Was an annual HVAC technical-support agreement, including customized software services, taxable as a Florida service warranty?

Plain-English summary

The annual technical-support agreement was not a taxable service warranty for its HVAC maintenance and administrative services. The covered heating, ventilation, and air-conditioning system had become part of the building's real property, which placed the agreement outside the cited service-warranty definition.

The contractor remained the consumer of materials included and used in performing that agreement and owed tax on their cost. But when an agreement excluded parts and the contractor separately identified and billed replacement components, those part sales were taxable to the customer.

Customized software received similar treatment for a different reason. When a contractor specialist interviewed the customer and modified the program—creating databases, graphics, thermostat settings, and alarms for that facility—the software transaction was an exempt customized service, and its support agreement was not a taxable service warranty. A software update sold for the customer to modify without specialist help was taxable tangible personal property.

What this means for you

The tax result depended on what the agreement actually covered. Real-property HVAC service, included consumable parts, separately sold components, customized software work, and off-the-shelf updates each followed different rules.

The Department did not accept the broad claim that all software was nontaxable merely because it was integral to the HVAC system. It relied on actual customization by the contractor's specialist.

Common questions

Q: Was HVAC maintenance under the plan a taxable service warranty? No. It covered equipment incorporated into real property.

Q: Who paid tax on parts included and consumed under the plan? The contractor paid tax on its cost as the consumer.

Q: What if replacement parts were excluded and billed separately? The contractor had to separately itemize and collect sales tax on those part sales.

Q: Were customized software services taxable? No, when the contractor's specialist modified the program to the customer's facility requirements.

Q: Were customer-installed software updates taxable? Yes, when sold for the customer to modify without assistance from the contractor's specialist.

Citations and references

• Fla. Stat. § 212.0506 — service-warranty tax and real-property exclusion
• Fla. Admin. Code r. 12A-1.051 — real-property contractor and separately sold part treatment
• Fla. Admin. Code r. 12A-1.032 — customized and prepackaged computer software
• Fla. Admin. Code r. 12A-1.105 — service warranties
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-049

Original ruling text

SUMMARY

The Department rules that the sale of a service agreement for the maintenance of an entire heating, ventilation, and air conditioning (HVAC) system, including computer software services, is not subject to sales tax because such is a service agreement covering tangible personal property that has become a part of real property, or an agreement covering an exempt service transaction involving the sale of customized or modified computer software. Consequently, the service agreement is not a "service warranty" under Section 212.0506, F.S.

Jul 11, 1997

Re: TAA 97A-049
Sales and Use Tax; Service Warranty
XXX ("Company")
Section 212.0506, F.S.
Rules 12A-1.032, 12A-1.051, and 12A-1.105, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated February 4, 1997, in which you asked: (1) Is the sale of a Technical Support Program service agreement for the maintenance of an entire heating, ventilation, and air conditioning system (that may include software services), exempt from sales tax under Section 212.0506, F.S., regarding the taxation of service warranties of real property? And, (2) In the event that only the portion of the service agreement covering computer software is subject to sales tax, is software that is customized as described (in your request) exempt from sales tax under Rule 12A-1.032, F.A.C., regarding computers and related systems?

You have provided the Department with the following information as facts regarding the issue in question:

Our client (Company) is a heating, ventilation, and air conditioning (HVAC) system contractor and is primarily engaged in the original installation, repair and maintenance of building temperature control systems...

The sales and use taxation of the activities performed by (Company) is easily determined under Florida Regulation, Rule (1)2A-1.051(, F.A.C.,)... (Company) is the ultimate consumer of all materials and supplies consumed under lumpsum construction contracts for improvements to real property. As a contractor, (Company) self-assesses and remits use tax to the State on materials and supplies consumed under lump-sum construction contracts for real property. (Company) may also sell HVAC components to its customers, with or without installation service. As a retailer, (Company) collects sales (tax) on time and material contracts and on sales of parts. You are seeking, due to the lack of specific regulatory guidance, assistance regarding Company's recently introduced new service agreement referred to as a Technical Support Program (TSP) designed to maintain an optimal efficiency of HVAC systems in non-residential facilities. The TSP is offered in the form of an annual service agreement, which provides building owners with a comprehensive service plan for their entire HVAC system.

You state that the service options offered under a TSP are summarized in three categories, HVAC Maintenance, Administrative Services, and Software Services. HVAC Equipment Maintenance provides for the periodic inspection and testing of the major components of the HVAC system equipment, including all pneumatic, air conditioning, central cooling, and central heating equipment. Depending upon the terms of the agreement, replacement parts and fluids may be provided on an as needed basis as the result of periodic inspections.

Administrative Services offers a wide range of services to support the operation of an HVAC system, including laboratory testing for pollution control, fire and alarm control, system performance review and evaluation, owner training, emergency

response, and quality assurance reviews.

Under Software Services, HVAC system software is developed by Company for use in computerized HVAC systems. This software is an integral component of the HVAC system, and is necessary to operate the system efficiently. The software is initially installed on the customer's computer and is modified by Company at the customer's facility. A Company systems specialist interviews the customer and identifies the environmental and functional requirements of the facility. Examples of typical modifications include, creating databases, setting up graphics, identifying desired thermostat points, and developing alarms to alert the operators of any deviation in the systems controls. The Company systems specialist modifies the software at the customer's location by altering the source code of the computer program and manipulating standard set-up options. Annual software upgrades are usually installed by a Company systems specialist, again modified to meet the customer's needs. However, you state that, in certain cases, the Company's customer may be properly trained to modify the upgrades without assistance of a Company systems specialist.

You have provided the Department with a detailed description of the variety of services offered under the TSP, and since a standard TSP does not exist (each TSP is written to the customer's specifications), you have also provided two examples of TSP proposals issued to the Company's customers for review.

In support of question number 1 above, you cite the provisions of Section 212.0506, F.S., which provides that the term "service warranty" does not include contracts or agreements covering tangible personal property which becomes a part of real property. Further, you assert that Rule 12A-1.051, F.A.C., includes HVAC contractors as contractors who install, repair, improve, or alter real property. You conclude that a TSP service agreement for the maintenance of an entire HVAC system, including any computer software or software updates, involves the incorporation of tangible personal property into real property, as a fixture, and is not a taxable service warranty.

You also have cited Rule 12A-1.032, F.A.C., specifying that

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, as support for question number 2 regarding the computer software program. You conclude that when sold and included in the TSP agreement, the software service constitutes an exempt service transaction, and it is consequentially not taxable as a service warranty under the provisions of Section 212.0506, F.S.

Department Response

With respect to the provisions of Section 212.0506, F.S., the Department affirms your conclusion that Company's TSP service agreement, relating to HVAC Maintenance and Administrative Services, is not a taxable service warranty. Such a TSP service agreement covers the maintenance, testing, performance review, evaluation and quality assurance of a HVAC system, which is incorporated into and has become a part of real property as a fixture. Company is liable for the applicable tax on the cost price of all property consumed and used in the performance of the TSP service agreement, for HVAC Maintenance and Administrative Services, pursuant to the provisions of Rule 12A1.051, F.A.C.

Furthermore, because the TSP service agreement is not a "service warranty" for application of Florida's sales and use tax purposes, the provisions of Rule 12A-1.105, F.A.C., regarding agreements which cover the cost of labor and which provide for the furnishing of parts at an additional charge, is not applicable to Company's sale of its TSP service agreements.

Company is, however, alerted to the fact that under its TSP service agreements which specifically exclude any parts or materials, under the corrective maintenance and component replacement clause of the TSP agreement, the Company would be deemed to be selling tangible personal property which is subject to sales tax on the amount charged its customer for such components or parts. Under such an agreement, Company would be deemed to be executing a contract as described in subparagraph (2)(d) of Rule 12A-1.051, F.A.C., requiring it to specifically

identify the respective system for which the parts are not included as a part of the agreement, and to separately itemize and bill the customer for those parts, including the sales tax on the amount charged its customer for such parts.

Regarding the "Software Services" portion of the TSP, the Department, without additional facts, cannot agree with your analysis and conclusion that said services are not taxable because they are an integral part of the HVAC system. However, resolution of that issue is not critical to your request.

Pursuant to Rule 12A-1.105(1)(b)2., F.A.C., if the original software package was not taxable, any service contract related to said software package is not a taxable service warranty. And, pursuant to Rule 12A-1.032, F.A.C., the charge for the original package is exempt as a service transaction if a Company systems specialist interviews the customer, identifies the environmental and functional requirements of the facility, and modifies the Company's software program by creating databases, setting up specific graphics, identifying desired thermostat points, and develops specific alarms to alert operators of any deviation in the systems controls, commensurate with the facility's specific requirements.

Therefore, the Department affirms your conclusion that the sale of customized or modified prepackaged software is not a taxable retail sale, and the sale of a TSP service agreement which includes computer software or software updates covering customized or modified software is not a service warranty under s. 212.0506, F.S., and is not subject to sales tax. However, where Company sells its software updates to a customer, who is capable of making the required modifications with no assistance from a Company systems specialist, such a sale is a taxable sale of tangible personal property.

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,

Horace Royals
Tax Law Specialist

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