Were subscriptions to highly customized, electronically delivered software and related cloud services subject to Florida sales tax?

Plain-English summary

The Florida Department of Revenue concluded that the taxpayer's highly customized software subscriptions and related cloud-computing services were not subject to Florida sales and use tax.

The taxpayer customized remotely hosted software for each client's investment-management needs. Clients accessed the software over the Internet, while hosting, access, backup, and storage occurred at the provider's out-of-state data centers. No disk, hardware, or other tangible product was delivered for the transactions addressed.

Installation of the customized software directly on a client's hardware also remained nontaxable when no tangible personal property was sold. By contrast, the ruling says canned software delivered to an in-state client on a disk would be taxable. The Department declined to answer hypothetical questions about servers located in Florida.

What this means for you

Software and SaaS providers

Document customization, electronic delivery, hosting location, and whether any tangible medium or hardware is transferred.

Technology purchasers

The taxpayer's own purchases of the described software and cloud subscriptions were also nontaxable. A resale certificate was unnecessary for the nontaxable cloud services.

Accountants and tax professionals

Separate customized electronic software from canned software delivered on tangible media. The ruling did not cover the taxpayer's separate transactions that included tangible products.

Common questions

Q: Were the customized software subscriptions taxable?
A: No.

Q: Were hosted access, storage, and backup taxable?
A: No, under the stated facts.

Q: Would canned software delivered on a disk to a Florida client be taxable?
A: Yes.

Citations and references

• Fla. Stat. §§ 212.02, 212.05, and 213.22
• Fla. Admin. Code rr. 12A-1.032(4) and 12A-1.071

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 16A-014

Original ruling text

Executive Director
Leon M. Biegalski

QUESTION: IS THE SALE OF THE SERVICES (BOTH, SOFTWARE AND CLOUD-COMPUTING)
SOLD BY [THE TAXPAYER] TO ITS CLIENTS SUBJECT TO SALES TAX?
ANSWER – BASED ON THE FACTS BELOW: NO. BASED ON THE FACTS PROVIDED, THE
SALE OF THE SUBSCRIPTIONS TO THE SOFTWARE AND THE SALE OF THE CLOUDCOMPUTING SERVICES DESCRIBED IN THE LETTER ARE NOT SUBJECT TO FLORIDA SALES
AND USE TAX. TAXPAYER’S REPRESENTATIVE HAS DESCRIBED THE SALE OF
CUSTOMIZED SOFTWARE, DELIVERED ELECTRONICALLY, WHICH IS NOT SUBJECT TO
TAX. THE REPRESENTATIVE HAS PROVIDED THAT THE TAXPAYER DOES NOT DELIVER
ANY TANGIBLE PRODUCTS TO ITS CLIENTS.
August 8, 2016
Re:

Technical Assistance Advisement 16A-014
Sales and Use Tax– Computer Software and Cloud Computing Services
Sections 212.02 and 212.05, Florida Statutes (F.S.)
Rules 12A-1.032 and 12A-1.071, Florida Administrative Code (F.A.C.)
XXXX (the Taxpayer)
FEI #

Dear XXXX:
This is in response to your letter dated October 15, 2015, 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 computer software and services sold by your client. 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 dated October 15, 2015, provides that following in part:
. . . [The Taxpayer] is a limited liability company domiciled and headquartered in Florida.
[The Taxpayer] has a partnership with [the Software Provider], which allows [the Taxpayer] to
license basic software developed by [the Software Provider] (the “Basic Software”) and sold to
[the Taxpayer] by . . . the “Reseller,” pursuant to [a] Services Provider License
Agreement (the “SPLA” . . .) with [the Software Provider].
[The Taxpayer] is allowed to customize and resell the Basic Software to its clients (the “Clients”).
Child Support – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – Dr. Maurice Gogarty, Director  Information Services – Damu Kuttikrishnan, Director

http://dor.myflorida.com/dor/
Florida Department of Revenue
Tallahassee, Florida 32399-0100

Technical Assistance Advisement
Page 2 of 10

The SPLA also grants [the Taxpayer] cloud-computing services (hosting, access, back-up and
storage), which are hosted and supported by [the Software Provider], and sold to [the Taxpayer] by
[the Reseller].
Hence, [the Taxpayer] purchases subscriptions to the Basic Software and to the cloud-computing
services. [The Taxpayer] then customizes the Basic Software for resale to its Clients, which must
also subscribe to receive the software and cloud-computing services from [the Taxpayer].
Naturally, the subscriptions purchased by [the Taxpayer] are vastly different from the subscriptions
that [the Taxpayer] sells to its Clients. But the underlying concept is that [the Taxpayer] purchases
the Basic Software for customization and resale. And, [the Taxpayer] purchases the cloudcomputing services as an integral part and necessary component to both access and deployment of
the software, as well as to resell the cloud-computing services to its Clients.
To that end, we note that [the Taxpayer] does not receive or provide the software through a
tangible medium. [The Taxpayer] and its Clients are only able to access the server and the
software remotely. The server from where the software and data are hosted and backed-up are at
locations, the “Data Center(s)”, which are owned, operated and maintained by [the Software
Provider]. The Data Centers are located outside Florida.
[The Taxpayer]’s Clients are primarily venture capital firms and/or family offices. As a result, the
software sold to each Client is highly customized and designed to meet the specific needs and
requirements of each Client, with measures, tools, and metrics specific to each Client’s industry
and market.
For example, [the Taxpayer] purchases the subscription for the Basic Software, which could be
accounting software, from [the Software Provider]. [The Taxpayer] will then heavily customize
that Basic Software to serve particular functions, such as accounting and fund management,
customer relationship management, reporting solutions, portfolio management solutions, event
management portals, etc. These software products and solutions are then further customized by
[the Taxpayer] to suit the specific and individualized needs for each of its Clients (e.g., the
software product is tailored for a specific industry and/or for a precise brand, product, project or
any other item indicated by the Client). The customization includes variables such as industry
specific terminology, but it could also be tailored to product or project specific reports, as required
by each Client. Thus, while the infrastructure for the software and the hardware is dependent on
[the Software Provider], the actual installation and configuration (i.e., the customization) of the
software for its Clients, is done by [the Taxpayer].
[The Taxpayer] has employees in three other states. These out-of-state employees are involved
with sales and consulting. All other employees are in Florida. Hence, [the Taxpayer] has no
employees at the Data Centers.

Technical Assistance Advisement
Page 3 of 10

[The Taxpayer] has been charging its Clients sales tax on the sale of the subscriptions. . . .
Again, [the Taxpayer] does not provide any tangible property to its Clients. That is, the software is
never made available to [the Taxpayer]’s Clients by disk or any other tangible medium. Further,
[the Taxpayer] does not provide any hardware - the Clients use their own hardware to access the
software. At no time do the Clients have any control of [the Taxpayer’s] hardware.
With the exception of a very exclusive number of Clients, the software is only available to the
Clients on-line. Hence, there is never an element of tangible personal property that [the Taxpayer]
sells or delivers (or otherwise grants use or access to) for which [the Taxpayer] receives
compensation.

In an e-mail dated XXXX, you confirmed that the Taxpayer selected the Data Centers that are owned,
operated and maintained by the Software Provider are located outside of Florida. Specifically, you
provided that the Taxpayer “. . . selected the XXXX Data Center and the XXXX Data Centers.”

Along with the request for advisement, you included copies of the following:






A Services Provider License Agreement (Indirect) (the SPLA), between the Taxpayer, as the
“Customer,” and the Software Provider;
a Financial Products License Agreement executed by the Taxpayer and one of its clients (the
Client) on June 14, 2012;
a software as a service (SaaS) Product Rider for [Software Product #1], executed by the Taxpayer
and the Client on June 14, 2012;
a software as a service (SasS) Product Rider for [Software Product #2], executed by the Taxpayer
and the Client on June 14, 2012; and,
Invoice XXXX issued by the Taxpayer to the Client on March 1, 2015.

The SPLA provides the following in part:
. . . 3. How to qualify for this program.
To be eligible for this program, Customer must enroll and maintain its status as a Member of the
[Software Provider] Partner Network at any level (Community, Subscriber, Competency, or
Advanced Competency) and join the Hosting Community. . . .

4. Definitions. . . .
   “Client Software” means software that is installed on an End User’s device that allows the device
   to access or use the Products.
   “End User” means an individual or legal entity that obtains Software Services directly from
   Customer, or indirectly through a Software Services Reseller.

Technical Assistance Advisement
Page 4 of 10

“End User Agreement” means the agreement between Customer and an End User under which
Customer provides Software Services to the End User. . . .
“Software Services” means services that Customer provides to End Users that make available,
display, run, access, or otherwise interact, directly or indirectly, with the Products. Customer must
provide these services from data center(s) through the Internet, a telephony network or a private
network, on a rental, subscription or services basis, whether or not Customer receives a fee.
Software Services exclude any services involving installation of a Product directly on any End
User device to permit an End User to interact with the Product.
“Software Services Reseller” means a legal entity to which Customer grants rights under this
Agreement to provide Customer’s Software Services to End Users.

5. Reseller.
   . . . a. Reseller. Customer must designate a Reseller by submitting the form provided by [Software
   Provider] . . .
6. How Products may be used.
   . . . a. License grant to provide Products as Software Services. Subject to the terms of this
   agreement, [the Software Provider] grants Customer a non-perpetual, non-exclusive, terminable,
   non-transferable, worldwide and limited right during the term of this agreement to copy, install,
   access, display, run, distribute, make available or otherwise interact with the Products in order to
   provide Software Services. . . .
   The Financial Products License Agreement provides the following in part:
   . . . 1.1 [The Taxpayer] is in the business of licensing customized software solutions (the
   “Solution(s)”) to the financial investment and services industry. [The Taxpayer’s] Solutions may
   be licensed for installation (referred to herein as a “License”) or for access on a subscription
   (software as a service) basis (referred to herein as a “Subscription”).
   1.2 Customer desires to license or subscribe to one or more Solutions from [the Taxpayer] for use
   within Customer’s business as provided more specifically in the Solution-specific riders (“Product
   Riders”) that are attached to this Agreement . . . .
7. Definitions
   . . . 2.12 “Hosted Systems” means the hardware, configuration, systems software, applications
   software, software utilities, firmware, embedded software, telecommunications equipment and
   connectivity, and other facilities where the Subscribed Solutions are hosted or that [the Taxpayer]
   uses to provide access to them and includes the Subscribed Solutions hosted thereon.

Technical Assistance Advisement
Page 5 of 10

6. Subscription Licenses
   . . . 6.3 Unless otherwise expressly provided in the applicable Product Rider, the following terms
   and conditions apply to all Subscription licenses:
   (a) Customer acknowledges that its access and use of the Subscribed Software will be web-based
   only. The Subscribed Software will not be provided to Subscriber in CD-ROM form (or any
   other form of media) and will not be installed on any servers or other computer equipment owned
   or otherwise controlled by Customer. Instead, the Subscribed Software will he hosted by [the
   Taxpayer] at a hosting facility that [the Taxpayer] leases from a third-party hosting vendor (the
   “Hosting Site”) and accessed and used by Customer through the use of the Internet and Customer’s
   computers. The Hosting Site servers may be owned or leased by [the Taxpayer] in its discretion.
   ...
   (d) [Taxpayer] will provide Customer with login ids to access the Subscripted Solutions. . . .
7. Warranties and Limitations of Liability
   . . . 10.6 Customer shall be responsible for selecting, obtaining and maintaining any equipment
   needed for the operation, access and use of the Licensed Solutions and any equipment or ancillary
   services needed or to connect to, access or otherwise use the Subscription Solutions . . . .
   The SaaS Product Rider for [Software Product #1] provides the following in part:
   This software as a service (SaaS) Product Rider to the . . . [Taxpayer] Financial Products License
   Agreement (the “Agreement) between [the Taxpayer], and . . . (“Customer”). . . .
8. Subscribed Solutions. The Subscribed Solutions covered by this Product Rider are . . .
   
   

[Software Product #1] Solution
Added Features: CRM Solution and Data Warehouse with XXXX

5. Grant of Subscription Licenses.
   (a) [Software Product #1] Solution Subscription License. Subject to the terms and
   conditions of this Product Rider and the Agreement, including without limitation all terms
   applicable to Subscription licenses, [the Taxpayer] grants Customer’s Authorized Business Units a
   personal, non-exclusive and non-transferable limited license to access via the Internet and use the
   hosted [Software Product #1] Solution during the Initial Term and any Renewal Term for
   Authorized Usage only . . . .

Technical Assistance Advisement
Page 6 of 10

(i) Storage Capacity. The Subscriptions include a database and document storage allowance of 5
gigabytes (GB) (the “Storage Allowance”).

8. Subscription Fees.
   . . . (c) Storage Fees. There is no charge for the Storage Allowance. [Taxpayer] may impose an
   incremental excess storage fee (the “Additional Storage Fee”) for each month in which (he
   combined size of the databases used by the Subscribed Solutions exceeds five (5) gigabytes (GB)
   at any time during the month . . . .

The SaaS Product Rider for [Software Product #2] provides the following in part:
1. Subscribed Solutions
This is a software as a service (SaaS) Product Rider to the . . . [Taxpayer] Financial Products
License Agreement (the “Agreement”) between [the Taxpayer] and . . . (“Customer”). . . .
Subscribed Solutions, The Subscribed Solutions covered by this Product Rider are . . .


[Software Product #2] - 350 Investor/Contacts / 2 Administrators

5. Grant of Subscription Licenses.
   (a) [Software Product #2] Solution Subscription License. . . . [Taxpayer] grants Customer’s
   Authorized Business Units a personal, non-exclusive and non- transferable limited license to
   access and use a hosted installation of the [Software Product #2] (the “Hosted Investor Portal”) via
   the Internet during the applicable Term for Authorized Usage only . . . .
   (f) Storage Capacity. The Investor Portal Subscription includes a document storage allowance of l5
   gigabytes (GB) (the “Storage Allowance”).

8. Subscription Fees.
   . . . (e) Storage Fees: There is no charge for the Storage Allowance. If document storage in the
   Hosted Investor Portal exceeds the Storage Allowance during a calendar quarter or partial calendar
   quarter in the Term, then [Taxpayer] will invoice Customer for additional storage for the month(s)
   in which the Storage Allowance is exceeded (the “Additional Storage Fee”). . . .

Technical Assistance Advisement
Page 7 of 10

Requested Advisement
You have asked several questions regarding the tax treatment of Taxpayer’s services. I will respond to
these questions in the conclusion section of this letter.
Taxpayer’s Position
Your letter dated October 15, 2015, provides that following, in part, regarding the Taxpayer’s position:
In sum, the sale of the subscriptions to the software (which is customized and delivered to the
Clients electronically) and the sale of the cloud-computing services sold by [the Taxpayer] to its
Clients, is exempt from Florida sales and use tax.
Applicable Authority and Discussion
All sales of tangible personal property in the State of Florida are subject to tax, unless specifically exempt
by Chapter 212, F.S. The term “sale” is defined in s. 212.02, F.S., to mean “[a]ny transfer of title or
possession, or both . . . of tangible personal property for a consideration.” Section 212.02(15), F.S.,
provides that a “sale” of tangible personal property includes the lease or rental of tangible personal
property. Pure service transactions that do not involve the sale of tangible personal property are generally
not subject to tax under Florida law, unless the taxation of the service is specifically authorized by
Chapter 212, F.S. When tangible personal property and services are sold as part of the same sale, the
entire sales price is subject to tax. Section 212.02(16), F.S., defines “sales price” to include “any services
that are sold as part of the sale” of tangible personal property.
The terms “lease,” “let” and “rental” are defined in s. 212.02(10)(g), F.S., to include transactions in which
the owner of tangible personal property transfers possession or use of property to another, for
consideration, without the transfer of title. Rule 12A-1.071(1)(b)1., F.A.C., provides that transfer of
custody or possession of the property, actual or constructive, constitutes an attribute of tangible personal
property ownership with respect to an operating lease. Any person who leases or rents tangible personal
property in this State is exercising a taxable privilege. Computer hardware is tangible personal property.
Sales and leases of computer hardware are subject to sales tax. Charges for services included in the sale
or lease of computer hardware are also subject to tax. See section 212.05, F.S.
Rule 12A-1.032(4), F.A.C., provides that prepackaged or canned software supplied on a tangible medium
is taxable. However, the rule further 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. Customized software is defined 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. However, electronically accessed software and customized software is subject
to Florida sales tax when sold as part of the sale of tangible personal property. Such software is
considered to be services that are included in the “sales price” of the computer hardware.

Technical Assistance Advisement
Page 8 of 10

According to the National Institute of Standards and Technology, “cloud computing” is a “model for
enabling convenient, on-demand network access to a shared pool of configurable computing resources
(e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released
with minimal management effort or service provider interaction.” 1
Your letter provides that the Taxpayer does not receive the software in a tangible format from the
Software Provider. The software is hosted at data centers that are owned and operated by the Software
Provider. The Taxpayer and its customers are only able to access the server and the software remotely.
You also provide that the software is never made available to the Taxpayer’s customers by disk or any
other tangible medium, and the Taxpayer does not provide any hardware to its customers.
The SPLA confirms that the Taxpayer must provide its products and services “from data center(s) through
the Internet, a telephony network or a private network, on a rental, subscription or services basis . . . .”
The Financial Products License Agreement provides that access and use of the subscribed software will be
“web based only” and will be hosted at a hosting facility and accessed and used by the Client through the
use of the Internet and customer’s computers. The SaaS Product Riders for [Software Product #1] and
[Software Product #2] provide that the Client receives non-exclusive and non-transferable limited licenses
to access the products “via the Internet.”
Conclusions
Your letter implies that the Taxpayer does deliver some elements of tangible personal property to an
“exclusive number of Clients” as part of the services it provides. Please note, this response is regarding
the subject transaction described in your letter and does not address the “exclusive number” of
transactions that involve the delivery of tangible personal property.
Questions:

1. Whether [the Taxpayer] should charge, collect or remit sales tax on the sale of the services
   (both, software and cloud-computing) sold by [the Taxpayer] to its Clients? a. Whether [the
   Taxpayer] should charge, collect or remit sales tax on the sale of the customized software (which is
   delivered to the Clients electronically and accessed by the Clients over the internet)? b. Whether
   [the Taxpayer] should charge, collect or remit sales tax on the sale of the cloud-computing services
   (which includes access, storage and backup)?
   Response:
   Based on the facts provided, the sale of the subscriptions to the software and the sale of the cloudcomputing services described in your letter are not subject to Florida sales and use tax. You have
   described the sale of customized software, delivered electronically, which is not subject to tax. You have
   provided that the Taxpayer does not deliver any tangible products to its clients.

1

National Institute of Standards and Technology, U.S. Department of Commerce, Special Publication 800-145, p. 2.

Technical Assistance Advisement
Page 9 of 10

2. With respect to question 1., above, does it matter if [the Taxpayer] installs the software directly
   onto the Client’s hardware? In this case, the software is highly customized (it has been designed
   by [the Taxpayer] specifically for that Client, using terms, measurements, metrics and other
   variables unique to that Client), and it is installed by [the Taxpayer] (hence, the software is not
   delivered to the Client on a disk or by any other tangible medium).
   Response:
   Rule 12A-1.032(4), 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. You have provided that the software is “highly customized” and does not involve the sale or
   delivery of tangible personal property. If that is the case, the charge for software installation is not subject
   to sales tax.
3. Whether [the Taxpayer] should pay sales tax to [the Reseller] for the subscription to the
   software and/or the cloud-computing services?
   Response:
   Based on the facts provided, the purchase of the subscriptions to the software and cloud-computing
   services described in your letter is not subject to Florida sales and use tax.
4. Whether, [the Taxpayer] should charge Florida sales tax to its Clients which are not located in
   Florida? a. Would it make a difference if the software was canned, but is electronically delivered
   to the Clients’ out-of-State location? b. Would it make a difference if the software is customized,
   but is electronically delivered to the Clients’ out-of-state location? c. Would it make a difference
   if the software was canned, and delivered to the Clients’ out-of-State location through a disk?
   Response:
   Sales to clients who receive software products outside Florida are not within Florida’s taxing jurisdiction.
5. With respect to question 4., would it make a difference if the software was canned, and
   delivered to the Clients’ in-state location through a disk?
   Response:
   Yes. Rule 12A-1.032(4), F.A.C., provides that prepackaged or canned software supplied on a tangible
   medium is taxable.
6. With respect to cloud-computing services (to host, store and back-up),
   a. Since the server is in a state other than Florida, are such services subject to sale tax when [the
   Taxpayer] purchases the cloud-computing services?

Technical Assistance Advisement
Page 10 of 10

Response:
Based on the facts provided, the purchase of the subscriptions to the software and cloud-computing
services described in your letter is not subject to Florida sales and use tax.
b. Since the cloud-computing services will be resold to [the Taxpayer]’s Clients, if the Department
determines that the cloud-computing services are taxable, can such services be purchased exempt,
if [the Taxpayer] were to extend a resale certificate to [the Reseller]?
Response:
Based on the facts provided, the charges for the subject cloud-computing services are not subject to
Florida sales tax. The use of a resale certificate is unnecessary.
c. and d. If the server were in the State, would the cloud-computing services be subject to sales tax
at the time of purchase . . . [or] at the time of sale?
Response:
The Department declines to respond to these questions as they are hypothetical in nature and are not
related to the transaction that is the subject of your request for advisement.
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
850/717-6839
Record ID: 206044