Was a lump-sum charge for prepackaged software customized after analyzing each customer's systems subject to Florida sales tax?

Plain-English summary

The lump-sum customized-software charge was exempt from Florida sales tax.

The seller began with in-house packaged software but analyzed each customer's programming language, equipment, and performance needs. It then cut a programmed tape with only the purchased features, modified the format, and placed the customer's name in the software.

The finished package was designed for and sold only to that customer, not made available to the mass market. The single charge covered the software and all related services.

The Department treated the transaction as a professional service for customized software rather than a retail sale of usable, unmodified canned software.

What this means for you

The result depended on substantive customer analysis and modification, customer-specific availability, and one combined charge. Fully usable mass-market software was distinguished as taxable in the cited rule.

Common questions

Q: Did starting with prepackaged software make the sale taxable? A: No, because the seller materially tailored it to the individual customer's requirements.

Q: Was the physical tape separately taxable? A: No. It was part of the exempt customized-service transaction.

Q: Was the software sold to the mass market? A: No. Each program was sold only to the customer for whom it was prepared.

Citations and references

• Fla. Stat. § 212.08(7)(v)1. — professional services with inconsequential property
• Fla. Admin. Code r. 12A-1.032(4) and (5) — customized software and computer services
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-017

Original ruling text

May 01, 1995

Re: Technical Assistance Advisement 95A-017 Sales and Use Tax - Sales of Software Statute: 212.08(7)(v)1., F.S. Rule: 12A-1.032(4),(5), F.A.C. Petitioner: XXX (Herein "Taxpayer") FEI: XXX

Dear :

This is a response to your petition received February 28, 1995, for the Department's issuance of a Technical Assistance Advisement ("TAA") concerning the above referenced party and matter. Your petition has been carefully examined and the Department finds it to be in compliance with the requisite criteria set forth in Chapter 12-11, F.A.C. This response to your request constitutes a TAA and is issued to you under the authority of s. 213.22, F.S.

DISCUSSION OF FACTS

Your request imparts the following discussion concerning the matter under advisement:

[Taxpayer] sells pre-packaged software which is created inhouse and customized to be compatible with its customers' programming languages, equipment, and specific performance needs. Prior to sale, taxpayer's representatives meet with personnel at the customer site to evaluate each customer's software environment in order to recommend a software product package (tape medium) compatible with the customer's requirements. Taxpayer then cuts each "tape" with only the features purchased and identifies each customer by name in the software's text field. The result is that certain portions of the tape are modified (in terms of format and customer name) and incorporated into the customer's program. The customer is then charged one lumpsum for the software and all services rendered pursuant to

the sale of the software.

None of the software packages sold to taxpayer's customers are sold or made available to the mass market. Each program is designed with a particular customer in mind and then is sold only to that particular customer.

REQUESTED ADVISEMENT

Your petition requests that the Department of Revenue consider whether sales of Taxpayer's software are subject to the Florida sales and use tax.

DISCUSSION AND ANALYSIS OF LAW

Section 212.08(7)(v)1., F.S., provides:

"Also exempted are professional, insurance, or personal service transactions that involve sales as inconsequential elements for which no separate charges are made."

Rule 12A-1.032(4),(5), 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. "(5) When a computer technician surveys a customer's needs and as a result makes recommendations which may include

instructional material, diagrams, and layouts, a software package, including pre-punched cards or programmed tapes, the charge made is construed to be for professional services and is exempt."

CONCLUSIONS OF LAW

In determining whether sales tax applies, we must consider whether the Taxpayer's software as described in your petition constitutes "prepackaged" software (tangible personal property) or "customized" software (a service). Based on the facts presented, where the Taxpayer customizes software to an individual customer's needs, it is our finding that the Taxpayer is providing a customized software package. As provided in Rule 12A-1.032, F.A.C., this transaction is construed to be a transaction charge and exempted under s. 212.08(7)(v)1., F.S., as a professional service. Therefore, the Taxpayer is not required to collect Florida sales tax on the charge to its customer.

This response constitutes a Technical Assistance Advisement under s. 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 s. 213.22, F.S. Our response is predicated upon 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 from that which is expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details that might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Sincerely,

Leigh C. Lindsay
Technical Assistant

Control #19921