Were later software programming, implementation, training, and related charges taxable as part of the original sale?

Plain-English summary

A purchaser paid Florida sales and use tax on software and hardware, then later bought programming, project management, training, implementation, testing, modifications, and related travel and lodging from the same vendor.

Florida treated the later charges as part of the original taxable transaction. The original perpetual agreement expressly incorporated the professional-services addendum, anticipated services supporting and modifying the software, and set the hourly rates even though the precise work and amounts were determined later.

The services therefore were not incidental or separate transactions. They were inextricably intertwined with the original software and hardware purchase and subject to Florida sales tax.

What this means for you

Later timing and separate billing do not necessarily separate services from a taxable software-and-hardware sale. The governing agreement and the services' relationship to the property can make the charges part of the taxable sales price.

Common questions

Did it matter that the specific modifications were identified later? No. The original agreement already incorporated the services addendum and established the terms under which the vendor would provide the work.

Which charges were covered? The ruling described programming, project management, training, implementation, testing, modifications, and travel and lodging expenses.

Why did the professional-services exemption not apply? The software and hardware were not inconsequential elements, separate charges were made, and the services were part of the taxable sale.

Citations and references

• Fla. Stat. § 212.02(16) (sales price includes services that are part of a sale)
• Fla. Stat. § 212.05 (taxable sales of tangible personal property)
• Fla. Stat. § 212.08(7)(v)1. (professional-service transactions)
• Fla. Admin. Code r. 12A-1.032(4)-(5) (computer software and professional services)
• American Telephone & Telegraph Co. v. Department of Revenue, 25 Fla. L. Weekly D1216 (Fla. 1st DCA 2000)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06A-025

Original ruling text

SUMMARY
QUESTION: Are charges for additional services considered to be part of the sales price of the original transaction?
ANSWER - Based on Facts Below: Yes. It is indicated in the Software and Equipment Agreement that Exhibit A and
the Addenda for the services are part of the agreement entered into effective September 27, 2001. The Vendor and
Purchaser concurred that the terms of the agreement would commence on that date and were perpetual unless
terminated. Therefore, the additional services are not incidental elements of the transaction. Instead, the services are
inextricably intertwined with the original purchase of the software and hardware.

August 23, 2006

Re: Technical Assistance Advisement 06A-025
Sales Tax - Software Services
Section(s) 212.05, and 212.02, F.S.
Rule(s) 12A-1.032, F.A.C.
FEI# XX
Dear:
This response is in reply to your letter dated April 18, 2006, requesting the Department's issuance of a Technical
Assistance Advisement ("TAA") pursuant to Section 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding the
Department's position on the taxability of software services. An examination of your letter has established that you
have complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is
hereby granting your request for issuance of a TAA.
Facts
Your letter provides in pertinent part:
The request pertains to an agreement between [Purchaser] and [Vendor] dated XXX for the purchase and installation
of XXX. Addendum A to this agreement establishes terms for [Vendor] to provide professional services to [Purchaser]
at specified hourly rates.
Florida Sales [and] Use tax was paid on the original software purchase and on subsequent license fees.
During 2004 and 2005, [Vendor] performed professional services for [Purchaser] in the form of programming for
modifications, implementation, testing and training. These services were billed to [Purchaser] at the specified hourly
rate, plus travel and lodging expenses.

You provided the following documents for review:

1. [Vendor] XXX Agreement
2. Software and Equipment Agreement Exhibit A
3. Addendum A Professional Services
4. Addendum B Annual and Extended Term Support
5. Addendum C Equipment
6. Addendum D Sublicensed Software
7. Addendum E To [Vendor]-XXX Agreement and Related Addenda
8. Invoices for services
   On May 24, 2006, the Department received a follow up letter and additional information pertaining to the transaction
   summarized above. The additional information provided includes an equipment lease agreement Purchaser entered
   into with a third party and copies of invoices from Vendor for sublicensed products and hardware.
   In your follow-up letter you indicate:
   ... The expenditures specifically relate to the implementation of the [Vendor] software package called XXX. These
   expenditures were made after the initial purchase of the base package. The types of payments made were for: Project
   Management, Training, Implementation and Modifications.
   All of the payments made for the above types of costs were not planned, nor detailed nor agreed to at any time prior
   to the purchase of the initial base package. We did anticipate that we would incur some or all of these costs at some
   point in the future, but we did not know or agree to how much and which. We did however agree to an hourly rate
   schedule for any of these type [of] costs with the software vendor in the initial agreement.
   Specifically related to any modifications made after the initial purchase, none were identified nor agreed to nor
   documented at or before the initial purchase. All modifications were determined during the course of training and
   implementation several months after the initial purchase.... (Emphasis Supplied)
   The Software and Equipment Agreement Exhibit A itemizes the licensed software and equipment acquired by
   [Purchaser]. According to Exhibit A, [Purchaser] acquired the XXX software, advanced modules, and interface tools,
   as well as, sublicensed software and hardware (a server and modem). The [Vendor] XXX agreement, dated XXX,
   outlines the terms of the agreement and provides the following in pertinent part:
9. PARTIES AND EFFECTIVE DATE
   THIS AGREEMENT (together with Exhibit A and the Addenda initialed in Section 3, the "Agreement"), is entered
   into effective this XXX (hereafter the "Effective Date") between [Vendor] ... and [Purchaser] ....(Emphasis Supplied)
10. PURPOSE
    [Vendor] has developed and/or has licensing rights from ... to the XXX products for the XXX eserver (formerly XXX)

computer. [Vendor] has also sales or licensing rights for the Equipment and Sublicensed Software. Client wishes to
acquire a license to use the XXX Software and Releases in Client's business, and, as indicated by the Addenda
initialed in Section 3, may wish to purchase Equipment from [Vendor], be licensed to use Sublicensed Software,
and/or obtain the services of [Vendor] in supporting and modifying the XXX to meet the specific needs of Client's
business operations.

3. IDENTIFICATION OF AGREEMENTS AND ADDENDA
   The parties agree to all of the terms and conditions of this Agreement, including Exhibit A and the Addenda initialed
   below:
   Addendum A: Professional Services

10. TERM
    The term of this Agreement shall commence on the Effective Date and is perpetual unless it is terminated as set forth
    in Section 18 of this Agreement.

18. TERMINATION

Termination of Addendum: Client and [Vendor] will have any and all rights of termination and non-renewal of each
Addendum to this Agreement as specified in such Addendum. In addition, [Vendor] shall have the option to terminate
Addendum A or B or both ....

19. GENERAL PROVISIONS
    Entire Agreement: This Agreement, including Exhibit A and the Addenda initialed in Section 3, sets forth the entire
    Agreement and understanding of the parties relating to the subject matter herein and merges and supersedes all prior
    agreements ....

Document 3, Addendum A, Professional Services, provides:
1. PURPOSE

[Vendor] has licensed to Client the XXX as specified in the body of the Agreement. This addendum establishes the
terms under which [Vendor] may provide services to Client.

2. SERVICES PROVIDED
   [Vendor] will provide services on a Time and Materials basis including, but not limited to:
   Assistance to Client in the Installation of the XXX, assistance to Client in defining areas where the XXX software may
   require Client or [Vendor] Modifications, Implementation as defined in the body of the Agreement, Training as
   requested by Client, proposals for [Vendor] Modifications to the Licensed XXX Software, development of [Vendor]
   Modifications and testing and corrections of such modifications.

Requested Advisement and Taxpayer Position
You seek advisement on the taxability of the additional services provided, which you believe are exempt from Florida
sales tax as professional services.
Applicable Authority
Section 212.05, F.S., provides in part:
It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the
business of selling tangible personal property at retail in this state, including the business of making mail order sales,
or who rents or furnishes any of the things or services taxable under this chapter, or who stores for use or
consumption in this state any item or article of tangible personal property as defined herein and who leases or rents
such property within the state....
Section 212.02, F.S., provides in pertinent part:
(15) "Sale" means and includes:
(a) Any transfer of title or possession, or both, exchange, barter, license, lease, or rental, conditional or otherwise, in
any manner or by any means whatsoever, of tangible personal property for a consideration.

(16) "Sales price" means the total amount paid for tangible personal property, including any services that are a part of
the sale ....

(19) "Tangible personal property" means and includes personal property which may be seen, weighed, measured, or
touched or is in any manner perceptible to the senses ....

Rule 12A-1.032, F.A.C., provides in part:
(4) The charge which a computer technician makes for a customized software package which includes such items as
instructional material, pre-punched cards or programmed tapes is construed to be a service charge and exempt. Retail
sales of pre-packaged programs for use with audio/visual equipment or other computer equipment, where the
programs are fully useable by the customer without modifications and the vendor does not perform a detailed analysis
of the customer's requirements in selecting or preparing the programs, are taxable as sales of tangible personal
property. However, where the vendor, at the customer's request, modifies or alters a pre-packaged program to the
customer's specification and charges the customer for a single transaction, the charge is for a customized software
package and is exempt as a service transaction.
(5) When a computer technician surveys a customer's needs and as a result makes recommendations which may
include instructional material, diagrams and layouts, a software package, including pre-punched cards or programmed
tapes, the charge made is construed to be for professional services and is exempt.
Response
At issue is whether the charges for the additional services are considered part of the sales prices of the original
transaction that included software and hardware.
Section 212.05, F.S., imposes sales tax on the "sales price" of each article of tangible personal property when sold at
retail in this state. Section 212.02(16), F.S., defines "sales price," in part, to mean the total amount paid for tangible
personal property including any services that are a part of the sale. The identity of a service that is "part of the sale,"
as required by s. 212.02(16), F.S., has been clarified in American Telephone and Telegraph Company v. Department
of Revenue, 25 F.L.W. D1216 (Fla. 1DCA 2000).
In that case the appeals court affirmed the conclusion of the trial court that certain engineering services were
"inextricably intertwined" with the sales of the telecommunication equipment. Id. at 3. Also, the court found that there
is no requirement that the purchases of services must be linked with tangible personal property. The court, referring to
s. 212.02(16), F.S., said that"... the Legislature chose not to limit the sales tax to services that must be purchased with
tangible personal property...." Id. at 3. The court concluded that the intent of the statute did not limit the services in
such a manner and that the court would "... have no authority to do so." The court distinguished the Fifth District Court
of Appeal opinion in Department of Revenue v. B&L Concepts, 612 So.2d 720 (Fla. 5th DCA 1993), which found no
tax was due on the charge for delivering furniture. The court in American Telephone and Telegraph stated that the test
is not whether such charges are optional. The real question is whether the sale of the service is incidental to the sale
of the property, whether the services are subordinate, having a minor role. In American Telephone and Telegraph,
since the trial court found that the engineering services were clearly not incidental to the sale of the switching
equipment, the services were part of the sales price of the equipment. Further, the appeals court held that services
were not separate or discrete transactions but were "a part of the sale" even when the sales prices of the services and
of the tangible personal property were separately stated and separately billed. Id. at 4.
Section 212.08(7)(v)1., F.S. exempts from tax professional, insurance, or personal service transactions that involve

sales as inconsequential elements for which no separate charges are made. See also Rule 12A-1.032(5), F.A.C. The
tangible personal property involved in this case is not an inconsequential element of the original transaction, and the
sale involves separate charges. Therefore, Section 212.08(7)(v)1., F.S., and Rule 12A-1.032(5), F.A.C., do not apply.
It is clearly indicated in the Software and Equipment Agreement that Exhibit A and the Addenda are part of the
agreement entered into effective September 27, 2001. Both Vendor and Purchaser concurred that the terms of the
agreement would commence on September 27, 2001, and were perpetual unless terminated. In applying the cited tax
law, rules, and case law to the facts presented herein, it is concluded that the additional services are not incidental
elements of the transaction. These services are inextricably intertwined with the original purchase of the software and
hardware and are subject to Florida sales tax.
This response constitutes a Technical Assistance Advisement under Section 213.22, F.S., which is binding on the
Department only under the facts and circumstances described in the request for this advice as specified in Section
213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised
that subsequent statutory or administrative rule changes, or judicial interpretations of the statutes or rules, upon which
this advise is based, may subject similar future transactions to a different treatment than expressed in this response.
You are further advised that this response, your request and related backup documents are public records under
Chapter 119, F.S., and are subject to disclosure to the public under the conditions of s.213.22, F.S. Confidential
information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the
undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material and this
response, deleting names, addresses and any other details which might lead to identification of the taxpayer. Your
response should be received by the Department within 15 days of the date of this letter.
Sincerely,
Heather S. Miller
Senior Tax Specialist
Technical Assistance and Dispute Resolution
(850) 922-4835
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