Were customized banking software, its monthly service contract, and exclusive electronic reports taxable?

Plain-English summary

The software, related monthly service contract, and exclusive electronic reports were not subject to Florida sales tax. The contract required modifications for each financial institution, and the resulting program could not be used by another customer without further changes, so it qualified as custom software.

The service contract sold with that custom software was also nontaxable. Updates supplied on CD or tape at no extra charge did not change the result. Monthly information reports were nontaxable because they were produced and delivered electronically for one customer exclusively.

What this means for you

The ruling depended on genuine customer-specific development and exclusive report delivery. Standardized software or reports furnished to multiple customers can receive different treatment.

Common questions

Q: Why was the software considered custom? It was modified to each licensee's needs and could not be used by another customer without additional work.

Q: Did free CD or tape updates make the service taxable? No.

Q: Why were the monthly reports nontaxable? They were provided exclusively to a single customer rather than sold as general information services.

Citations and references

• Fla. Stat. §§ 212.02, 212.05, and 212.08 — sales and use tax
• Fla. Stat. § 212.0506 — service warranties
• Fla. Admin. Code r. 12A-1.032 — custom software
• Fla. Admin. Code r. 12A-1.062 — information services
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-045

Original ruling text

SUMMARY

QUESTION 1: Is the software being marketed in this case
considered customized, and is it exempt from sales tax?

ANSWER 1 - Based on Facts Below: Based on the information
contained in the contract submitted for review, the product
meets the necessary criteria to determine that it is custom
software and is not subject to Florida sales tax pursuant
to Rule 12A-1.032, F.A.C.

QUESTION 2: Is the monthly service contract subject to
sales tax?

ANSWER 2 - Based on Facts Below: Service contracts sold in
conjunction with customized software are not subject to
sales tax.

QUESTION 3: Are monthly data information reports
electronically transmitted to the customer subject to sales
tax?

ANSWER 3 - Based on Facts Below: Charges for information
reports provided to s single customer exclusively are not
taxable pursuant to Rule 12A-1.062, F.A.C.

Oct 24, 2002

Re: Technical Assistance Advisement 02A-045
XXX ("Taxpayer")
FEI # XX
Sales Tax - Custom Software Sales/Service
Sections 212.02, 212.05, 212.08, 212.0506, F.S.
Rules 12A-1.032 and 12A-1.062, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to

your letter of XX. You have asked the Florida Department of
Revenue to provide clarification and guidance on the application
of sales tax for the sales and support service of customized
software.

Background

Taxpayer developed and markets a software product called XXX
("Program") that is licensed to financial institutions. The
software is designed to integrate bank and non-banking account
statements into one document for delivery to the licensee's
customers.

A careful review of the contract titled, "[Taxpayer] Master
License Agreement," submitted with the request for a Technical
Assistance Advisement, provides the following information.

Taxpayer developed and owns a software product called
Program that it licenses to financial institutions. (page
1)

The Licensee agrees to provide all hardware necessary for
the installation and operation of the software application.
(Schedule B, page 1)

The contract includes a software customization process
schedule, which outlines Taxpayer's modifications of the
software to meet the needs of the licensee. Once modified,
the software could not be used by another customer.
(Schedule C)

Taxpayer and Licensee agree to the contract price at the
time of the sale. Contract price includes a one time up
front fee, monthly service fee based on actual number of
statements generated, and a monthly maintenance service at
a level selected by Licensee upon entering into the
contract agreement. (Schedule D)

Requested Advisement and Taxpayer's Position

You presented the following:

Up Front Fee - Taxpayer customizes the software for the
particular customer and bills the customer a single amount for
the software and customization. Once customized, the software
product could not be used at another customer site without
further modifications. Based on Rule 12A-1.032(4), F.A.C., it is
your belief that the transaction is tax exempt due to the custom
work that is added to the base product.

Monthly Service Fee - Taxpayer will then charge the customer a
monthly service fee based on the number of statements printed
from the software. This monthly service fee consists of three
components: telephone support; error corrections and/or bug
fixes; and a data processing service. The telephone support is
provided by an employee located at your offices outside Florida,
connected by a phone to the customer's location. The monthly
service fee also entitles the customer to receive error
corrections and/or bug fixes to the software. These updates are
sent by U.S. Mail service on a CD or tape. The data processing
service is provided on a monthly basis, at which time Taxpayer
will execute a data sort/format function on data received from a
third party. This output is then sent to the customer
electronically. The prices for the telephone support, error
corrections and/or bug fixes and data processing service are
bundled into one Monthly Service Fee, and they are not stated
separately on the invoice. Based on Technical Assistance
Advisement 99A-039, it is your interpretation that the
transaction is tax exempt due to the custom work that was
involved in the initial Upfront Fee.

Applicable Authority and Discussion

Section 212.05, F.S., provides:

It is hereby declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of selling tangible personal property at
retail in this state, including the business of making mail
order sales, or who rents or furnishes any of the things or
services taxable under this chapter, or who stores for use
or consumption in this state any item or article of

tangible personal property as defined herein and who leases
or rents such property within the state.

Section 212.02, F.S., provides in pertinent parts:

(15) "Sale" means and includes:

(a) 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.

(16) "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....

(19) "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 212.08(7)(v)1., F.S., provides:

(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.

Rule 12A-1.032, F.A.C., provides in part:

(1) Computer "hardware" is defined as the machine and all
of its components. Computer "software" is the programming
needed to make computers operate....

(4) The charge which a computer technician makes for a
customized software package which includes such items as
instructional material, pre-punched cards or programmed
tapes is construed to be a service charge and exempt.
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. However, where 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, the charge is for a
customized software package and is exempt as a service
transaction. (e.s.)

Rule 12A-1.032(4), F.A.C., provides that the sale of a software
package customized to fit the specific needs of the purchaser is
exempt from tax when it meets the following criteria: 1) the
vendor modified the pre-packaged software program; 2) to the
customer's specification and at the customer's request, and 3)
charged the customer for a single transaction. A review of the
Master License Agreement shows that the transaction meets these
three basic criteria. Therefore, the sale of the software is
not subject to Florida sales tax as long as no consequential
tangible personal property is exchanged as a part of the
transaction.

Section 212.0506, F.S., provides in part:

(1) It is the intent of the Legislature that every person
is exercising a taxable privilege who engages in this state
in the business of soliciting, offering, providing,
entering into, issuing, or delivering any service warranty.

(2) For exercising such privilege, a tax is levied on each
taxable transaction or incident, which tax is due and
payable at the rate of 6 percent on the total consideration
received or to be received by any person for issuing and
delivering any service warranty.

(3) For purposes of this section, "service warranty" means
any contract or agreement which indemnifies the holder of
the contract or agreement for the cost of maintaining,
repairing, or replacing tangible personal property. The
term "service warranty" does not include contracts or

agreements to repair, maintain, or replace tangible
personal property if such property when sold at retail in
this state would not be subject to the tax imposed by this
chapter, nor does it include such contracts or agreements
covering tangible personal property which becomes a part of
real property. (e.s.)

In order for a service warranty to be exempt from tax, the
subject tangible personal property must be exempt from tax at
the time it is sold. Service warranties sold in conjunction with
the sale of customized software would not be subject to tax. An
update provided to the customer on a CD or tape at no extra
charge to the customer is not taxable.

Rule 12A-1.062, F.A.C., provides in pertinent part:

(1) The sale of information services involving the
furnishing of printed, mimeographed, multigraphed matter,
or matter duplicating written or printed matter, other than
professional services and services of employees, agents, or
other persons acting in a representative or fiduciary
capacity, are taxable.

(3)(a) "Information services" means and includes the
services of collecting, compiling or analyzing information
of any kind of nature, or furnishing reports thereof to
other persons. The charge for furnishing information
services, such as newsletters, tax guides, research
publications, and other written reports of compiled
information, which are not produced for and provided
exclusively to a single customer, is taxable. (e.s.)

Charges for monthly reports provided to a single customer
exclusively are not information services subject to sales tax
pursuant to Rule 12A-1.062(3)(a), F.A.C.

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, 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.

If you have any further questions with regard to this matter and
wish to discuss them, you may contact me directly at (850)9224839.

Sincerely,

Jean Davis
Senior Tax Specialist
Technical Assistance & Dispute Resolution

JD\
Control No: 51529