Did Florida tax required training and software-support contracts, and how could a dealer recover tax collected on telephone-only support?

Plain-English summary

Training required with a hardware sale was taxable, while a contract providing only telephone support was not.

Required training was part of the hardware's total sales price. A support or maintenance contract was taxable when it covered maintaining, repairing, or replacing software or hardware. But if the written contract provided only telephone help, the Department treated it as a nontaxable service.

For tax collected in error, the dealer first had to refund its customers. It could then submit a written refund application within 36 months of paying the tax to the state, or take a supported credit on a later return filed within that period.

What this means for you

The support contract's actual benefits mattered. The ruling distinguished telephone advice from software updates or maintenance, repair, and replacement coverage.

Common questions

Q: Was separately described training exempt? A: Not when the customer was required to buy it with the hardware. It remained part of the taxable total sales price.

Q: Were all software-support contracts taxable? A: No. Telephone-only support was not taxable, while maintenance, repair, replacement, or software-update benefits could make the contract taxable under the described facts.

Q: Could a customer claim the refund directly from the Department? A: No under the quoted rule. The customer had to obtain the refund from the dealer.

Q: What did the dealer need before claiming a refund or credit? A: It had to refund the customer and keep documentation showing the erroneous collection, remittance, and customer refund.

Citations and references

• Fla. Stat. §§ 212.02(16)(a), 212.02(17), 212.05, and 212.08(7)(v) — sale, sales price, tax, and services
• Fla. Admin. Code rr. 12A-1.001(17), 12A-1.014, and 12A-1.105 — services, refunds, and service warranties
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-036

Original ruling text

Aug 04, 1995

Re: Technical Assistance Advisement 95A-036 Sales & Use Tax - Telephone Support and Training Services Sections: 212.05, 212.06, 212.08, F.S. Rules: 12A-1.001, 12A-1.105, 12A-1.014, F.A.C. Petitioner: XXXXX

Dear

This is a response to your letter dated May 19, 1995, and a telephone conversation with you on May 26, 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:

XXXX (hereafter "Company") is an XXXX corporation that develops and sells computer software. In addition, Company sells computer hardware as well as certain services related to the computer hardware and software sale. Such services include installation, training, repair service, data conversions, software support/ maintenance contracts, as well as other miscellaneous services.

Company designs computer automation programs for use by independent property and casualty insurance agencies. Company is currently collecting and remitting sales tax on computer software and hardware sales. Company is also collecting and remitting tax on the related software

support/maintenance contracts whether or not its customers receive software updates.

Requested Advisement

Based on our telephone conversation, you are not seeking a determination on whether the software is "canned" or "customized" software. Your company has determined that the software is "canned" software and tax is currently being collected on the software sales. You are seeking guidance on the tax status of your telephone support and training services. I will restate your questions below and follow with the Department's response. Discussion, Analysis and Conclusion of Law

Question

"1. If training is required to be purchased as part of the software and hardware sale, should tax be charged on the training?"

Response

Section 212.02(16)(a), F.S., defines "sale" as:

"Any transfer of title or possession, or both, exchange, barter, license, lease, or rental, conditional or otherwise, in any manner or by an means whatsoever, of tangible personal property for a consideration."

Section 212.02(17), F.S., defines "sales price" as:

"... [T]he total amount paid for tangible personal property, including any services that are a part of the sale, valued in money, whether paid in money or otherwise,..."

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,... "(1) For the exercise of such privilege, a tax is levied on each taxable transaction or incident, which tax is due and payable as follows: "(a)1.a. At the rate of 6 percent of the sales price of each item or article of tangible personal property when sold at retail in this state, computed on each taxable sale for the purpose of remitting the amount of tax due the state, and including each and every retail sale...."

Based on the above statutory cites, it is the Department's position that tax is due on the total sales price of the hardware including the training required to be purchased as a part of the sale.

Question

"2. Should sales/use tax be charged on the software support/ maintenance contracts?"

Response

Rule 12A-1.105, F.A.C., provides in part:

"(1)(a) Every person who solicits, offers, provides, issues, or delivers any service warranty, or who receives, on behalf of another person, any consideration from a service warranty holder is exercising a taxable privilege and shall register as a dealer with the Department of Revenue before such person may engage in or conduct business in this state.... "(b)1. The term `service warranty' means any contract or agreement which indemnifies the holder of the contract or agreement for the cost of maintaining, repairing, or replacing tangible personal property, whether or not the contract provides for the furnishing of parts.... "(2)(a) The tax shall be due at the rate of 6% on the total consideration received or to be received by any person for the privilege of engaging in the business of soliciting, offering, providing, entering into, issuing, or delivering

any service warranty.
"(b) The tax shall be due and payable by the person receiving the consideration from the service warranty agreement holder at the time such consideration is received. The person receiving the consideration from the service warranty agreement holder shall collect the tax and remit it to the Department at the times and in the manner provided in Rule 12A-1.056, F.A.C...."

Section 212.08(7)(v), F.S., and Rule 12A-1.001(17), F.A.C., both provide in part:

"Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made are exempt."

From our phone conversation, it is my understanding that the software support/maintenance contracts in question currently provide software updates and allow your customers to telephone your company for support regarding various software problems. Some of your customers do not have the equipment to facilitate new software versions. Therefore, although they have the option of purchasing the software updates, it is not realistically possible with their equipment. The contract is not for maintaining, repairing, or replacing the hardware.

The software support/maintenance contracts are taxable if they are for maintaining, repairing, or replacing the software or hardware. However, if some of your customers' contracts are written in such a fashion as to reflect that they receive only telephone support, this is a service and is not taxable.

Question

"3. If the user does not and will not receive software upgrades and/or enhanced versions of the software, should they be liable for the sale/use tax charge?"

Response

Please see the response to question number two.

Question

"4. If the answer to number 3 is that the user should not be liable for the use tax, what form should the user file in order to secure a refund of the sales/use tax erroneously paid? What attachments should be included with such form?"

Response

The proper handling of a refund or credit is found in Rule 12A-1.014, F.A.C., which provides in subsections (2) through (7):

"(2) When any sale, upon which the tax has been paid to the dealer by the purchaser, is cancelled or the property sold is returned to the dealer, and the sales price is refunded to the purchaser, the dealer shall also refund to the purchaser the tax paid by the purchaser. If, in lieu of a refund of the sales price, the dealer credits such amount on the purchaser's account, a corresponding credit for sales tax previously paid by the customer shall be made. "(3) Any dealer who makes taxable sales to nontaxable persons, or refunds taxes paid to any purchaser, or pays any tax in error for which he later claims a refund or credit shall keep internal records to support such sales. "(4)(a) When any dealer refunds the tax paid by a purchaser, the Department of Revenue will refund such tax if application therefor is made in writing within 36 months from the date of payment of the tax to the state. The application for refund must state in clear and convincing terms the grounds for refund. "(b) Any dealer who is entitled to a refund of taxes paid to the Department of Revenue may, in lieu of applying to the Department for a refund, take credit for such amount on any subsequent report filed within 36 months of the date on which the dealer remitted the tax to the state. Such credits must be supported by schedules attached to the tax report and if, in the discretion of the Department, said credit is improperly taken, it may be disallowed by the

Department within thirty-six (36) months of the date on which such credit is taken by the dealer.... "(5) Adequate records showing the amounts of returned merchandise, cancelled sales and merchandise purchased for use or consumption and subsequently resold which form the basis for a credit or refund, must be maintained by the dealer. "(6) Whenever a dealer credits a customer with tax on returned merchandise or for tax erroneously collected, he must refund such tax to his customer before his claim to the State for credit or refund will be approved. "(7) A taxpayer who has overpaid tax to a dealer, or who has paid tax to a dealer when no tax is due, must secure a refund of the tax from the dealer and not from the Department of Revenue."

Based on the above regulatory provisions, you have two options in regard to your refund question. After first refunding the taxes paid in error to your customers, you may make an application for refund in writing to the Department of Revenue within 36 months from the date of payment of the tax to the Department of Revenue. The application for refund must state in clear and convincing terms the ground for refund. I have enclosed an application, Form DR-26, for your convenience. Sufficient documentation to support that tax was initially collected and remitted to the State in error must accompany the application for refund. Also, you will need to provide documentation to support that the tax was actually refunded to your customers.

Your second option is to take a credit for the taxes paid in error on line 6, referred to as "less refunds and lawful deductions," on your next tax return, Form DR-15, filed within 36 months of the date on which you remitted the tax to the Department of Revenue. Such credits must be supported in the same manner discussed above by schedules attached to the tax report. Again, you must first refund the tax overpayments to your customers before credit is taken or in requesting a refund.

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 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 Section 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

/ll
Control #21501