Were fees for an online bond-information system taxable in Florida, and did its Florida activities create collection nexus?

Subject

Computer Information Service

Plain-English summary

Florida did not tax the recurring or usage-based fees for electronic access to the company's online bond analytics, databases, research, and financial models. The service was excluded from taxable telecommunications, and electronically delivered information was not treated as taxable tangible personal property or printed information.

The result changed when physical products were sold. Modems, routers, computer systems, other equipment, and noncustomized software delivered on disks, CD-ROMs, or other tangible media were taxable. Installation charges were part of the taxable sales price, and optional training or similar incidental services escaped tax only if separately stated and avoidable by the customer.

The Department also found that the provider had substantial Florida nexus under the law applied in 1998. Its employees visited Florida customers to install hardware and provide training or technical help. Florida affiliates or independent contractors that solicited sales and performed post-sale services for the provider would also establish nexus.

What this means for you

This ruling drew a sharp line between electronically delivered information and taxable physical equipment or canned software. It also shows that, under the historical cases the Department applied, even an out-of-state digital-service business could acquire a Florida collection duty through people performing installation, solicitation, training, or support in the state.

Common questions

Q: Were the online database and financial-model access fees taxable? No. The ruling found no Florida sales, use, or gross receipts tax on the recurring or per-use electronic access charges.

Q: What items were taxable? Hardware and canned software delivered on tangible media were taxable, along with installation included in their sales price.

Q: Was training always taxable? No. The ruling said an incidental service such as training was not taxable if it was separately stated and optional for the customer.

Q: Why did the out-of-state provider have to collect Florida tax? Its employees' Florida installation and support visits created nexus under the ruling's analysis. Affiliates or contractors soliciting and servicing customers for it could do the same.

Citations and references

• Fla. Stat. § 203.012(5) — online computer services excluded from telecommunications
• Fla. Stat. § 212.05(1)(e)1.a. — tax on telecommunication service
• Fla. Stat. § 212.08(7)(v)2. — information services involving printed matter
• Department of Revenue v. Quotron Systems, 615 So.2d 774 (Fla. 3d DCA 1993)
• Henley Holdings v. Department of Revenue, 599 So.2d 1282 (Fla. 1st DCA 1992)
• Attorney's Title Insurance Fund v. Department of Revenue, No. 91-1832 (Fla. 2d Cir. Ct. 1992)
• Fla. Stat. §§ 212.05(1)(a), 212.06(1)(a) — taxable property and collection duty
• Fla. Admin. Code rr. 12A-1.032(4), 12A-1.016(3)(a) — canned software and installation
• Department of Revenue v. B & L Concepts, 612 So.2d 720 (Fla. 5th DCA 1993)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992); Scripto, Inc. v. Carson, 362 U.S. 207 (1960); Tyler Pipe Industries v. Washington State Department of Revenue, 483 U.S. 232 (1987) — nexus authorities applied by the ruling
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-081

Original ruling text

SUMMARY

Recurring or per usage fees charged by Taxpayer to access an on-line fixed income bond analytic system, which include central site databases and financial models including a mortgage database, fixed income database, historical database and a research library are not subject to Florida Sales and Use Tax or Florida Gross Receipts Tax as charges for telecommunication service. Furthermore any recurring or per usage charge to view, access, download, or obtain financial, stock, bond, or other information is not subject to any other provisions of Florida Sales and Use Tax, as long as the information is provided in an electronic format.

However, the sale of any equipment, including modems, router, computer systems, or any other tangible personal property to Florida customers is subject to sales tax. Noncustomized or "canned" software is considered tangible personal property when provided on diskettes, CD-ROMs, or other tangible media, and is subject to tax. The fact the Taxpayer's employees visit Florida clients to install hardware and to provide training or technical assistance creates the requisite "substantial nexus" with Florida to require the collection of Florida sales tax. Furthermore, the presence of affiliated corporations, or even independent contractors, that conduct solicitation and sales activities, as well as provide post-sale services, in Florida on behalf of Taxpayer, would also be sufficient to create "substantial nexus" with Florida.

Nov 04, 1998

Re: Technical Assistance Advisement 98A-081 Sales and Use Tax -- Computer Information Service Section 203.012(5), F.S.; Section 212.08(7)(v)2., F.S. Rule 12A-1.032(4), F.A.C. XXX ("Taxpayer")

Dear :

Your letter of July 29, 1998, requested a Technical Assistance Advisement concerning the above referenced matter. This response constitutes a Technical Assistance Advisement (TAA) under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.

STATED FACTS

Your letter imparts the following facts:

[Taxpayer], which is located in XXX, has developed a fixed income bond analytic system ("System") which could be used by money management firms, securities dealers and other fixed income market professionals, insurance companies, banks, corporate pension fund departments, and other research professionals. The System provides access to
[Taxpayer]'s and/or its affiliates['] central site databases and financial models including a mortgage database, fixed income database, historical database and a research library (such databases are located [outside Florida]). The System provides customers the capability of using [Taxpayer]'s electronic reports, sectors and scenario files or of customizing them. The System operates through a high speed network and distributed client/server work station technology. The servers are located in
[Taxpayer]'s [non-Florida] office and users are connected through a wide area network or analog telephone line. The System can run on a personal computer or work station along with other applications and does not require a dedicated machine.

[Taxpayer] charges its customers a fee in order to access the System. [Taxpayer] typically sells a router and a modem to its customers during the initial installation of the System and imposes a separate charge for such equipment.

Regarding [Taxpayer]'s activities within the State it is

our understanding that leads to potential customers may be obtained from referrals, employees of an affiliated company and/or [Taxpayer]'s employees. The affiliated company, not
[Taxpayer], has an office in the State. Once a potential customer has been introduced to [Taxpayer] it is possible that, on occasion, a follow up visit to the customer's facility be made by an employee of [Taxpayer] in order to demonstrate the System's capabilities. If the potential customer orders the System, employees of [Taxpayer] may visit the customer to provide training or technical assistance.

REQUESTED ADVISEMENT

You are requesting a determination regarding the sales tax consequences of the activities described above. Additionally, if the activities are determined to be taxable, you are requesting a determination whether the limited activities within the state subject Taxpayer to the responsibility of collecting and remitting Florida sales tax. Finally, you are inquiring whether the answer to your second inquiry would be different if Taxpayer's activities are conducted by employees of an affiliated corporation.

DETERMINATION

A. Whether Service is Taxable as a "Telecommunication Service."

Chapter 203, F.S., imposes a tax on the gross receipts received by a utility provider for any utility service, which includes "telecommunication service." Sales tax is also levied upon "telecommunication service," as defined in Chapter 203, F.S., at a rate of seven percent. Section 212.05(1)(e)1.a., F.S.

However, Section 203.012(5), F.S., states that "[t]he term
`telecommunication service' does not include any Internet access service, electronic mail service, electronic bulletin board service, or similar on-line computer service."

The on-line computer service operated by Taxpayer is not

considered to be a telecommunication service in Florida. Thus, recurring or per usage fees charged by Taxpayer to access the on-line system are not subject to Florida Sales and Use Tax or Florida Gross Receipts Tax as charges for telecommunication service.

B. Whether Service is Taxable Under Other Provisions of Chapter 212, F.S.

The sale of the information services that Taxpayer provides does not constitute the sale of anything taxable under Chapter 212, F.S., and charges for such services are therefore not subject to Florida Sales and Use Tax. Likewise, the charge to access Taxpayer's databases, research, and financial modeling does not constitute the sale of anything taxable under Chapter 212, F.S.

Section 212.08(7)(v)2., F.S., provides that information services become subject to sales tax only when they involve the furnishing of printed matter:

(v) Professional services.-1. Also exempted are professional, insurance, or personal service transactions that involve sales as inconsequential elements for which no separate charges are made.

2. The personal service transactions exempted pursuant to
   subparagraph 1. do not exempt the sale of information services involving the furnishing of printed, mimeographed, or multigraphed matter, or matter duplicating written or printed matter in any other manner, other than professional services and services of employees, agents, or other persons acting in a representative or fiduciary capacity or information services furnished to newspapers and radio and television stations. As used in this subparagraph, the term "information services" includes the services of collecting, compiling, or analyzing information of any kind or nature and furnishing reports thereof to other persons.

In Department of Revenue v. Quotron Systems, 615 So.2d 774 (Fla. 3d DCA 1993) (per curiam), the Third District Court of Appeal affirmed the trial court's holding that the transmission of

electronic images to video display screens does not constitute a sale of tangible personal property and is therefore not subject to sales tax. As a result of Quotron Systems, the Department now takes the position that the sale of an "electronic image" is not considered to be the sale of tangible personal property, and is not subject to sales tax. Quotron Systems also dismissed the Department's contention that payment for the information service constituted a rental of Quotron's computer equipment. Id. at 778 (Conclusions of Law nos. 14-16).

Similar decisions were rendered in Henley Holdings v. Department of Revenue, No. 89-4381 (Fla. 2d Cir. Ct. 1991), aff'd per curiam, 599 So.2d 1282 (Fla. 1st DCA 1992); and Attorney's Title Insurance Fund v. Department of Revenue, No. 91-1832 (Fla. 2d Cir. Ct. 1992).

Therefore, any recurring or per usage charge to view, access, download, or obtain financial, stock, bond, or other information is not subject to Florida Sales and Use Tax, as long as the information is provided in an electronic format. Along the same lines, the charge to have access to Taxpayer's financial models is not subject to Florida Sales and Use Tax, as long as the access occurs electronically, and the models are not provided in any tangible format.

C. Whether Sale of Computer Hardware and Canned Software is Taxable.

The sale of any equipment, including modems, routers, computer systems, or any other tangible personal property to Florida customers is subject to sales tax, at a rate of six percent. Section 212.05(1)(a), F.S. Noncustomized or "canned" software is considered tangible personal property when provided on diskettes, CD-ROMs, or other tangible media, and is therefore also subject to sales tax. Rule 12A-1.032(4), F.A.C. Therefore, a one time charge for the "Yield Book" access software that may be installed on customer's computers would be subject to sales tax.

The tax must be collected by Taxpayer on the separate charge for any hardware or "canned" software sold, and such tax must be

remitted to the Department, since Taxpayer is the selling dealer. Section 212.06(1)(a), F.S. A charge for the installation of hardware or canned software is part of the sales price of the hardware or canned software, and is taxable, even if the installation charge is separately stated and the installation is provided at the option of the purchaser. See Rule 12A-1.016(3)(a), F.A.C. A charge to a customer at the time of the sale of hardware or canned software for services provided by Taxpayer that are incidental to the sale of the hardware and canned software, such as training, is taxable unless 1.) the charge for the services is separately stated on a billing to the customer, and 2.) the charge for the services is avoidable at the option of the customer (the services are not required to be purchased by the customer). See Department of Revenue v. B & L Concepts, 612 So.2d 720 (Fla. 5th DCA 1993).

Your letter implies that any necessary hardware is installed by Taxpayer's employees at the customer's location. The fact that Taxpayer's employees visit Florida clients to install hardware and to provide training or technical assistance creates the requisite "substantial nexus" with Florida to require the collection of Florida sales tax. See Quill v. North Dakota, 504 U.S. 298 (1992), for further discussion of state tax nexus issues.

The presence of affiliated corporations, or even independent contractors, that conduct solicitation and sales activities, as well as provide post-sale services, in Florida on behalf of Taxpayer, would also be sufficient to create "substantial nexus" with Florida. See Scripto, Inc. v. Carson, 362 U.S. 207 (1960). In Scripto, the U.S. Supreme Court held that an out-of-state seller, which did not own, lease, or maintain any office or other place of business in Florida, which did not have any regular employees or agents in Florida, and which did not have any bank account or stock of merchandise in Florida, but which arranged with unrelated independent contractors to solicit and sell its merchandise within Florida on a regular basis, had sufficient nexus with Florida to allow Florida to impose a duty on the out-of-state seller to collect Florida sales tax. See also Tyler Pipe Industries v. Washington State Dep't of Revenue, 483 U.S. 232 (1987).

Based on the facts provided, Taxpayer has substantial nexus with the state of Florida, and is required to register as a dealer and collect and remit sales tax on all computer hardware and "canned" software sales in Florida, including those consummated by the affiliated corporation.

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.

Sincerely,

Ralph G. Pepe
Tax Law Specialist
Technical Assistance & Dispute Resolution (850) 922-4802

Control #: 34967