When were licenses, services, and renewals for legal-management software subject to Florida sales tax?

Plain-English summary

Florida classified the developer's standard program as canned software because customers could use the same program without modification. Installation, configuration, and training alone did not make it customized.

Delivery determined the tax on that canned product. A disk, CD, DVD, computer diskette, or load-and-leave transfer was tangible personal property and taxable. Software delivered only through the internet was not tangible property and was not taxable by itself.

Actual modification could change the result. When the developer created customer-specific SQL statements, reports, or service authorizations as part of the license sale and supplied no other tangible property, Florida treated the transaction as a nontaxable customized-software service. The developer had to document the modification.

Services that were part of a taxable tangible-software sale, including installation and travel, entered the taxable sales price even if separately stated. Services accompanying electronic-only or customized software were nontaxable under the ruling. Annual renewals followed the initial transaction: taxable if the original tangible canned-software sale was taxable, and nontaxable if the original electronic or customized transaction was not.

What this means for you

Software labels are less important than delivery and actual work performed. Keep transaction-level evidence of physical versus electronic delivery and of substantive customer-specific code or program alteration.

Common questions

Did configuration alone make software custom? No.

Were internet downloads taxable? Not by themselves.

How were renewals treated? They followed the taxability of the initial license transaction.

Citations and references

• Fla. Stat. §§ 212.02, 212.05, and 212.08(7)(v), and Fla. Admin. Code rr. 12A-1.006 and 12A-1.032, as quoted and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 10A-010

Original ruling text

SUMMARY
QUESTIONS AND ANSWERS:

1. It has been suggested that the requirement for training and configuration might allow
   [Taxpayer’s] software to be classified as “custom.” In some instances, the software has
   been sold without any training or configuration as the purchaser already has a trained and
   qualified operator.
   Does the Department view such sales as taxable events subject to Florida Sales Tax?
   Rule 12A-1.032, F.A.C., requires modification or alteration to the software package
   before rising to the level of an exempt service. Under the facts and circumstances
   Taxpayer provided, Taxpayer’s Software is generally sold as canned or pre-packaged
   software that is fully useable by the customer without modifications. This includes
   installation and configuration only, which Taxpayer provides is not mandatory. The sale
   of canned or pre-packaged software delivered via tangible form is subject to sales and use
   tax.
   However, Taxpayer has provided that modification and alteration to the software may
   occur when this Taxpayer creates custom SQL statements, reports, and service
   authorizations to an individual customer’s specifications. When Taxpayer modifies
   Software as part of the sale of the license, and does not sell other tangible personal
   property, then the transaction is not subject to sales and use tax. Taxpayer will have the
   burden of documenting that modification or alteration of the Software occurs under any
   given transaction.
2. Does the Department consider computer software and related licenses tangible
   personal property?
   Canned or pre-packaged software delivered in tangible form (disks or load and
   leave method) is tangible personal property. The sale of a license to use this type
   of software is subject to sales and use tax.
   3.

[Taxpayer’s] current method of delivering its computer software being
licensed, is via the internet. . . .
Does the Department view such sales as taxable events subject to Florida
Sales Tax?

Software delivered electronically is not tangible personal property and is not
subject to sales tax, by itself.
4.

If a client requests the delivery to be via CD ROM or DVD, Taxpayer may,
upon request, provide the same installation package in this manner.

Technical Assistance Advisement
Page 2 of 9
Does the Department view such sales as taxable events subject to Florida
Sales Tax?
The sale of canned or pre-packaged software delivered via CD ROM or DVD is
subject to sales and use tax.

5. In the past, Taxpayer has delivered the licensed software and installation
   package on computer diskettes, shipping them to the licensee.
   Does the Department view such sales as taxable events subject to Florida
   Sales Tax?
   The sale of canned or pre-packaged software delivered via computer diskettes is
   subject to sales and use tax.
6. Annual license renewals are required to continue use of the licensed programs.
   These renewals are typically provided via the internet.
   If any of the sales themselves were taxable events, are the fees collected as
   license renewals viewed as taxable events subject to Florida Sales Tax?
   The annual license renewals are renewals of the initial transaction. Therefore, if the
   initial transaction was subject to sales tax, the sale of canned or pre-packaged software
   delivered via tangible form, then the subsequent renewal of that transaction is subject to
   sales tax. If the initial transaction was not subject to sales tax, the sale of modified or
   altered software or electronically downloaded software, then the subsequent renewal of
   that transaction is not subject to sales tax.
   February 16, 2010
   XXX
   Re:

Technical Assistance Advisement 10A-010
Software
Sales and Use Tax
Sections 212.02, 212.05, 212.08, Florida Statutes (F.S.)
Rules 12A-1.006, 12A-1.032, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)
FEIN: XXX

Dear XXX:
This is in response to your letter dated August 18, 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

Technical Assistance Advisement
Page 3 of 9
regulatory requirements for issuance of a TAA. Therefore, the Department is hereby
granting your request for a TAA.
FACTS
Your letter provides in part:
[Taxpayer] is a Florida based corporation that develops, markets and
provides training and support services for its computer software licenses.
This software, called XXX XXX [“Software”], is used by lawyers, inhouse counsel and other entities for managing their legal files and billing
for their services. The software license is typically sold with 20-100 hours
of training and implementation services as it is highly configurable to
meet the needs of each specific client. The software licenses are for a
period of one year and may be renewed annually.
. . . [Taxpayer is] requesting clarification as to the Department of
Revenue’s position when, if ever, computer software licenses and the
associated services would be considered subject to Florida State Sales
Tax.
1.

Does the Department consider computer software and related licenses
tangible personal property?

2. [Taxpayer’s] current method of delivering its computer software being
   licensed, is via the internet. . . .
   Does the Department view such sales as taxable events subject to Florida
   Sales Tax?
3. If a client requests the delivery to be via CD ROM or DVD, [Taxpayer]
   may, upon request, provide the same installation package in this manner.
   Does the Department view such sales as taxable events subject to Florida
   Sales Tax?
4. In the past, [Taxpayer] has delivered the licensed software and installation
   package on computer diskettes, shipping them to the licensee.
   Does the Department view such sales as taxable events subject to Florida
   Sales Tax?
5. Annual license renewals are required to continue use of the licensed
   programs. These renewals are typically provided via the internet.

Technical Assistance Advisement
Page 4 of 9
If any of the sales themselves were taxable events, are the fees collected as
license renewals viewed as taxable events subject to Florida Sales Tax?

6. It has been suggested that the requirement for training and configuration
   might allow [Taxpayer’s] software to be classified as “custom.” In some
   instances, the software has been sold without any training or configuration
   as the purchaser already has a trained and qualified operator.
   Does the Department view such sales as taxable events subject to Florida
   Sales Tax?
   Taxpayer provided Purchase and Subscription License Agreements as well as invoices.
   The Agreements provide a line item charge for “Installation, Planning, Customization
   and Training Services” at a specific number of hours. Taxpayer provides additional
   training or support, prepaid or not, at varying hourly rates.
   Taxpayer markets Software as having a “flexible design” that is “customizable to meet
   your needs without custom programming.” On October 26, 2009, Taxpayer provided that
   “the [Software] also allows for the integration of external processes, . . . such as
   designing and programming an external process to calculate interest.” Taxpayer’s follow
   up on November 9, 2009, provided:
   There are several other types of changes that are made to the software.
   Case types and codes are added. Workflow processes are added. . . . None
   of these require modification to the software, only to the configuration.
   We also program custom processes, such as SQL statements and reports.
   These processes can then be added as part of a client’s system. . . . (e.s.)

. . . Typically, the service authorizations are not part of the original
contract, but often the hours sold with the contract for
Training/Implementation are used for the actual custom projects, as
needed. . . .
Installation consists of assisting the client with installing the [Software]
program on their computer system, if required. Planning consists of
consulting service to ensure the client configures their system in a manner
that suits their ultimate goal. Customization includes items previously
discussed, such as writing reports or SQL statements. Training may be on
using the [Software] product as an end user, as an administrator to
configure the setup or for any other purpose the client requires . . . . There
is no specific activity contemplated by the [Agreement’s] line item.
The “subscription” and purchase are only for licenses to use the
[Software]. We do not “sell” the software itself. The software in each
scenario is identical. The training required, if any, is also identical. . . .

Technical Assistance Advisement
Page 5 of 9
ISSUE
What are the Florida sales and use tax implications related to Taxpayer’s software sales?
DISCUSSION
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 . . . .
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. (e.s.)

(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 . . . .

Section 212.08(7)(v), F.S., provides in part:
Professional services.-1. Also exempted are professional, insurance, or personal service
transactions that involve sales as inconsequential elements for which no
separate charges are made.

Rule 12A-1.006(4), F.A.C., provides:
Except as otherwise provided in paragraph (b) of subsection (1), charges
for repairs[, installation, adjustment, alteration, maintenance, or
remodeling] of tangible personal property which require labor or service
only are taxable unless the repairer (dealer) can establish by evidence in

Technical Assistance Advisement
Page 6 of 9
the dealer’s records that the dealer furnished no tangible personal property
which was incorporated into or attached to the repaired item. It is
immaterial that the cost of the material furnished is insignificant when
compared to the cost of the labor involved. For maintenance contracts
covering tangible personal property, refer to Rule 12A-1.105, F.A.C.
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, prepunched 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. (e.s.)
The Florida Legislature has declared that persons engaged in the business of selling
tangible personal property at retail in this state are subject to the Florida sales and use tax.
The term “sale” expressly includes a license to use tangible personal property. Therefore,
the sale of a license to use computer software that is tangible personal property is subject
to sales and use tax.
Service only transactions, except those authorized for taxation by Chapter 212, F.S., are
generally not subject to tax. When tangible personal property and services are a part of
the same sale, the entire sales price is subject to tax. See Section 212.02(16), F.S.
Generally, labor to install, alter, or repair tangible personal property is subject to sales
tax. See Rule 12A-1.006(4), F.A.C.
To further determine if services are “part of the sale,” the Department looks to a number
of factors. First, in order to not be included as part of the sale, the services must not be
invoiced with the sale of tangible personal property. Second, even if the service is
separately invoiced, one must determine whether the service provided is intertwined or
incidental.
Whether a service is “part of the sale” has been 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

Technical Assistance Advisement
Page 7 of 9
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, separate, incidental services
which are not “part of the sale” of tangible personal property are not subject to tax.
Software that is fully useable by a customer without modifications is considered canned
or prepackaged. The sale of canned or pre-packaged 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. Charges for services, including
installation and travel charges, that are part of the sale of tangible canned or pre-packaged
software are a part of the sales price and subject to sales tax.
Conversely, a sale of customized software is a professional service transaction and is not
subject to sales tax provided the customized software is not part of the sale of other
tangible personal property. See Section 212.08(7)(v), F.S. Rule 12A-1.032(4), F.A.C.,
defines customized software as modifying or altering the prepackaged program to the
customer’s specifications, at the customer’s request.
Likewise exempt is a sale that solely involves software, canned or customized,
electronically downloaded by the customer, as there is no conveyance of tangible
personal property. Keep in mind that electronically downloaded software is subject to
Florida sales tax when sold as part of the sale of tangible personal property. Since the
sale of customized software and electronically delivered software are not sales of tangible
personal property, charges for other services that are a part of such sales are likewise not
subject to sales tax. For instance, a sale that includes only customized software and
training is not subject to tax.
Therefore, your questions are answered in the following manner:

6. It has been suggested that the requirement for training and configuration might allow
   [Taxpayer’s] software to be classified as “custom.” In some instances, the software
   has been sold without any training or configuration as the purchaser already has a
   trained and qualified operator.
   Does the Department view such sales as taxable events subject to Florida Sales Tax?
   Rule 12A-1.032, F.A.C., requires modification or alteration to the software package
   before rising to the level of an exempt service. Under the facts and circumstances
   Taxpayer provided, Taxpayer’s Software is generally sold as canned or pre-packaged
   software that is fully useable by the customer without modifications. This includes
   installation and configuration only, which Taxpayer provides is not mandatory. The sale
   of canned or pre-packaged software delivered via tangible form is subject to sales and use
   tax.

Technical Assistance Advisement
Page 8 of 9
Further, Taxpayer does not complete a detailed analysis in selecting or preparing the
programs for each customer, because 1) the customer contacts Taxpayer to purchase the
program, Taxpayer is not hired by the customer to select a program(s) to fit its needs, and
2) the same program is prepared and provided to all customers, there is no special
preparation of the program based on a detailed analysis of the customer. Therefore, the
sale of the software license under these facts and circumstances is generally subject to
sales tax as canned or pre-packaged software.
However, Taxpayer has provided that modification and alteration to the software may
occur when this Taxpayer creates custom SQL statements, reports, and service
authorizations to an individual customer’s specifications. When Taxpayer modifies
Software as part of the sale of the license, and does not sell other tangible personal
property, then the transaction is not subject to sales and use tax. Taxpayer will have the
burden of documenting that modification or alteration of the Software occurs under any
given transaction.

7. Does the Department consider computer software and related licenses tangible
   personal property?
   Canned or pre-packaged software delivered in tangible form (disks or load and
   leave method) is tangible personal property. The sale of a license to use this type
   of software is subject to sales and use tax.
8. [Taxpayer’s] current method of delivering its computer software being
   licensed, is via the internet. . . .
   Does the Department view such sales as taxable events subject to Florida
   Sales Tax?
   Software delivered electronically is not tangible personal property and is not
   subject to sales tax, by itself.
9. If a client requests the delivery to be via CD ROM or DVD, [Taxpayer] may,
   upon request, provide the same installation package in this manner.
   Does the Department view such sales as taxable events subject to Florida
   Sales Tax?
   The sale of canned or pre-packaged software delivered via CD ROM or DVD is
   subject to sales and use tax.
10. In the past, [Taxpayer] has delivered the licensed software and installation
    package on computer diskettes, shipping them to the licensee.
    Does the Department view such sales as taxable events subject to Florida
    Sales Tax?

Technical Assistance Advisement
Page 9 of 9
The sale of canned or pre-packaged software delivered via computer diskettes is
subject to sales and use tax.

11. Annual license renewals are required to continue use of the licensed programs.
    These renewals are typically provided via the internet.
    If any of the sales themselves were taxable events, are the fees collected as
    license renewals viewed as taxable events subject to Florida Sales Tax?
    The annual license renewals are renewals of the initial transaction. Therefore, if the
    initial transaction was subject to sales tax, the sale of canned or pre-packaged software
    delivered via tangible form, then the subsequent renewal of that transaction is subject to
    sales tax. If the initial transaction was not subject to sales tax, the sale of modified or
    altered software or electronically downloaded software, then the subsequent renewal of
    that transaction is not subject to 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 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
Deputy Director
Technical Assistance and Dispute Resolution
(850) 922-4746
HFB/lp
Ctrl# 72327