Was licensed practice-management software exempt as customized software because it took more than a year to implement and integrate?

Plain-English summary

The licensed software, installation, related fees, and monthly maintenance were taxable. The customer planned to integrate the vendor's practice-management product with its proprietary health-claims financing network and argued that a 504-day implementation showed the software was customized.

The Department relied on the contract. It described delivery and licensing of the vendor's proprietary software and did not require the vendor to modify or alter that software to the customer's specifications. A long implementation period and integration into the customer's system did not, by themselves, satisfy the custom-software rule.

What this means for you

The contract must substantiate customization. Calling a project complex, integrating it into a proprietary platform, or spending a long time implementing it did not replace express vendor obligations to modify the software for the customer.

Common questions

Q: Was the software license exempt as customized software? No.

Q: Were installation and other related fees taxable? Yes.

Q: Was monthly software maintenance taxable? Yes.

Q: Did the Department decide the hardware and bundled-service issue? No; the request did not ask it to do so.

Citations and references

• Fla. Stat. §§ 212.02(15)(a), (16), (19) and 212.05(1)(a) — sale, price, tangible property, and tax
• Fla. Stat. § 212.08(7)(v), (13) — software-related exemptions cited
• Fla. Admin. Code r. 12A-1.032(4) — custom software
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-021

Original ruling text

SUMMARY

QUESTION: Are payments made for software, which will be
integrated into the taxpayer's own proprietary software,
exempt from tax as payments made for "customized software"
pursuant to Rule 12A-1.032(4), F.A.C.?

ANSWER - Based on Facts Below: The Department finds that,
notwithstanding the fact that the software described in the
contract may require over a period of one year to install,
there is no indication in the contract that the vendor is
"modifying or altering" the software to the taxpayer's
specifications. Accordingly, tax is due on charges made
for the sale or licensing of the software, including any
related installation fees or other fees.

Apr 16, 2002

Re: TAA 02A-021
Sales and Use Tax - Computer Software
Section 212.02(15)(a), (16), and (19), F.S.
Section 212.05(1)(a), F.S.
Section 212.08(7)(v), and (13), F.S.
Section 212.21(2), F.S.
Rule 12A-1.032, F.A.C.
XXX ("Company")
FEI: XX
XXX ("Provider")
FEI: XX

Dear :

This is a response to your letters dated March 1, 2002, and
March 26, 2002, and the letter of your colleague, XXX, dated
November 26, 2001, in which you requested the issuance of a
Technical Assistance Advisement (TAA) concerning the above
referenced parties and matter. Your letters and supporting
documents have been carefully examined, and the Department finds

your request 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, Florida Statutes.

Facts

Your letter of November 26, 2001, states in part:

[Company] is an advanced e-Claim Financing Network that
functions as a health claims intermediary. [Company]
software tools integrate multiple providers, multiple
payors, and multiple financial institutions within a secure
Internet network that is used for the submission,
adjudication, financing, and payment of medical claims. A
unique feature of the [Company] system is that it offers
the physician a financing mechanism whereby the physician
can receive an immediate cash payment

upon submission of a claim. The payment is based upon a
system-generated calculation of the amount that will be
paid, a calculation, which in certain instances, is based
upon acutely pre-adjudicating the claim. [Company] unites
physicians, financial institutions and insurance companies
(payers), by streamlining traditional health care processes
and eliminating friction points that cause excess costs and
delays in payment. The e-Claim Financing Network provides
a secure, friction-free platform that will enable providers
to receive advance funding for their medical claims at the
point and time of service.

[Provider] is a provider of practice management systems
(PMS) to the medical community. A practice management
system is the front end of a physician's office, allowing
him to schedule appointments, file insurance claims in a
traditional manner, bill patients, and reconcile accounts.

[Company] contracted with [Provider] to take the technology
of the [Provider] PMS front end and make substantive
changes and modifications to it, based upon a detailed
analysis and scope of requirements outlined by [Company],

to enable the technology to work in an ASP environment, online, and in real time. The commercially available version
of the [Provider] technology performs none of these
required functions.

The [Company] e-Claims Financing Network, known as CONCERT
(Claims On-line Network Clearing Exchange in Real Time) has
been in development since 1999, and has called upon many
companies who specialize in custom software to build and
develop the various platforms, technologies, databases and
interfaces required in a system of this magnitude....

In your current letter, you describe the transaction as follows:

[Company] is acquiring customized [Provider] software and
related licenses and integrating same with [Company's] own
proprietary software for [Company's] use in providing an
exempt service, namely to wit: a secure, web-based network
which will facilitate the third party advance funding of
medical claims. Neither the [Provider] software nor the
[Company] software will be sold (or resold). While nothing
in the attached contract between the parties specifically
identifies the [Provider] software as being "custom" or
"customized", on the fifteenth (15th) page of the
attachment, entitled Software Schedule, you will see a 504
day implementing schedule. Clearly, [Company] would not
need over one (1) year to install and implement standard,
"off-the-shelf" software.

With your letter, you have included a copy of the contract,
which is comprised of: a "System Implementation Agreement,"
dated December 15, 2000, between the subject parties; a
"Software Schedule"; a "Standard Support Services Agreement"; a
"Computer Services Supplement"; a "Software Support Schedule"; a
"System Environment Specifications"; and a "Contract
Supplement," dated February 26, 2001.

The first page of the "System Implementation Agreement" states
the following in part:

[Provider], by its acceptance of this agreement (the

"Agreement"), agrees to sell to the customer identified
below (the "Customer"), and to deliver the hardware
described on the Hardware Schedule (the "Hardware"), if
attached. In addition, [Provider] agrees to deliver and
install the proprietary [Provider] software and products
manufactured by [Provider] and described on the Software
Schedule (the "Software"), and to grant to Customer a
license to use the Software pursuant to the terms and
conditions of this Agreement. The Software includes
interfaces, if such items are included on the Software
Schedule ("Interfaces"). Customer agrees to purchase the
Hardware, and all items and services provided or performed
under this Agreement, to accept the license for the
Software and Third Party Software (defined below), and to
pay the requisite price and fees therefor, all in
accordance with the terms and conditions of this Agreement.
For purposes of this Agreement, "Third Party Software"
shall mean software licensed to Customer pursuant to this
Agreement under the brand name of a third party and
described on the Third Party Software Schedule attached
hereto, if any. Special undertakings, if any, with respect
to installation, training, conversions, Interfaces and
other matters, if any, will be as specified on the
appropriate schedules and attachments. Customer and
[Provider] expressly incorporate into this Agreement only
the schedules and supplements indicated as included in the
box below, and no other documents or writings shall be
considered a part of this Agreement. Software support and
maintenance services, if to be provided, are governed by
the [Provider] Standard Support Services Agreement, which
is a separate undertaking.

Advisement Requested

Are payments made for the [Provider] software, which will be
integrated into [Company's] own proprietary software, exempt
from tax as payments made for "customized software" pursuant to
Rule 12A-1.032(4), F.A.C.?

Applicable Law and Discussion

Section 212.21(2), F.S., provides the legislative intent to tax
"each and every sale, admission, use, storage, consumption, or
rental levied and set forth in this chapter, except as to such
sale, admission, use, storage, consumption, or rental as shall
be specifically exempted therefrom by this chapter subject to
the conditions appertaining to such exemption...."

Section 212.08(13), F.S., further states that "No transactions
shall be exempt from the tax imposed by this chapter except
those expressly exempted herein...."

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.

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 exemption.

Section 212.05(1)(a)1.a., F.S., imposes a tax on the "... sales
price of each item or article of tangible personal property when
sold at retail in this state...." Section 212.02(15)(a), F.S.,
defines the term "Sale" to mean and include "Any transfer of
title or possession, or both, exchange, barter, license, lease,
or rental, conditional or otherwise, of tangible personal
property for a consideration." In turn, "Tangible personal
property" is defined under s. 212.02(19), F.S., to mean and
include "... personal property which may be seen, weighed,
measured, or touched or is in any manner perceptible to the
senses".

Under s. 212.02(16), F.S., "Sales price" means "the total amount
paid for tangible personal property, including any services that
are a part of the sale, [and as] consideration for a transaction
which requires both labor and material to alter, remodel,
maintain, adjust, or repair tangible personal property."
Accordingly, any installation, preparation fees, or maintenance
fees sold with software, as part of that transaction, would be
part of the sale, and would be subject to tax.

Rule 12A-1.032, F.A.C., interprets the statutes with respect to

computer-related sales and rentals. In subsection (4) of the
rule, sales of software are subject to tax when "... fully
[usable] by the customer without modifications...." 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, F.A.C. The basis for the
exemption applicable to customized software is found is 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. The
identity of a service that is "part of the sale" as required
under 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 appeal 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 appeal 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 if 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
tangible personal property. Rather, the nontaxable service must
be incidental and optional to the buyer. American Telephone and
Telegraph, Id., at page 4.

Determination

In reviewing the contract submitted for our consideration, the
Department finds that, notwithstanding the fact that the
software described in the contract may require over a period of
one year to install and implement, there is no indication that
the vendor is "modifying or altering" that software to your
company's specification. Further, the contract appears to be
for the sale, or licensing, of the vendor's proprietary
software.

Applying the cited tax laws and rules and the case law to the
facts of the instant transaction, a conclusion is reached that
charges made for the sale or licensing of the [Provider]
software, including any related installation fees or other fees,
are subject to Florida's sales and use tax as sales of taxable
tangible personal property. The software support services,
described in the Software Support Schedule as "Monthly Software
Maintenance Fee," also would be taxable, based on the reasoning
provided above.

Since a request was not made for same, no determination of
whether the sale of tangible personal property - hardware includes the sale of a service or services is reached here.

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 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 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,

Dee Overcash
Senior Tax Specialist

Control #49531