Did an equipment seller's support and consulting agreement create a taxable Florida service warranty?

Plain-English summary

Florida found the three-year equipment support agreement was not a taxable service warranty.

The seller provided research, field servicing, training, engineering support, evaluations, design help, and consultation. But the customer employed its own mechanics, paid maintenance and repair costs, and received no indemnification for maintaining, repairing, or replacing the equipment.

Because indemnification was the required service-warranty element, the percentage-of-sales payments under the agreement were not taxable. Separate sales of parts or other tangible personal property remained taxable.

What this means for you

• The agreement's label did not control its tax status.
• No service warranty arose without indemnification of repair or replacement cost.
• Consulting and supervisory help alone did not create the required indemnification.

Common questions

Q: Were the agreement payments taxable as a service warranty? A: No.

Q: Were replacement-part sales taxable? A: Yes.

Citations and references

• Fla. Stat. § 212.0506(2), (3) — service warranties
• Fla. Admin. Code r. 12A-1.105(1)(b)1. — service warranty definition
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-025

Original ruling text

Title:

Taxable Service Warranty; Services Provided by Seller of Equipment

Apr 22, 1996

Re: Technical Assistance Advisement 96A-025 Whether a taxable service warranty arises from certain services provided by seller of equipment Section 212.0506(2), and (3), F.S. Rule 12A-1.105(1)(b)1., F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated November 10, 1995, in which you ask whether payments made by XXXX (herein Customer), to XXXX (herein Stapling), in accordance with the terms of an agreement bearing the legend, Service Agreement (herein Agreement), are subject to Florida sales or use tax as a service warranty.

The Agreement has a term of three years. Customer is obligated to pay to Stapling 0.45 percent of the gross sales of boxes which are manufactured through the use of the equipment purchased by Customer.

You state on the first page of your letter that Customer had formerly leased certain equipment from Stapling which is used in the manufacture of wirebound boxes. Customer has now purchased the equipment from Stapling. After the sale of the equipment to Customer, both parties are to be bound by the terms of the Agreement which you maintain is not a service warranty.

You assert in page 2 of your letter that Stapling "... is not warranting the equipment." You add that Customer "... will be responsible for any repair work or any break downs of the equipment". You then conclude that "... Florida Statutes 212.0506 taxing service warranties does not apply." You also assert that "[n]one of the elements of the [Agreement] is

specifically listed as being taxable under any of the Florida statutes or The Rules of the Florida Department of Revenue."

Department Response

Section 212.0506(2), F.S., imposes sales tax on the "... total consideration received or to be received by any person for issuing or delivering any service warranty." The term " service warranty" is defined in s. 212.0506(3), F.S., to mean "... any contract or agreement which indemnifies the holder of the contract or agreement for the cost of maintaining, repairing, or replacing tangible personal property."

The wording in Rule 12A-1.105(1)(b)1., F.A.C., with respect to the definition of the term "service warranty," mirrors the statute and adds that the consideration paid for the service warranty is taxable "... whether or not the contract provides for the furnishing of parts."

In analyzing the terms of the Agreement, the Department first notes that the payment from Customer to Stapling in an amount equal to 0.45 percent of the gross sales of the boxes which are manufactured by the equipment is not a payment related to the purchase price of the equipment, but is a payment in exchange for the services to be received by Customer which are enumerated in the Agreement. The Department further notes that all, or most, of the parts purchased by Customer are obtained from Stapling, which is the manufacturer of the equipment. Also, the instant communication does not consider the provision in Section 4.c. of the Agreement because the Department was informed that Customer did not purchase such equipment from Stapling, and that Customer has no such equipment in its possession. You opined that this provision may be part of a standardized agreement.

In Section 4. of the Agreement, Stapling is obligated to provide eleven enumerated services to Customer after the sale of the equipment to Customer. An analysis of these services will determine whether the Agreement is a service warranty, the payments for which are subject to sales or use tax.

Section 4 of the Agreement reads in full as follows:

"4. Services. Stapling agrees to provide:

"a. Continued research for upgrading of the BF/RF machine to improve production efficiencies; "b. Field servicing of the purchased BF/RFs; "c. Closing and assembly machine servicing; "d. Mechanic training assistance; "e. Engineering support on spare parts inquiries; "f. Research on various auxiliary equipment required to process material and manufacture containers (i.e.: dryer feeder and heading equipment); "g. Laboratory evaluation of raw materials; "h. Laboratory evaluation of containers; "i. Container design and sample assistance; "j. Trade Show exhibitions and presence; and "k. Promotional and sales brochures.

"Stapling and Customer shall consult with one another from time to time so that they may determine the specific services to be provided. Stapling shall use its reasonable best efforts to identify new product markets for wirebound technology."

In telephone conversations on December 11, and December 12, 1995, the Department learned that the provision in Section 4.b. which describes "field servicing," permits Customer to request periodic visits of Stapling personnel on-site and provides, when needed, particularly if a major part is to replaced, what is described as "supervisory assistance" in its replacement, or, consultation or "supervisory assistance" in the relocation or repositioning of the equipment for the purpose of achieving a more efficient manufacturing process.

With regard to this element of the transaction, it is the Department's understanding that a statement to the contrary which appears in your letter was based on incomplete information as to the on-site visitation by personnel of Stapling. You learned that such visits do occur in a telephone conversation with your client on December 12, 1995.

During telephone conversations on December 14, 1995, the

Department learned that the enumerated item in 4.j. which describes trade show exhibitions, was an activity wherein Stapling alone appears at such shows for the general purpose of encouraging the use of wirebound boxes.

Also, during these conversations, the Department was informed that the promotional and sales brochures, identified as item 4.k., describe the brochures purchased by Stapling and made available not to Customer, but used by Stapling as an advertising device to encourage the use of wirebound boxes. The Department was assured that Customer did not gain title or possession of such material, nor did Customer use any such material in advertising its own business activity.

Consequently, the Department finds no taxable significance to Customer of these two items.

It is noted that Customer employs its own mechanics in the maintenance, repair of the equipment, and in the replacement of the equipment, or of its parts. It is the understanding of the Department that Stapling does not hire, nor in any other manner contract with a third party contractor to effect such on-site work on the equipment. You state on the first page that Stapling does not "... provide any tangible personal property that will be used with or as a part of the equipment." You also state that Customer "... may purchase repair parts from
[Stapling]. However the parts will be installed by mechanics employed by [Customer]. These mechanics are not employed nor are they in any way connected with [Stapling]."

In a review of the enumerated services to be provided Customer by Stapling in Section 4. of the Agreement, and of the other provisions of the Agreement, the Department concludes, based on the information provided by you in your letter, and during the telephone conversations on December 11, and December 12, 1995, that the Agreement may not be validly termed a "service warranty" as such agreement is defined in s. 212.0506, Florida Statutes.

To trigger the tax, the requisite element of Section 212.0506,

F.S., is the indemnification of the holder of the agreement by the issuer of the agreement, or by others acting through the agreement, of the cost of maintenance, repair, or replacement of the tangible personal property which is the subject of the agreement.

Here, the Department finds no indemnification of the Customer of such cost of the maintenance, repair, or the replacement of the box manufacturing equipment purchased from Stapling. It is the explicit understanding of the Department, gained from a telephone conversation on December 12, 1995, that in the instance when personnel of Stapling are sought for supervisory assistance in the maintenance and repair of the equipment, or in the replacement of such equipment, or its parts, or in consultation as to the arrangement of the machines, that such assistance or consultation has no effect, whatsoever, on the cost, or warranty of any part or machine, nor does the decision to seek the assistance or consultation immunize Customer from the assessment of some penalty for which it would be liable if assistance or consultation were not sought from Stapling.

The decision to seek assistance or consultation from Stapling resides solely in Customer, and the assistance or consultation which is received by Customer has a value only as to the extent of the competency of the assistance, or the efficacy of the consultation. The element of indemnification is not present in the terms of the Agreement, as the facts have been conveyed to the Department.

Thus, the consideration paid to Stapling by Customer, pursuant to the terms of the Agreement, is not subject to sales or use tax because the Agreement is not a service warranty as that term is defined in s. 212.0506, Florida Statutes.

Any sale to Customer of equipment parts or other tangible personal property by Stapling would, of course, be subject to sales or use tax.

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 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 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 which 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 the response.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Tax Policy and Dispute
Resolution

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