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Connecticut identifies new taxable computer and data processing services


 New software products and services can trigger new tax obligations.

Computer and data processing services are taxable in Connecticut, though most of these services are taxed at a reduced rate of 1 percent. The law is clear on this matter. Yet computer and data processing services are organic: Technology morphs and new software services crop up. It often takes time for state laws to catch up, which can leave vendors unsure of how to tax new software services.

For example, a small and perhaps growing number of restaurants now provide customers with “devices” — “tablets with a touch screen interface” — they can use to order and pay for their meals. At one restaurant chain with locations in Connecticut, customers can opt to use the devices to access “premium content,” i.e., interactive games, music from the restaurant playlist, news, sports, and social media.

The devices are provided by an out-of-state vendor that charges the restaurant a monthly fee for the use of the devices, as well as additional fees for sales of premium content. Since these types of services didn’t exist when the Connecticut law was written, the involved parties didn’t know if they were taxable. If they are, is the out-of-state vendor required to collect and remit tax?

Taxable and exempt services

Connecticut law clearly states that certain computer and data processing services are taxed at 1 percent. These include, but aren’t limited to, “time, programming, code writing, modification of existing programs, feasibility studies and installation and implementation of software programs and systems even where such services are rendered in connection with the development, creation or production of canned or custom software or the license of custom software.”

However, canned or prewritten computer software is considered tangible personal property and taxed at the full rate. Software that was initially developed as custom software for in-house use that’s subsequently sold or licensed to unrelated third parties is also considered canned or prewritten software and is fully taxable.

Digital products delivered electronically, such as music, ringtones, software, and video, are considered nontaxable telecommunications services. And internet access services are exempt from sales tax as of July 1, 2001.

Given the inherent lack of clarity enshrouding the taxability of new computer and data processing services, the Connecticut Department of Revenue Services (DRS) issued a ruling to clarify how tax applies to the devices and the services provided by the restaurant and out-of-state vendor. It determined:

  • The restaurant is supplying taxable computer and data processing services to customers who access the premium content and should apply tax to those sales
  • The monthly fees and additional consideration for premium content the restaurant pays to the out-of-state vendor are taxable “as the rental or leasing of tangible personal property”
  • The out-of-state vendor must register with the state and collect and remit tax “on all consideration” paid to it by the in-state restaurant

For additional details, see Conn. Gen. Stat. §12-407(a)(37)(A) and Department of Revenue Services Ruling No. 2017-6.

Offering new products and services is one way software companies can trigger nexus, the obligation to collect and remit tax. Learn more in 5 Reasons Why High-Growth Companies Stumble with Sales Tax.


Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.