Were electronically downloaded medical-practice software licenses and their support agreements subject to Florida sales tax?

Plain-English summary

The taxpayer developed medical-practice management and electronic-record software and performed remote setup, configuration, data migration, consultation, and training. It sold no computers or networking products.

Every software installation, upgrade, form, and training document was delivered electronically over the internet. Florida ruled that the license was a nontaxable service transaction regardless of whether the software was canned or customized because no tangible personal property was conveyed.

The annual agreement covering technical support, upgrades, maintenance, repair, or replacement of the electronically downloaded software was also nontaxable.

What this means for you

Electronic-only delivery can keep both software and related support outside Florida sales tax under this ruling. Any physical medium, hardware, or other tangible property in the same sale can change the result.

Common questions

Did canned versus customized software matter? No, under the electronic-only delivery facts.

Were implementation and training materials tangible? No; all were delivered electronically.

Was the support agreement taxable? No.

Citations and references

• Fla. Stat. §§ 212.02, 212.05, and 212.0506 and Fla. Admin. Code r. 12A-1.032, as quoted and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 10A-028

Original ruling text

SUMMARY
QUESTION: Is the license to use Taxpayer’s software, which is downloaded
electronically by the customer subject to Florida sales tax?
ANSWER – Based on the Facts Below: The license to use software that is downloaded
electronically by the customer is a service transaction and is not subject to sales tax provided it is
not part of the sale of tangible personal property.
June 21, 2010
XXX
Re:

Technical Assistance Advisement (TAA) 10A-028
Sales and Use Tax – Computer Software
Sections 212.02, 212.05, and 212.0506, Florida Statutes (F.S.)
Rule 12A-1.032, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)
FEI # XXX

Dear XXXr:
This is in response to your letter dated May 13, 2010, 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., concerning the taxability of the sale, installation, and support of computer
software offered by your company. An examination of your letter has established 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.
Facts
Your letter provides the following in part:
The primary business activity of [Taxpayer] is the development, sale, installation and
support of Medical Practice Management and Electronic Medical Records software. We
do not sell any computer or networking products. Our principal customers are physicians
and associated health care providers located throughout the world. The software permits
our customers to perform multiple tasks related to patient care and medical office
management including billing, scheduling, documenting patient encounters
electronically, marketing, letter writing, photo imaging of medical records, and
integration with web site portals.

Technical Assistance Advisement
Page 2 of 5
Our software always requires installation/configuration by our Client Services and
Software Development department personnel working with the customer by phone and
over the Internet. [Taxpayer] software can never be used by a customer without
[Taxpayer] involvement in set-up, installation and configuration of the software on the
customer’s computers and networks. All of our contracts contain professional services
fees related to set-up, installation and configuration of the software. In many cases,
historical data migration is required to bring patient demographics, scheduling, clinical
encounters and/or financial transactions from legacy software systems into our software,
and this always requires the services of one of our software developers.
[Taxpayer] software has been designed to permit a broad range of uses to accommodate
each customer’s unique circumstances. This requires extensive setup of the software,
consultation and training with our customers before they can use the software. [Taxpayer]
software cannot be used without [Taxpayer] setup and training. Further it cannot be used
by other customers once it has been installed and/or configured for use for a specific
customer.
[Taxpayer] software is always downloaded electronically by a [Taxpayer] support
specialist from a [Taxpayer] server to a customer’s computer network. We do not
provide a disk or any other tangible media containing our software. This is our standard
practice for both new software and upgrades to previously downloaded software.

[Taxpayer] software contracts always include an amount for Annual Support and Internet
downloadable software upgrades and other training and support services. [Taxpayer]
does not sell any tangible personal property to its customers as indicated by the attached
sample purchase agreement and invoice.

Along with your request for advisement you provided a copy of a Software License Agreement
(the Agreement), including addendums to the Agreement regarding Evaluation and Management
Coding and [Forms] and State Mandated Informed Consent. You also provided a copy of
standard software training and implementation documents that you state are sent electronically to
your clients.
The Agreement provides the following in part:
. . . 1.2 Purpose: Under the terms and conditions contained herein, the User intends to
purchase from [TAXPAYER] a non-exclusive License to use certain Software and
Documentation owned by [TAXPAYER].

2.0 Definitions

Technical Assistance Advisement
Page 3 of 5
2.1 Software: Software refers to the practice management software product known as
“[Taxpayer] Practice.” Software includes any copies in any form, in whole or part, of any
version thereof.
2.2 Documentation: Any written Electronic materials provided by [TAXPAYER] to the
User relating to the Software, and any copies thereof.
2.3 Electronic Data: Electronic Data shall mean all information regardless of form that
User has entered or transferred through the Software. Electronic Data shall include, but is
not limited to, digital information regarding client data, Electronic PHI, and other
information.
3.0 Software
3.1 Grant of License: [TAXPAYER] will provide through Internet download one (1)
copy of the Software and applicable online Documentation to the User. [TAXPAYER]
hereby grants the User a non-exclusive License to use the Software and Documentation
during the term of this Agreement. The User agrees to the following restrictions: (1)
User shall limit the use of this Software to use on a single server/workstation plus the
number of purchased licenses as specified in a signed purchase agreement, (2) User shall
make no copies thereof unless [TAXPAYER] provides prior authorization, except for one
(1) backup copy for archival purposes, program error verification, or to replace defective
media, and all copies made must bear the copyright notices contained in the original
downloaded, (3) User shall not modify, adapt, translate, create derivative works,
disassemble, decompile or otherwise reverse engineer the Software except and only to
the extent that such activity is expressly permitted by applicable law notwithstanding this
limitation. . . .

3.3 Upgrades: From time to time, [TAXPAYER] may make improvements, upgrades via
internet download, and repairs to the Software and Documentation. . . .
5.0 Limited Warranties. Disclaimers and Remedies
5.1 Limited Warranty and Disclaimer: [TAXPAYER] warrants for a period of Ninety
(90) Days from the date of the installation of the Software, or as the date is extended by
the User subscribing to annual support agreements, that the Software will execute its
programming instructions when properly installed on a personal computer or workstation
meeting specifications recommended by [TAXPAYER]. [TAXPAYER] does not warrant
that the operation of the Software will be uninterrupted or error free. In the event that this
Software fails to execute its programming instructions during the warranty period, User’s
sole and exclusive remedy shall be to provide access to [TAXPAYER] to the computer
network on which the Software resides for [TAXPAYER] to attempt resolution within a
reasonable time based on the severity of the issue. Such correction is not warranted nor
guaranteed; however, [TAXPAYER] will continue to provide whatever service and/or
Internet update of software as necessary during the warranty period in an attempt to

Technical Assistance Advisement
Page 4 of 5
correct the problem(s). . . .

The Addendum to the Agreement regarding Evaluation and Management Coding, describes
[Taxpayer] Practice E&M Coding to provide “features and algorithms to assist in calculating
office visit service codes for billing”
The Addendum to the Agreement regarding [Forms] and State Mandated Informed Consent
describes [Forms] as “a comprehensive set of content-specific electronic forms, letters and
patient education documents, including informed consent documents from the American Society
of Plastic Surgeons (ASPS) Patient Consultation Resource Book. [Forms] is a module in the
practice management software product known as [Taxpayer] Practice (Software.)”
The standard software training and implementation documents provide that the “software
download and installation will be done over the Internet.” The training documents also provide
that the “[Forms] electronic procedure education, post-op, recovery, and consent content” will be
provided in an electronic format.
Requested Advisement
You request that the Department of Revenue (the Department) provide an advisement on the
taxability of the charge imposed for the license to use Taxpayer software.
Applicable Authority
Section 212.05, F.S., provides that the sale of tangible personal property is subject to tax. The
term “sale” includes a license to use tangible personal property. See Section 212.02(15), F.S.
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. Software supplied on a
tangible medium is taxable. Charges for services that are part of the sale of such taxable
software are part of the sales price and are subject to sales tax.
Rule 12A-1.032, F.A.C., provides that a sale of customized software is a service transaction and
is not subject to sales tax provided the customized software is not part of the sale of other
tangible personal property. Likewise exempt is a sale that solely involves software, canned or
customized, that is provided to the customer in an electronic format, as there is no conveyance of
tangible personal property. Keep in mind that electronically accessed software is subject to
Florida sales tax when sold as part of the sale of tangible personal property.
With regard to annual support charges that cover the cost of technical support, software
upgrades, and other support related services, 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, while an agreement that covers the cost of
maintaining, repairing, or replacing customized software or software that was downloaded
electronically is not subject to sales tax.

Technical Assistance Advisement
Page 5 of 5
In this case, your letter and the Agreement provide that the software is “always downloaded
electronically by a [Taxpayer] support specialist from a [Taxpayer] server to a customer’s
computer network.” [Taxpayer] does “not sell any computer or networking products” or any
other tangible personal property to its customers. All improvements and upgrades are done via
internet download. All training documents and forms are provided in an electronic format as
well.
Conclusion
The facts submitted for review indicate that the software under advisement was provided in an
electronic format. In addition, you assert that Taxpayer did not provide any tangible personal
property. According to the foregoing discussion, the license to use Taxpayer’s software that was
delivered via electronic download is not subject to Florida sales tax, regardless of whether or not
the software is customized or canned. Also exempt is a service agreement that covers the cost of
maintaining, repairing, or replacing software that was electronically downloaded.
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 that
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 section 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,

Brinton Hevey
Tax Law Specialist
Technical Assistance and Dispute Resolution
850/488-7157
Record ID: 83527