When were CD-ROM software licenses, customization, training, maintenance, and updates taxable in Florida?

Subject

Taxability of Customized Software and Support Services

Plain-English summary

The CD-ROM software license was exempt when the software company analyzed the customer's requirements and customized the program to those needs. Under the cited rule, modifying a prepackaged program at the customer's request and specifications made the single transaction an exempt customized-software service.

The result changed when an independent consultant performed the customization. If the consultant was not the software company's agent, the company sold taxable customizable software on a tangible CD-ROM, while the consultant's work was a separate transaction.

If that independent service transferred no tangible personal property, its separately charged customization was not taxable. But transferring canned software as part of the consultant's transaction created a separate taxable sale.

Training, maintenance, support, and updates followed the software transaction when sold as part of it. If customers could buy the software license without those services and purchased them independently, the service charges were not taxable as long as no tangible personal property was transferred.

What this means for you

The ruling focused on who supplied the customization and whether services were part of the software sale. Extensive customization by someone else did not turn the licensor's CD-ROM into the licensor's exempt customized-software transaction.

Agency could change that result. An independent consultant working at the licensor's direction and under its control was treated like the licensor for the customization analysis.

Common questions

Q: Was vendor-customized CD-ROM software taxable? No, where the vendor evaluated the customer's needs and customized the program to the customer's specifications.

Q: What if an unrelated consultant customized it? The licensor's CD-ROM sale was taxable; the consultant's service was analyzed separately.

Q: What if the consultant acted as the licensor's agent? Then the ruling applied the vendor-customization result, treating the license as exempt.

Q: Was a separately billed customization service taxable? Not if it was an independent service and transferred no tangible personal property.

Q: Were training and maintenance taxable? They followed the license if bundled into the same transaction. Optional services bought independently were not taxable if no tangible property was transferred.

Q: Did the ruling address downloaded or cloud software? No. Its tangible-property analysis relied on delivery by CD-ROM.

Citations and references

• Fla. Stat. §§ 212.05, 212.06 — sales and use tax
• Fla. Stat. § 212.02(15)(a), (16), (19) — sale, sales price, and tangible personal property
• Fla. Admin. Code r. 12A-1.032(1), (2), (4), (5) — computer hardware, software, and customization
• Department of Revenue v. Anderson, 403 So. 2d 397 (Fla. 1981); Housing by Vogue, Inc. v. Department of Revenue, 403 So. 2d 478 (Fla. 1st DCA 1981); Pioneer Oil Co. v. Department of Revenue, 401 So. 2d 1319 (Fla. 1981); State ex rel. Szabo Food Services, Inc. v. Dickinson, 286 So. 2d 529 (Fla. 1973) — strict construction of exemptions
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-088

Original ruling text

Dec 31, 1997

Re: Technical Assistance Advisement 97A-088 Sales and Use Tax - Taxability of Software. Sections: 212.05, 212.06, F.S Petitioner: XXX (Taxpayer)

Dear :

This is a response to your request dated August 1, 1997, received August 8, 1997, for the issuance of a Technical Assistance Advisement ("TAA") concerning the above referenced 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.

STATED FACTS

You provide the following facts, in part:

[Taxpayer],... engages in the business of licensing computer software throughout the United States.
[Taxpayer's] software contains three main modules from which customers may choose. The modules assist customers in managing their accounting, human resources and logistic functions. Within each of these main modules, customers may choose among various applications according to their specific needs. For example, within the accounting module, customers can choose from the following applications: accounts receivable, accounts payable, fixed assets, general ledgers and others. The modules are inoperable for any specific customer's business needs until customized as discussed below. [Taxpayer's] pre-sale technical representatives meet with customers to assist them in determining which modules or applications will best suit each customer's particular business needs. The pre-sale technical representatives typically spend several months

with a particular customer reviewing their operations and system requirements. Based on this review, the pre-sale technical representatives develop a System's Requirements Analysis which the customer uses in deciding which modules or applications to license and, how the required customer's configuration should be customized....

You also indicate that the software cannot be used by the Taxpayer's customer without being extensively customized. You indicate that the customizing may be performed either by the taxpayer or by an independent consultant. There is a separate charge for the software being customized. Included in the license of taxpayer's software is a six month maintenance agreement. There is a separate charge for training. You indicate that the software is in the form of a CD-ROM disk.

REQUESTED ADVISEMENT

You ask:

A. Whether the licensing of [Taxpayer's] software to Florida customers is subject to sales and use tax when the software customization is performed by [Taxpayer] personnel?

B. Whether the licensing of [Taxpayer's] software to Florida customers is subject to sales and use tax when the software customization is performed by an independent consultant?

C. Whether the licensing of [Taxpayer's] software to Florida customers is subject to sales and use tax when the software customization is performed by an independent consultant with assistance of [Taxpayer] personnel?

D. Whether the separately stated charges for the customization of [Taxpayer] software are subject to Florida sales and use tax?

E. Whether the separately stated charges for training services offered to [Taxpayer] customers are subject to

Florida sales and use tax?

F. Whether the separately stated charges by [Taxpayer] for maintenance support and updates are subject to Florida sales and use tax?

LAW AND ANALYSIS

I. The Statute.

Sales and Use tax under Chapter 212, F.S., is a transactional tax on the sale of tangible personal property. Specifically, the statutory basis for the taxability of computer hardware and computer software is under s. 212.05, F.S. That section provides, in part:

212.05 Sales, storage, use tax.--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. (E.S.)

Section 212.02(15)(a), (16) and (19), F.S., defines the terms "Sale" "Sales price" and "tangible personal property" in part, as:

(15) "Sale" means and includes:

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

(16) "Sales price" means the 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, and includes any amount for which credit is given to the purchaser by the seller, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service cost, interest charged, losses, or any other expense whatsoever. "Sales price" also includes the consideration for a transaction which requires both labor and material to alter, remodel, maintain, adjust, or repair tangible personal property. Trade-ins or discounts allowed and taken at the time of sale shall not be included within the purview of this subsection.... (E.S.)

(19) "Tangible personal property" means and includes personal property which may be seen, weighed, measured, or touched or is in any manner perceptible to the senses.... The term "tangible personal property" does not include stocks, bonds, notes, insurance, or other obligations or securities; intangibles as defined by the intangible tax law of the state; or pari-mutuel tickets sold or issued under the racing laws of the state. (E.S.)

Because the subject software involved here is in the form of a cd-rom and can be seen, weighed, measured, or touched, the license of the software clearly represents the "sale" of "tangible personal property" as defined above. When taxpayer's customers pay consideration for the license, of the subject software they have performed a "sale" as defined above. Once a "sale" has taken place, tax is due as computed on the "sales price" as defined above, unless some exemption can be found to be applicable.

In some jurisdictions(FN 1), customized software is subject to Sales tax on the full sales price including services associated with the creation of the software. In Florida, Rule 12A-1.032, F.A.C., provides for an exemption for software under certain circumstances.

II. The Rule.

The Department, by law, is authorized to adopt rules in order to implement Florida Statutes under s. 120.54, F.S. Accordingly, the Department has adopted Rule 12A-1.032, F.A.C., regarding computers and related systems. Rule 12A-1.032(1),(2),(4) and (5), F.A.C. provides, in part:

12A-1.032 Computers and Related Systems. (1) Computer "hardware" is defined as the machine and all of its components. Computer "software" is the programming needed to make computers operate.

(2) The sale to a consumer of a computer and its related components is taxable when delivered to a customer in this state. The rental of a computer and its related components, including terminal equipment (hardware) which is physically located in this state, is taxable.
...
(4) ... [W]here 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, their retail sales 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. (E.S.)

Important to this analysis is the manner in which the law requires construction of an exemption. As provided under Rule 12A-1.032(4) and (5), F.A.C., customized or modified software is exempt from taxation. Florida courts have consistently and

unwaveringly held that exemptions must not be expanded beyond their express terms and must be strictly and narrowly construed against the taxpayer. See Department of Revenue v. Anderson, 403 So.2d 397 (Fla. 1981); Housing by Vogue, Inc. v. Department of Revenue, 403 So.2d 478 (Fla. 1 DCA 1981); Pioneer Oil Co. v. Department of Revenue, 401 So.2d 1319 (Fla. 1981); State ex rel. Szabo Food Services, Inc. v. Dickinson, 286 So.2d 529 (Fla. 1973). Therefore, under Florida law, the burden is upon the taxpayer, as the party claiming an exemption, to establish from its actual books and records that it is clearly entitled to the customized software exemption.

According to the rule, all that is required for the sale of computer software to be exempt is for taxpayer to perform some modification or alteration of a pre-packaged program, at the customer's request, to the customer's specifications.

CONCLUSION

With regard to your question A., because the taxpayer engages in evaluation of its customer's programming needs and customizes the software to those needs the licensing of taxpayer's software to Florida customers is exempt from sales and use tax.

With regard to your question B., an independent consultant and not taxpayer is customizing the software to the customer's needs and therefore the license sold by taxpayer is not for customized software but is the sale of customizable software. The transaction between the independent consultant and the customer is separate from the software license. The software license is taxable as the sale of tangible personal property, (i.e., the cd-rom of the customizable software).

With regard to your question C., please see the answer to question B. above. However, if the independent consultant is working as an agent of the taxpayer, (i.e. at the taxpayer's direction and under the taxpayer's control), see the answer to question A., above.

With regard to your question D., if the separate charge is made by an independent consultant who is not an agent of the

taxpayer, the answer depends on whether any other tangible personal property, as defined above, is involved. If no tangible personal property is sold or transferred to the customer, no sales tax is due. For example, if the consultant transfers a canned version of software to the customer, as part of the transaction, it is a separate taxable transaction. Generally, however, a separate transaction that involves no tangible personal property is not taxable.

With regard to your question E., consistent with the definition of the term "sales price" any software services such as the maintenance fee or training fee, sold with the taxpayer software, as part of that transaction, should be treated the same as the software license fee. A clear indication of whether the subject software services are part of the same transaction as the licensing of the software is whether taxpayer's customer has the option of purchasing them independent of the purchase of the software license. If the taxpayer's customer can purchase the software license without purchasing either the maintenance or training service, those services are not taxable if no other tangible personal property are sold or transferred as part of the sale of those independent services.

With regard to your question F., Please see the answer to question E., above.

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 confidential information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Should you have any further questions concerning this matter, please do not hesitate to contact me.

Sincerely,

Eric A. de Moya, Esq.
Tax Law Specialist
Technical Assistance and Dispute Resolution (904)922-4714

Control No. 30414

NOTICE UNDER THE AMERICANS WITH DISABILITIES ACT

Persons needing an accommodation to participate in any proceeding before the Department of Revenue, should contact the Department at (850)488-6374 (voice), or 1-800-DOR-8331 (TDD), at least five working days before such proceeding. You may also call via the Florida Relay System at 1-800-955-8770

FOOTNOTE 1 See South Central Bell Telephone Co. v. Barthelemy et. al., La SCt, October 17, 1994; CCH St. Tax Rep., s. 201-243.