Was a customized website software license subject to Florida sales tax?

Plain-English summary

The Department treated the taxpayer's website software as a nontaxable custom-software service. Although the taxpayer began with bare "vault" copies, each customer implementation required content, design, programming, and functional changes to the customer's exact specifications.

The software was generally transmitted electronically, with no tangible copy retained by the customer. If hosting ended, the customer could receive a compiled version of its customized site; the Department said that delivery still represented a custom service transaction.

The ruling included an important limit: if the taxpayer sold taxable hardware or canned software in tangible form and the software service was part of that sale, the service could become part of the taxable sales price.

What this means for you

Starting from a reusable software base did not make the product canned software where every customer received material customization and could not use the base product without the taxpayer's intervention.

Common questions

Was the customized website license taxable? No, on the described facts.

Did electronic delivery matter? Yes. Electronically downloaded software did not involve a taxable transfer of tangible personal property.

What if the customer received a compiled copy after hosting ended? It remained a custom-software service under this ruling.

Citations and references

• Fla. Stat. §§ 212.02 and 212.05 and Fla. Admin. Code r. 12A-1.032(4), as cited in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-044

Original ruling text

SUMMARY
QUESTION:
Is Taxpayer’s software package considered custom software? Is the software subject to sales tax?
ANSWER:
Taxpayer customizes its Software for each customer, to the customer’s specifications.
Therefore, the overall transaction is that of a service. Further, Taxpayer generally only
provides the Software via electronic methods. Therefore, the licensing of Taxpayer’s
Software is not subject to Florida sales tax as the sale of tangible personal property.
September 2, 2009

XXX
Re:

Technical Assistance Advisement 09A-044
Custom Websites
Sales and Use Tax
Sections 212.02, 212.05, Florida Statutes (F.S.)
Rule 12A-1 .032, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)
FEIN: XXX

Dear XXX:
This is in response to your letter dated August 10, 2009, 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
Is the software package considered custom software? Is the software subject to sales tax?
FACTS
Your letter provides in part:
…Taxpayer is the sole owner and developer of a proprietary software
program known as “XXX” (the “Software”).

Technical Assistance Advisement
Page 2 of 5
Taxpayer, using Taxpayer's Software, provides a customized package
website for lead generation and ecommerce which includes updates,
supplements, internet-based activities and support services. The Software
contains two main components: a database and a user interface in the form
of program pages to display and/or store information into the database. . . .
Taxpayer has base "vault" copies of the Software website that it clones for
each customer implementation. These "vault" copies are bare sites that
include database and user interface, but with no meaningful data or static
content. Once a customer hires Taxpayer to create a customized package
website, the implementation process consists of loading content pieces,
database content and functional modules that can be plugged into the site.
Taxpayer charges a fee for the basic conversion site Software set-up of
$XXX, plus time for customization. In addition, the customer's website is
then hosted by Taxpayer and a separate annual hosting fee is charged for
that service.
The Software interacts and acts in different ways depending on the needs
of the customer and their specifications. The implementation of the
website and customization is performed by an in-house production staff
which includes IT staff, design staff, programming and internet marketing
staff. Depending upon the customization, the appropriate parties are
included in the implementation process as they are needed. For example, if
a customer asks for certain design upgrades, then designers would get
involved creating a custom design or graphic design to be used on the site.
If the customer requests modification to the functions of the website, the
Taxpayer has programmers that add the additional features. Taxpayer does
have full-time programmers that it employs and uses in the customization
process. The customer does not retain any ownership in the Software;
provided, however, that in the event that the customer determines to cease
having the website hosted by Taxpayer, then the customer can receive a
copy of the customized website in compiled code format which they can
then have hosted with a company different from Taxpayer. . . . If the
customer wants to have the site functionally modified, they will not have
the ability to change the website on their own, as the website is sent to the
exiting customer in a compiled code format and, instead the customer will
need to have the modification implemented by Taxpayer. In addition, the
customers enter into a Licensing Agreement with Taxpayer which reflects
that Taxpayer is the sole owner and developer of the Software and that the
Software is not being sold to the customer. Instead, the customer is
granted a revocable license to use the Software as permitted by Taxpayer.
...
Every installation involves developing customization to each customer's
exact specifications. Taxpayer is continuing to develop and upgrade the
Software through the development of additional functional modules that
can be plugged into the conversion sites. Installation of the Software and

Technical Assistance Advisement
Page 3 of 5
conversion website is all done via electronic transmission. The customer
does not retain any tangible copies of the Software, although as described
above, in the event that the customer desires to cancel its hosting
agreement with Taxpayer, then Taxpayer will provide the customer with a
compiled version of the site which it could deliver in a tangible format or
via electronic submission. No customer could work with the Software
without Taxpayer's intervention to set the site up properly. (emphasis
supplied.)
TAXPAYER POSITION
Taxpayer requests that a ruling be made that the Software in question meets the criteria
necessary to qualify as custom software and that it is not subject to Florida sales and use
tax.
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
supplied.)
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-

Technical Assistance Advisement
Page 4 of 5
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 supplied.)
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.
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.
Under the facts provided, Taxpayer customizes its Software for each customer, to the
customer’s specifications. Therefore, the overall transaction is that of a service. Further,
Taxpayer generally only provides the Software via electronic methods. However, even
when the Taxpayer provides the customized Software after the termination of a hosting
agreement, the Software is still viewed as a custom service transaction. Therefore, the
licensing of Taxpayer’s Software is not subject to Florida sales tax as the sale of tangible
personal property.
However, if the Taxpayer also was in the business of selling tangible personal property
(hardware, canned software delivered in tangible form), and the Software service is part
of the sale of the taxable tangible personal property, then the Software would be part of
the taxable sales price.

Technical Assistance Advisement
Page 5 of 5
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
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-4708
HFB/
Ctrl# 69301