Were customized software, hardware, support services, and warranties taxable when sold together?

Subject

Computer Software, Hardware and Services

Plain-English summary

The hardware, customized software, enhancements, and support services described in the company's agreements were taxable. Florida treated them as part of the same transaction because the services were inextricably intertwined with tangible personal property or were not incidental to its sale. Separately stating and billing the charges did not avoid tax.

Enhancements distributed without additional consideration were not taxed. A service warranty applying solely to customized software was not taxable, but a warranty covering both software and tangible hardware was taxable. Operating manuals sold separately were tangible personal property and taxable.

What this means for you

Customization and separate line items did not control. The ruling looked at whether the software and services were part of, and integrated with, the hardware transaction.

Common questions

Q: Was customized application software taxable here? Yes, because it was sold as part of the described tangible-property transaction.

Q: Were support and enhancement services taxable? Yes on the stated integrated-sale facts, except an enhancement supplied for no additional charge.

Q: Was every service warranty taxable? No. A warranty solely on customized software was not taxable; a combined hardware-and-software warranty was.

Citations and references

• Fla. Stat. § 212.02(16) — sales price
• Fla. Stat. § 212.05(1)(a)1.a. — tax on tangible personal property
• Fla. Stat. § 212.0506 — service warranties
• Fla. Stat. § 212.08(7)(v)1. — professional and personal services
• Fla. Admin. Code r. 12A-1.105(1)(b)2. — service warranties
• American Telephone & Telegraph Co. v. Department of Revenue, 25 Fla. L. Weekly D1216 (Fla. 1st DCA 2000)
• Department of Revenue v. B & L Concepts, Inc., 612 So. 2d 720 (Fla. 5th DCA 1993)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-082

Original ruling text

SUMMARY

QUESTION: Is the sales price of computer hardware, computer
software products, service warranties, and computer
services sold to a purchaser subject to sales tax even in
the instance when the software products are customized?

ANSWER - Based on Facts Below: The computer hardware,
computer software products and services are subject to
sales tax, even when the software is customized and even if
separately stated and separately billed, when the hardware,
products and services are all sold in the same transaction
and are inextricably intertwined with the sale of tangible
personal property, or are not incidental to the sale of
tangible personal property. The service warranties would
not be taxable if applicable solely to the customized
software.

Dec 14, 2000

Re: Technical Assistance Advisement 00A-082
Computer Software, Hardware and Services
Section 212.02(16), F.S.
Section 212.05(1)(a)1.a., F.S.
Section 212.0506, F.S.
Section 212.08(7)(v)1., F.S.
Rule 12A-1.032(3), F.A.C.
Rule 12A-1.105(1)(b)2., F.S.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated August 18, 2000, in which you ask whether the
Company would incur a sales or use tax liability with respect to
five categories of sales made by the Company to its Florida
customers. You categorize these activities of the Company as
including the sales of: 1) computer application software, 2)
application software enhancement, 3) computer support services,

4) computer hardware warranty contracts, and 5) computer
hardware.

You state on the first page of your letter that the Company is
involved in the "... business of developing and licensing
application software programs." You further describe this
software as "... specifically customized to meet each customer's
unique needs and information system requirements."

The application software is more specifically described by you
on page two of your letter in the following manner:

The application software consists of numerous integrated
modules that can be purchased by a customer. Each module
is a separate and distinct program designed to perform a
specific function (e.g., fixed asset management, service
invoicing, service merchandising, etc.). Customers have
the option of purchasing whatever modules they deem
necessary to operate their business. Each module is
tailored by [the Company's] computer technicians to meet
the specific needs of the customer....

You state that the customer of the Company pays "a one-time
charge" for this application software.

After the development for, and the sale to, the customer of the
application software, there is an additional charge for what you
term "enhancement" of the software. An enhancement, as you
describe, may be "... special report writing tools."

Also, a customer may contract for the purchase of computer
support services, which you define as "... technical support,
updates to the software, and additional software
modification...." You state that the charge for this service is
"... a recurring monthly fee that is sold for a twelve-month
term."

The customer may also purchase computer hardware from the
Company. You state that the "hardware and the related computer
component system components" are purchased by the Company from
"... independent third party vendors for resale to its

customers."

Finally, you include within the activities of the Company the
sale of warranty contracts on the computer hardware and
software.

You emphasize, with respect to the sales activities described
above, that "... customers have the option of purchasing
whatever product(s) they desire. There is no contractual
mandate that a software purchase must include hardware, service
warranty or software support services or vice-versa. The price
of each item is separately stated and itemized on the customer's
invoice."

You attached to your letter two documents used by the Company: a
document bearing the legend Master Agreement, and one styled
Customer Guide. The Master Agreement contains generic
provisions of the entire contract, which is, evidently, commonly
executed by the Company and its clients.

The Master Agreement describes, in the Table of Contents,
provisions relating to the orders of the computer related goods,
the delivery of the goods, insurance, title, services,
guarantees and payment provisions of the sale. Other broad
provisions relate to data access, licensing, third party leasing
and other provisions such as default and dispute terms. This
contract appears to be applicable to any client of the company.

The Customer Guide has more focused language in that, for
example, on page 5, the Table of Contents speaks of the
installation of the system, the equipment maintenance and
support software services, and the other described professional
services which appear as part of the sale.

Department Response

The sale by the Company of computer hardware would be subject to
tax. The tax is applicable to the sale by the Company of
computer hardware because of the imposition of the tax as
provided in s. 212.05(1)(a), Florida Statutes.

However, a more through discussion is needed on the matter of
the taxability of the software and associated services as
described in the Customer Guide.

Section 212.02(16), F.S., defines the term "sales price" as
"[t]he total amount paid for tangible personal property,
including any services that are part of the sale, [and as] the
consideration for a transaction which requires both labor and
material to alter, remodel, maintain, adjust, or repair tangible
personal property." Especially relevant to the issues presented
here is the interpretation of the text of the statute that
includes as part of the sales price "any services which are part
of the sale." An analysis of when services are "part of the
sale" will be found in later paragraphs.

Other applicable statutes and administrative rules are s.
212.05(1)(a)1.a., F.S., which imposes sales tax on the "...
sales price of each item or article of tangible personal
property when sold at retail in this state...." Rule 12A-1.032,
F.A.C., interprets the statutes with respect to computer-related
sales and rentals.

In subsection (4) of Rule 12A-1.032, F.A.C., software is subject
to sales tax when "... fully usable by the customer without
modifications...." However, sales of software are not taxable
when 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...."

Such computer programs are styled as "customized software" in
subsection (4) of Rule 12A-1.032, Florida Administrative Code.
The basis for the exemption applicable to customized software is
found in s. 212.08(7)(v)1., F.S., which exempts "...
professional, insurance, or personal service transactions that
involve sales as inconsequential elements for which no separate
charges are made."

However, software when customized and therefore considered as
"services," is subject to sales tax when such software is sold
as a "part of the sale" of tangible personal property, which in
this instance, as noted in the Master Agreement and the Customer

Guide, are the hardware and component parts. The identity of a
service that is "part of the sale" as required by s. 212.02(16),
F.S., has been clarified in American Telephone and Telegraph
Company v. Department of Revenue, 25 F.L.W. D1216 (Fla. 1DCA
2000).

In that case the appeals court affirmed the conclusion of the
trial court that certain engineering services were "inextricably
intertwined" with the sales of the telecommunication equipment.
American Telephone and Telegraph, Id., at page 3. Also, the
court found that there is no requirement that the purchases of
services must be linked with tangible personal property. The
court, referring to s. 212.02(16), F.S., which defines the term
"sales price," said that "... the Legislature chose not to limit
the sales tax to services that must be purchased with tangible
personal property...." American Telephone and Telegraph, Id.,
at page 3. The court concluded that the intent of the statute
did not limit the services in such a manner and that the court
would "... have no authority to do so."

Further, the appeals court held that services were not separate
or discrete transactions but were "a part of the sale" even when
the sales prices of the services and of the tangible personal
property were separately stated and separately billed. American
Telephone and Telegraph, Id., at page 4. Neither, the court
said, considering the decision in Department of Revenue v. B & L
Concepts, 612 So.2d 720 (Fla. 5DCA 1993), could services escape
the tax if they were only incidental or optional to the sale of
the tangible personal property. Rather, the nontaxable service
must be incidental and optional to the buyer. American Telephone
and Telegraph, Id., at page 4

Therefore, in applying the case law to the facts of the instant
transaction, a conclusion is reached that the services described
in the Master Agreement and in the Customer Guide are being sold
as part of the same transaction because: they are either
inextricably intertwined with the sale of the tangible personal
property; are not incidental to the sale of tangible personal
property; or will not escape the tax merely because they are
separated stated and separately billed.

Thus, a determination is made that the hardware, software, and
certain services sold to the Company as described in the Master
Agreement and in the Customer Guide are subject to Florida sales
tax. The software and the services, which are taxable, include
the application software enhancement.

However, you are alerted that the Customer Guide states on page
21 that the enhancements, if the support service charge has been
paid, are "... generally distribute[d] to our customers without
an additional charge." If the information provided by you is
correct, the enhancements are not subject to tax in the instance
when the customer pays no consideration.

The software support services, which you describe as comprised
of technical support, software updates, and software
modifications, also would be taxable based on the reasoning
provided above. The Customer Guide, on page 21, describes the
category of "software support services" as including telephone
consultation, corrections of errors and malfunctions of the
software, revisions to operating manuals, and the provision of
enhancements.

If the provisions of the Customer Guide are applicable, the
telephone consultation, and the corrections of errors and
malfunctions would be taxable services. Further, a sale of an
operating manual would be subject to tax. Section 212.05,
Florida Statutes. Rule 12A-1.029(3), F.A.C., interpreting s.
212.05, F.S., notes that a manual, when separately invoiced,
represents a taxable sale of tangible personal property.

The sales of service warranties are subject to tax to the extent
as mandated in s. 212.0506, Florida Statutes. Rule 12A-1.105,
F.A.C., interprets the statute. However, should the Company
issue a warranty solely on the customized software, the tax
would not apply. Rule 12A-1.105(1)(b)2., F.A.C., contains a
provision that the term "service warranty" does not extend to
"... property which when sold at retail in this state would not
be taxable." Customized software, when not "part of the sale" of
tangible personal property, is not subject to tax. The warranty
would be taxable if the contract included warranty provisions on
both the tangible personal property and the software.

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 and
related backup documents 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. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the department
within 15 days of the date of this letter.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Technical Assistance and Dispute Resolution

Ctrl. No. 42234