalties or periodic payments received for the leasing or rental of tangible personal property. Conn. Agencies Regs. § 12-426-25(c). The gross receipts that the Vendor receives from the Company is from the lease of the Devices and includes both the monthly fee plus any revenue from the premium content fees that the Company pays to the Vendor. 

A business that has any physical presence in Connecticut must register to collect Connecticut sales tax on sales to Connecticut customers and must obtain a Connecticut Sales and Use Tax Permit.  Examples of such a physical presence include owning or leasing real or tangible personal property, maintaining an office, or having employees or agents present in this state. Informational Publication 2015(12), Getting Started in Business, p. 10. The Vendor has physical presence in Connecticut because of its Devices that are in the Company’s restaurants within Connecticut. Thus, the Vendor is a retailer who must register with the Department and collect the tax that is imposed upon the gross receipts from the leasing of the Devices. See Conn. Agencies Regs. §12-425-25(a).

LEGAL DIVISION

September 21, 2017