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

RGP/rp
Ctrl. No. 24024