Were canned-software licenses taxable when the reseller physically loaded the program onto a customer's server but left no disk or CD?

Subject

Computer Software and Hardware

Plain-English summary

Each canned-software license was taxable even though the reseller removed the disk or CD after loading the program onto the customer's server. The manufacturer's physical media was sent to the reseller's Florida engineer, who delivered and installed the fully usable prepackaged program. That distinguished the transaction from purely electronic information delivery.

Computer hardware sold with the licenses was also taxable tangible personal property. The reseller did not owe use tax on the manufacturer's master media when it bought the media for resale under an Annual Resale Certificate; instead, it collected tax on the total price of every license sold.

What this means for you

Leaving no disk with the customer did not remove tax when physical media was the delivery vehicle for canned software. The ruling separated the reseller's exempt inventory purchase from its taxable customer licenses.

Common questions

Q: Was load-and-leave canned software taxable? Yes.

Q: Was hardware sold in the same transaction taxable? Yes.

Q: Did the reseller owe use tax on the master media? No, with proper resale documentation.

Citations and references

• Fla. Stat. § 212.02(14)(a), (15)(a), (16), and (19) — dealer, sale, sales price, and tangible property
• Fla. Stat. § 212.05(1)(a)1.a. — retail sales tax
• Fla. Admin. Code r. 12A-1.032(4) — prepackaged computer programs
• Department of Revenue v. Quotron Systems, 615 So. 2d 774 (Fla. 3d DCA 1993)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-037

Original ruling text

SUMMARY

QUESTION 1: Is the sale of canned software licenses to a
customer, where the software is physically loaded on to the
customers server by the Vendor, and the customer receives
no tangible personal storage media in the transaction,
subject to tax?

ANSWER 1 - Based on Facts Below: Yes. Rule 12A-1.032(4), F.A.C.,
provides in pertinent part, "Retail sales of pre-packaged
programs for use with audio/visual equipment or other
computer equipment, where the programs are fully useable by
the customer without modifications..., are taxable as sales
of tangible personal property." As the software at issue is
"canned software" and meets the definition provided in Rule
12A-1.032(4), F.A.C., above, the sale of such licenses to
Florida customers are in fact subject to sales tax pursuant
to section 212.05(1)(a)1.a., F.S.

QUESTION 2: If the customer is also sold tangible personal
property in the transaction (i.e., a computer), does that
affect the taxability of the software licenses purchased if
the software is provided using the "load and leave" method
above?

ANSWER 2 - Based on Facts Below: Section 212.05(1)(a)1.a.,
F.S., provides that the sale of tangible personal property
at retail in this state is subject to tax. In the instant
facts, both the sale of the canned software and the sale of
the hardware constitute sales of tangible personal property.
Therefore, the sale of both items is taxable pursuant to
section 212.05(1)(a)1.a., F.S.

QUESTION 3: Does the vendor reselling the software licenses
owe use tax on the storage media (disk, CD-ROM) received
from the manufacturer?

ANSWER 3 - Based on Facts Below: The Vendor reselling the
software licenses would not owe use tax on the storage
media received from the manufacturer because these media
are purchased by the Vendor for resale. The Vendor would

be required to obtain an Annual Resale Certificate and
present the Certificate to the manufacturer from whom he
is buying the media in order to purchase the media tax exempt.

Jul 05, 2001

Re: Technical Assistance Advisement 01A-037
XXX ("Vendor")
Sales and Use Tax - Computer Software and Hardware
Sections: 212.02(14)(a), (15)(a), (16), (19),
212.05(1)(a)1.a., Florida Statutes
Rule: 12A-1.032(4), Florida Administrative Code

Dear :

This is in response to your request, dated May 14, 2001,
received May 22, 2001, for the Departments issuance of a
Technical Assistance Advisement ("TAA") concerning the above
referenced party and matter. Your letter 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 section 213.22, F.S.

Facts

You have provided the following facts:

Vendor is a full-service provider of computer hardware, software
and related computer services. In such capacity, Vendor is an
authorized reseller of canned application software licenses.

Vendor sells annual software licenses for resale from the
software manufacturer, receiving a master copy of the canned
application software on tangible storage media (i.e., disk, CDROM) in the transaction. Also included on the storage media is
any documentation defined as materials including, without
limitation, reference, user, installation, systems administrator

and technical guides relating to the use of the licensed
software.

Vendor sells annual software licenses to customer with the fee
based on a per user charge for the number of licenses purchased.
The fee includes the licensed software and documentation loaded
on it as well as any periodic software updates deliverable
throughout the year by Vendor.

Vendor takes the storage media to the customer's location and
loads the software and documentation on the customer's server.
Vendor then leaves the customer's premises with the software
media, a technique commonly referred to as "load and leave."
The customer never takes possession of the physical media and
receives nothing tangible in the transaction either in the
initial software load or in any subsequent software updates.
The software then resides on the customer's local server
network, which can then be downloaded onto the user's computers
according to the number of site licenses purchased from the
vendor. The vendor maintains the master copy of the software
and any software updates at all times.

You have described an example of a transaction in the following
manner:

Vendor receives an order from a customer for 100 site licenses
for the software product, for a cost of $150.00 each. Vendor
places an order with the manufacturer for the above mentioned
100 licenses. Vendor receives (1) one disk of the program from
the manufacturer for each customer, regardless of the number of
site licenses to be loaded from the disk for a particular
customer. Vendor is not billed tax by the manufacturer because
Vendor will resell all 100 site licenses associated with the
disk to the customer. Vendor files sales tax regularly and
issues the manufacturer a resale certificate. Vendor takes the
disk to the customer and "loads" the software program on the
customer's server and "leaves" with the disk. Vendor is left in
possession of a disk that does not have any more site licenses
to use the product.

The following facts, providing additional detail, were disclosed

pursuant to our telephone conversation on June 12, 2001:

The manufacturer ships the disk/CD-ROM from Utah to Vendor's
business located in Texas. Vendor then overnight mails the
master disk/CD-ROM to an engineer who is employed by Vendor and
is located in Florida. Subsequently, the engineer loads the
canned software program onto the customer's server, leaves with
the tangible master disk containing the program and mails the
master disk back to Vendor in Texas, where the disk is kept.

Taxpayer's Argument

According to the State of Florida Department of Revenue
Technical Assistance Advisement 98A-081: "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, 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."

The above advisement exempts the sale of software downloaded
electronically to the customer by the Vendor. Because of the
electronic transmission, there is no sale of tangible personal
property. You believe this advisement also exempts the sale of
canned software licenses and documentation provided via the
"load and leave" method described above, as the customer
receives no tangible personal property in the transaction.

Documentation Provided

You have provided the following documentation:
Vendor Invoice with terms and conditions listed on the back
Vendor Load and Leave Sales Tax Agreement
Statement of Work for customers using the "load and leave"
method of software delivery

Requested Advisement

I. Is the sale of [canned] software licenses to a customer,
where the customer receives no tangible personal storage media
in the transaction due to the "load and leave" method
illustrated above, subject to Florida sales and use tax?

II. If the customer is also sold tangible personal property in
the transaction, (i.e., a computer), does that affect the
taxability of the software licenses purchased if the software is
provided using the "load and leave" method?

III. Does the vendor reselling the software licenses owe use tax
on the storage media (diskette, CD-ROM) received from the
manufacturer? If so, what is the cost that the use tax is based
on, i.e., cost of a blank disk, the cost of a single software
disk ($150.00 above), or the cost of all licenses loaded from
the disk ($150.00 multiplied by 100 licenses above)?

Applicable Law

Section 212.05(1), F.S., levies a tax upon the sale of tangible
personal property 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.

Section 212.02(14)(a), F.S., provides in pertinent part:

"Retail sale" or a "sale at retail" means a sale to a
consumer or to any person for any purpose other than for
resale....

Section 212.02(19), F.S., defines tangible personal property,
and states in pertinent part:

"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....

Section 212.02(15)(a), F.S., defines "sale" as including:

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.

Section 212.02(16), F.S., defines "sales price" of tangible
personal property as follows:

"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....

Rule 12A-1.032(4), F.A.C., provides in pertinent part:

... Retail sales of pre-packaged programs for use with
audio/visual equipment or other computer equipment, where
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, are taxable as sales of tangible
personal property.

Discussion

I. Is the sale of [canned] software licenses to a customer,
where the customer receives no tangible personal storage media
in the transaction due to the "load and leave" method
illustrated above, subject to Florida sales and use tax?

The sale of software licenses to a customer furnished via the
delivery on tangible personal storage media using the load and
leave method, as illustrated above, is subject to Florida sales
and use tax. See 212.02(15)(a), 212.05, F.S. Rule 12A-1.032(4),
F.A.C., provides in pertinent part, "Retail sales of pre-

packaged programs for use with audio/visual equipment or other
computer equipment, where the programs are fully useable by the
customer without modifications..., are taxable as sales of
tangible personal property." As the software at issue is
"canned software" and meets the definition provided in Rule 12A1.032(4), F.A.C., above, the sale of such licenses to Florida
customers are in fact subject to sales tax pursuant to section
212.05(1)(a)1.a., F.S.

The holding in Department of Revenue v. Quotron Systems, 615
So.2d 774 (Fla. 3d DCA 1993) (per curiam), does not apply, as it
is limited to the specific facts of that case, which are
distinguishable from the present facts. Specifically, Quotron
involved the electronic delivery of information services,
whereas here, the canned software is mailed in the form of a
disk to Vendor's engineers, who are located in Florida. The
engineer then physically delivers and loads the canned software
onto the Florida customer's server.

II. If the customer is also sold tangible personal property in
the transaction (i.e., a computer), does that affect the
taxability of the software licenses purchased if the software is
provided using the "load and leave" method?

Section 212.05(1)(a)1.a., F.S., provides that the sale of
tangible personal property at retail in this state is subject to
tax. In the instant facts, both the sale of the canned software
and the sale of the hardware constitute sales of tangible
personal property. Therefore, the sale of both items is taxable
pursuant to section 212.05(1)(a)1.a., F.S.

III. Does the vendor reselling the software licenses owe use tax
on the storage media (disk, CD-ROM) received from the
manufacturer? If so, what is the cost that the use tax is based
on, i.e., cost of a blank disk, the cost of a single software
disk ($150.00 above), or the cost of all licenses loaded from
the disk ($150.00 multiplied by 100 licenses above)?

The Vendor reselling the software licenses would not owe use tax
on the storage media received from the manufacturer because
these media are purchased by the Vendor for resale. The Vendor

would be required to obtain an Annual Resale Certificate and
present the Certificate to the manufacturer from whom he is
buying the media in order to purchase the media tax exempt.

The Vendor would instead be required to collect sales tax from
the Vendor's customers.

The tax would be based on the total sales price, which means the
total amount paid for the tangible personal property, including
any services that are part of the sale. Thus, tax would be due
on each canned software license sold. Therefore, in your
example, sales tax would be due on the 100 site licenses sold to
the customer.

This response constitutes a Technical Assistance Advisement
under section 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 section 213.22, F.S. Our
response is predicated upon 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 from that which is expressed in this response.

You are further advised that this response, your request, and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of section 213.22, F.S. Confidential information
must be deleted before public disclosure. In an effort to
protect confidentiality, we request that 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 that 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,

Shehla A. Milliron

Senior Attorney
Control # 45401