When was customized medical practice software—and its maintenance—subject to Florida sales tax?

Plain-English summary

A software company employed four full-time programmers to adapt its medical practice-management system to different specialties and offices. Changes included procedure codes, diagnostic codes, code tables, user configurations, and other functions needed before any customer could use the system.

Florida agreed that this was custom software. Sold by itself, it was a nontaxable service transaction. A maintenance agreement covering only the custom software—unlimited support, updates, enhancements, and required government changes—was likewise nontaxable when it did not itself involve tangible personal property.

The result changed when the custom software was sold with taxable property:

• An April 14, 2008 contract contained only customized software and services, so the sale and related maintenance were not taxable.
• An April 28, 2008 proposal included a high-speed modem and cable, making the custom-software services part of a taxable tangible-property sale. The total price and related maintenance were taxable.
• A March 1, 2007 proposal included communications software that appeared to be canned. The Department could not determine how it was delivered. If it was canned software delivered in tangible form, the entire transaction and maintenance were taxable.

The Department applied the "inextricably intertwined" rule: services that form part of a taxable property sale enter the taxable sales price even if the services are separately stated, separately billed, or not mandatory.

What this means for you

Genuine customization can be a nontaxable service

The vendor performed detailed customer-specific programming rather than selling a fully usable off-the-shelf program. That distinction put the stand-alone software in the service category.

Delivery format matters for canned software

Prepackaged software delivered on tangible media or by a load-and-leave method was taxable under the ruling. Electronically downloaded software, by itself, did not involve a taxable transfer of tangible personal property.

Bundling can tax otherwise exempt custom work

Adding hardware or tangibly delivered canned software to the same sale pulled the associated custom-software services into the taxable sales price.

Maintenance follows what it covers

Maintenance solely for nontaxable custom or electronically downloaded software was not taxable. Maintenance related to taxable hardware or canned-software bundles was taxable.

Common questions

Q: Was the medical practice software taxable when sold alone?
A: No. The Department treated the heavily customized software as a nontaxable service transaction.

Q: What if the sale also included a modem and cable?
A: The entire transaction—including the custom software—was taxable because the services were part of the hardware sale.

Q: Does separately billing custom programming keep it exempt?
A: Not when it is part of a taxable tangible-property sale. The cited court decision says separate billing does not break the connection.

Q: Was every maintenance agreement taxable?
A: No. Maintenance for custom software sold alone was not taxable; maintenance related to taxable hardware or tangible canned software was.

Citations and references

• Fla. Stat. § 212.02(14)-(16) (retail sale, sale, and taxable sales price)
• Fla. Stat. §§ 212.05 and 212.0506 (tangible-property sales and service warranties)
• Fla. Stat. § 212.08(7)(v)1. (qualifying service transactions)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)
• Fla. Admin. Code r. 12A-1.032(4) (customized versus prepackaged software)
• American Telephone & Telegraph Co. v. Department of Revenue, 764 So. 2d 665 (Fla. 1st DCA 2000)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-001

Original ruling text

SUMMARY
QUESTION:
Are the Taxpayer’s sales of medical software subject to sales tax?
ANSWER:
The Taxpayer sells custom software. Taxpayer employs full-time software programmers to
customize its practice management software to varying medical specialties. The sale of this
software is a service transaction. This service transaction sold alone is not subject to sales
tax. Likewise, any maintenance agreement for the custom software sold alone, and not itself
involving the sale of tangible personal property, are not subject to sales tax.
January 8, 2009
XXX
Re:

Technical Assistance Advisement 09A-001
Custom Software
Sales and Use Tax
Sections 212.02, 212.05, 212.0506 Florida Statutes (F.S.)
Rule 12A-1.032, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)
FEI: XXX

Dear XXX:
This is in response to your letter dated September 11, 2008, requesting this 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 above referenced matter and party. 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 a TAA.
ISSUE
Are the Taxpayer’s sales of medical software subject to sales tax?
FACTS
Your letter provides your company sells and services software created for the medical
industry. Taxpayer provided that it employs four full-time programmers. Taxpayer provided
the needs of its medical clients, as all specialties of medicine, differ. Taxpayer provided
changes made to the software include procedure codes, diagnostic codes, and other code
tables.

Technical Assistance Advisement
Page 2 of 7
Taxpayer provided software support contracts to service its software. Taxpayer has recently
concluded an audit with the Department. Taxpayer has been and currently is collecting and
remitting tax from its clients on the sale and service of its software.
You provided the following documentation for three different customers: contracts, proposals,
invoices, and software support agreements. These proposals were dated: March 1, 2007;
April 14, 2008; and April 28, 2008. The proposals provide in part:
March 1, 2007
Other Hardware & Software
XXX Communications Software

Cost
$ XXX

April 14, 2008
[No additional hardware or software.]
April 28, 2008
Other Hardware & Software
Automated Second Copy 7 Backup Software
XXX Communications Software
High Speed Modem with Cable

Cost
$ XXX
$ XXX
$ XXX

TAXPAYER POSITION
Your letter provides in part:
The evaluation as to whether our software is considered customized or not is the fact
that we have programmers on staff that write and maintain custom programs for our
customers. The fact is that our software can not run without it being customized to the
specialty of medicine. It needs to be set up for each office based on their needs and
therefore, it can not run on its own without our intervention.
Examples of customized software are programs that interact and act [in] different
ways depending on the needs of the client. All code tables have to be designed
specifically for the client and how they are accessed with different options we turn on
or off. All of our set-up once the system is sold is tailored to that practice. Therefore,
every practice is different in what they use and require programmatically to tailor it to
[the] way they practice. A single doctor will not require the same set-up and a multiuser group. The software has to be changed to allow simultaneous users to be working
on the same files which require our customization. The bottom line is that no client
could work with our software without our intervention to set it up properly.
Regarding support of our software, all clients must pay us to use our software. For
that, we take unlimited phone calls, provide updates and enhancements to our software

Technical Assistance Advisement
Page 3 of 7
programs as they become available and make any mandatory changes to our software
that government agencies may require, such as XXX.

APPLICABLE STATUTES AND RULES
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 part:
(14)(a) "Retail sale" or a "sale at retail" means a sale to a consumer or to any person
for any purpose other than for resale in the form of tangible personal property or
services taxable under this chapter . . . .

(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 . . . . (Emphasis added.)
Rule 12A-1.032(4), F.A.C., provides:
(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.
(Emphasis added.)
Section 212.0506, F.S., provides in part:

Technical Assistance Advisement
Page 4 of 7
(1) It is the intent of the Legislature that every person is exercising a taxable privilege
who engages in this state in the business of soliciting, offering, providing, entering
into, issuing, or delivering any service warranty.
(2) For exercising such privilege, a tax is levied on each taxable transaction or
incident, which tax is due and payable at the rate of 6 percent on the total
consideration received or to be received by any person for issuing and delivering any
service warranty.
(3) For purposes of this section, "service warranty" means any contract or agreement
which indemnifies the holder of the contract or agreement for the cost of maintaining,
repairing, or replacing tangible personal property. The term "service warranty" does
not include contracts or agreements to repair, maintain, or replace tangible personal
property if such property when sold at retail in this state would not be subject to the
tax imposed by this chapter or if the parts and labor to repair tangible personal
property qualify for an exemption under this chapter, nor does it include such
contracts or agreements covering tangible personal property which becomes a part of
real property.

DISCUSSION
As provided in the statutory and regulatory provisions cited above, the sale of tangible
personal property is subject to tax. The term “sale” includes a license to use tangible personal
property. Service only transactions, except those authorized for taxation by Chapter 212, F.S.,
are generally not subject to tax.
Software that is fully useable by a customer without modifications is considered canned or
prepackaged. See Rule 12A-1.032(4), F.A.C. The sale of canned or prepackaged software
delivered to a customer in tangible form, including but not limited to, on a disk or via the load
and leave method, is a sale of tangible personal property subject to sales tax. See Section
212.05, F.S.
Conversely, a sale of customized software is a service transaction. Custom software is where
the vendor, at the customer's request, modifies or alters a prepackaged program to the
customer's specification. See Rule 12A-1.032(4), F.A.C. The basis for the exemption
applicable to customized software is found in Section 212.08(7)(v)1., F.S., which exempts ". .
. professional, insurance, or personal service transactions that involve sales as inconsequential
elements for which no separate charges are made."
Likewise not subject to tax are sales of software, canned or customized, electronically
downloaded by the customer, as there is no taxable conveyance of tangible personal property
subject to tax under Section 212.05, F.S.
However, Section 212.02(16), F.S., defines the taxable “sales price” as the “total amount paid
for tangible personal property, including any services that are a part of the sale.” Therefore,
when tangible personal property and services are a part of the same sale, the total amount is

Technical Assistance Advisement
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subject to tax. To determine if services are part of the sale of tangible personal property, the
Department first looks to whether the service provided is invoiced with tangible personal
property. Second, the Department determines whether the service is intertwined or incidental
to the sale of tangible personal property.
This determination was clarified in American Telephone and Telegraph Co. v. Department of
Revenue, 764 So.2d 665 (Fla. 1st DCA 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 666. The court relied on s.
212.02(16), F.S., and determined that “the ‘services that are part of the sale’ language is not
limited to only those services that must be purchased with tangible personal property.” Id. at

667. The court said that "[g]iven the Legislature chose not to limit the sales tax to services
     that must be purchased with tangible personal property, we have no authority do so." Id.
     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 669.
     Therefore, charges for services that are part of the sale of taxable tangible personal property
     are a part of the sales price and subject to sales tax. As provided above, the sale of
     customized software is a service transaction. As a result, when custom software services are
     part of the sale of taxable software or hardware, the total amount charged is subject to tax.
     Likewise, electronically downloaded software is subject to sales tax when it is part of the sale
     of taxable tangible personal property.
     Here, there are sufficient facts to show Taxpayer sells custom software. Taxpayer employs
     full-time software programmers to customize its practice management software to varying
     medical specialties. However, the agreements entered into on March 1, 2007, and April 28,
     2008, contain other software and hardware as part of the sale.
     The March 1, 2007, proposal includes a charge for XXX Software. This appears to be canned
     software. It is unclear how this software is delivered. If this software is canned and delivered
     in a tangible form, then it is a taxable sale of tangible personal property. The April 28, 2008,
     proposal, including high speed modems and cables, clearly contains the sale of taxable
     tangible personal property. Therefore, the custom software is a service that is part of the sale
     of taxable tangible personal property and the total amount is the taxable sales price.
     However, the April 14, 2008, proposal and contract are solely for the sale of customized
     software and other services. This is a service only transaction that is not subject to Florida
     sales tax.
     With regard to maintenance and travel charges, Section 212.0506, F.S., indicates that an
     agreement that covers the cost of maintaining, repairing, or replacing canned or prepackaged
     software (tangible personal property) is subject to sales tax. However, an agreement that
     covers the cost of maintaining, repairing, or replacing only customized software or
     electronically downloaded software, and does not itself involve the sale of tangible personal
     property, is not subject to sales tax.

Technical Assistance Advisement
Page 6 of 7

Here, the maintenance charges related to the April 14, 2008, contract are not subject to sales
tax, as they only relate to a nontaxable service transaction. However, the April 28, 2008, and
potentially the March 1, 2007 (depending on how additional software is delivered), contracts
are subject to tax, as they relate to the taxable sale of tangible personal property.
CONCLUSION
Taxpayer’s practice management software is custom software. The sale of this software is a
service transaction. This service transaction sold alone is not subject to sales tax. Likewise,
any maintenance agreement for the custom software sold alone, and not itself involving the
sale of tangible personal property, are not subject to sales tax.
However, when Taxpayer’s custom software is part of the sale of taxable tangible personal
property (canned software delivered in tangible form or hardware) the total sales price is
subject to tax. Likewise, any maintenance agreement related to these sales is subject to 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 advice 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,

H. French Brown, IV
Attorney
Technical Assistance and Dispute Resolution
(850) 922-4708
HFB/lp

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