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