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

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Persons needing an accommodation to participate in any
proceeding before the Department of Revenue, should contact the
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FOOTNOTE 1 See South Central Bell Telephone Co. v. Barthelemy
et. al., La SCt, October 17, 1994; CCH St. Tax Rep., s. 201-243.