Was electronically downloaded software taxable when the customer also received an incidental manual?

Plain-English summary

A stand-alone software license downloaded electronically was not subject to Florida sales tax. With no tangible storage media transferred, the Department treated the charge as a service rather than a sale of tangible personal property.

An included confirmation, reference manual, or user guide did not change the result when it was an inconsequential part of the software transaction and had no separate price. A separately charged manual was taxable tangible personal property. Electronically delivered software also became taxable when sold as part of the same transaction as nonincidental taxable hardware or canned software, even if separate invoices were used.

What this means for you

Delivery method and bundling controlled this ruling. Keep electronically delivered software separate from taxable hardware, physical copies, separately priced manuals, and taxable service-warranty coverage if you want the transaction analyzed as a stand-alone service.

Common questions

Q: Was software delivered on a disk treated the same way? No. The ruling states that canned software provided on a disk was taxable tangible personal property.

Q: Did an included manual make the download taxable? No, when the manual was inconsequential and not separately charged.

Q: Did the ruling decide every renewal scenario in the request? No. The vendor withdrew three of its five requested rulings.

Citations and references

• Fla. Stat. §§ 212.05(1) and 212.02(15), (16), (19) — taxable tangible-property sales
• Fla. Stat. § 212.08(7)(v)1. — inconsequential tangible elements of services
• Fla. Stat. § 212.0506(3) — service warranties
• Fla. Admin. Code r. 12A-1.032(4) and (5) — computer software
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-052

Original ruling text

SUMMARY

QUESTION 1: Are the initial software licenses Vendor sells,
for which the customer downloads the software electronically,
subject to Florida sales tax?

ANSWER 1- Based on the Facts Below: No. The charge for
electronically transmitted software is not subject to tax,
pursuant to Chapter 212, F.S., as there has been no
exchange of tangible personal property. This charge is
construed to be a service.

QUESTION 2: Does the answer to Question 1 change because
the customer receives tangible items, such as documentation
to confirm the purchase, manuals and guides, that are minor
and inconsequential to the software license?

ANSWER 2- Based on the Facts Below: No. If a manual is
provided to a customer, as part of the purchase of software
downloaded via the internet, the purchaser's receipt of the
manual would qualify for the exemption provided in s.
212.08 (7)(v)1., F.S., because the manual would be viewed
as an inconsequential element of the sale.

Nov 20, 2002

Re: Technical Assistance Advisement 02A-052
Sales and Use Tax - Software License Renewals
Sections: 212.05(1), 212.02(15),(16),(19), 212.0506(3),
212.08(7)(v)1., F.S.
Rule: 12A-1.032(4), (5), F.A.C.
XXX (Vendor)
FEI #: XX

Dear :

This is in response to your letters dated XX, 2002, and XX,
2002, and other correspondence provided requesting a technical

assistance advisement (TAA) regarding 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 state in your letters referenced above that your client is
XXX, Inc. (Vendor). Vendor sells software licenses for a fee.
The fee includes the right to use the licensed software and any
documentation, as well as any periodic updates available
throughout the license period. Vendor also sells software
license renewals. License renewals give the customer the right
to any software upgrades available during the duration of the
license renewal period.

Vendor also sells computer hardware. The computer hardware
sales and the software license sales are separate transactions.
The computer hardware purchased from Vendor is fully operational
(contains an operating system) for its intended use prior to
installation of any of the software licenses purchased and
delivered via the electronic download process. In some cases,
Vendor does not know if the software purchased pursuant to the
licenses is loaded onto machines purchased from Vendor.

The Vendor sells software licenses to customers in three
different forms.

Scenario 1:
For some licenses, the purchase is the customer's initial
purchase of the software license. After the license is
purchased, the customer downloads the software from Vendor's
server for use inside Florida. The customer does not receive
the software on tangible storage media from the Vendor.

Scenario 2:
The customer also purchases software license renewals from
Vendor and may be able to download updates electronically from
the manufacturer. With respect to these renewals, the customer

may have received the software on tangible storage media when it
purchased the initial license now being renewed. The customer
purchased the initial licenses from Vendor. When the initial
software license was purchased, Vendor collected and remitted
the applicable sales tax.

Scenario 3:
Same as scenario 2, except the customer originally purchased the
software licenses from another vendor or the manufacturer.
Vendor does not know whether the customer received the original
software license on tangible storage media or not.

TAXPAYER POSITION

In your correspondence you request a ruling on five
transactions, dealing with the renewal of software licenses,
that you believe are not subject to Florida sales tax under
Chapter 212, F.S. Your most recent letter withdraws your
request for rulings numbered 2, 3 and 5, which are therefore
omitted from this response.

The following are excerpts from your letter dated May 17, 2002:

In Department of Revenue v. Quotron Systems, Inc., 615
So.2d 774 (Fla. 3d DCA 1993), the Court held that
electronic images do not constitute tangible personal
property and the transmission of such images does not
constitute a sale. Id. at 776. Therefore, the transmission
of electronic images is not a sale of tangible personal
property subject to sales tax under chapter 212 of the
Florida Statues. Id. at 777. As a result of Quotron, the
Department has taken the position that "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." TAA 98A-081. Therefore,
the electronic download of software is exempt from sales
tax because there is no sale of tangible personal property.
TAA 01A-075 and TAA 01A-037.

When Vendor sells the customer an initial software license,

a sale within the meaning of section 212.02(15)(a), F.S.,
has taken place. The customer downloads the software from
Vendor's server and never receives any tangible storage
media. Because the software is delivered electronically,
the sale is not a sale of tangible personal property as
required by section 212.05(1)(a)1.a., F.S. Therefore, the
sale of the software license is not subject to sales tax.
...
As part of the software license, the customer receives
documentation such as confirmation of the purchase,
reference manuals and user guides. This documentation is a
minor part of the license when the license is viewed in its
entirety. No part of the license price is attributable to
the documentation. Although the documentation is tangible
personal property, it is a minor or inconsequential part of
the sale. The receipt of the documentation does not make
the sale of the license the sale of tangible personal
property. See Rule 12A-1.032(5), F.A.C., TAA 99A-039 and
TAA 93A-073. Therefore, the sale or renewal of a software
license for which the customer receives appropriate
documentation but does not receive the software on tangible
storage media is not subject to sales tax.

REQUESTED ADVISEMENT

In your original letter dated May 17, 2002, you requested five
rulings. The second letter dated August 28, 2002, eliminates
Vendor's request for rulings numbered 2, 3 and 5, and requests a
ruling on numbers 1 and 4 as stated below:

The initial software licenses Vendor sells, for which the
customer downloads the software electronically, are not
subject to Florida sales tax.

The answer to the above requested ruling(s) does not change
because the customer receives tangible items, such as
documentation to confirm the purchase, manuals and guides,
that are minor and inconsequential to the software license.

APPLICABLE STATUTES AND RULES

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, 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, 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. "Sales
price" also includes the consideration for a transaction
which requires both labor and material to alter, remodel,
maintain, adjust, or repair tangible personal property....

(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,
including electric power or energy, boats, motor vehicles
and mobile homes as defined in s. 320.01(1) and (2),
aircraft as defined in s. 330.27, and all other types of
vehicles....

Section 212.0506(3), F.S., provides:

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.

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

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 pertinent parts:

(4) ...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....

(5) When a computer technician surveys a customer's needs
and as a result makes recommendations which may include
instructional material, diagrams and layouts, a software
package, including pre-punched cards or programmed tapes,
the charge made is construed to be for professional
services and is exempt.

RESPONSE

The charge for electronically transmitted software is not
subject to tax, pursuant to Chapter 212, F.S., as there has been
no exchange of tangible personal property. This charge is
construed to be a service. Pursuant to Rule 12A-1.032(4),
F.A.C., the sale of canned software provided to customers on a

disk is subject to sales tax as the sale of tangible personal
property. The sale of computer hardware is also subject to
sales tax as the sale of tangible personal property.

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". The retail sale of electronically
transmitted software may be viewed as a service rendered as part
of the sale of tangible property subject to sales tax if: 1.
The sales of the electronically transmitted software and the
tangible personal property are part of the same sales
transaction and 2. The sale of the electronically transmitted
software is not incidental to the sale of the tangible personal
property. American Telephone and Telegraph Company v. Florida
Department of Revenue, 764 So.2d 665 (Fla. 1st DCA 2000).
Electronically transmitted software that is sold as part of the
same sales transaction as the sale of canned software, such as a
CD-ROM backup copy or the sale of computer hardware is subject
to sales tax. Sales tax would apply if both a sale of hardware
and a sale of the electronically transmitted software were part
of the same transaction, regardless if more than one invoice is
involved.

If a manual is provided to a customer, as part of the purchase
of software downloaded via the internet, the purchaser's receipt
of the manual would qualify for the exemption provided in s.
212.08 (7)(v)1., F.S., above because the manual would be viewed
as an inconsequential element of the sale. If a manual is
invoiced as a charge that is separately stated on the customer's
invoice, the transaction is a sale of tangible personal
property, as defined in s. 212.02(15), F.S.

Please be advised that, if transactions involving tangible
personal property are covered by a "service warranty", as
defined in s. 212.0506(3), F.S., the sale of such service
warranties are subject to tax, pursuant to s. 212.0506, F.S.
Rule 12A-1.105, F.A.C., interprets the statute. The service
warranty would be taxable if the contract included warranty

provisions on both tangible personal property and electronically
transmitted software. Rule 12A-1.105, 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". Thus, should the Vendor issue a service
warranty solely on the electronically transmitted software,
sales tax would not apply to the sale of the service warranty.

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 advise 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.

Sincerely,

Valerie Koenitzer, CPA
Senior Tax Specialist
Technical Assistance and Dispute Resolution
(850) 922-9412

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