Were technical services exceeding the original software project's estimated hours subject to Florida sales tax?

Plain-English summary

A purchaser licensed software, bought hardware, and contracted for installation, integration, training, and other technical services. The original documents estimated project hours but required the purchaser to pay for additional time if the vendor needed it to complete the project.

Florida found that later charges for analysis, design, coding, debugging, installation, deployment, training, and support were part of the original transaction. The services were not incidental even though they were separately billed after the initial agreements.

Because the additional technical services were inextricably intertwined with the software and hardware transaction, the charges were subject to Florida sales tax.

What this means for you

An estimate of project hours does not necessarily separate later work from an original taxable sale. A contractual commitment to pay for necessary additional services can make those charges part of the sales price.

Common questions

What technical services did the ruling describe? Analysis, database and program design, coding, documentation, debugging, installation, deployment, training, and ongoing support.

Did separate later invoices make the services exempt? No. The agreement already obligated the purchaser to pay for extra hours needed to complete the project.

Why did the professional-services exemption not apply? The tangible personal property was not inconsequential and the transaction involved separate charges.

Citations and references

• Fla. Stat. § 212.02(16) (sales price includes services that are part of a sale)
• Fla. Stat. § 212.05 (taxable sales of tangible personal property)
• Fla. Stat. § 212.08(7)(v)1. (professional-service transactions)
• Fla. Admin. Code r. 12A-1.032(5) (computer professional services)
• American Telephone & Telegraph Co. v. Department of Revenue, 25 Fla. L. Weekly D1216 (Fla. 1st DCA 2000)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06A-021

Original ruling text

SUMMARY:
QUESTION: Are charges for additional Technical Services considered to be part of the sales price of the original
transaction?
ANSWER - Based on Facts Below: Yes. The software license and hardware purchase agreement indicate that
Purchaser agreed to additional Technical Services if they became necessary to complete the project. Therefore, these
services are inextricably intertwined with the original transaction and are subject to Florida sales tax.

July 26, 2006

Re: Technical Assistance Advisement 06A-021
Sales Tax - Software Services
Section(s) 212.02 and 212.05, Florida Statutes
Rule(s) 12A-1.032, Florida Administrative Code
XXX (Purchaser)
FEI # XX
Dear :
This response is in reply to your letter dated April 26, 2006, requesting the Department's issuance of a Technical
Assistance Advisement ("TAA") pursuant to Section 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding the
Department's position on the taxability of software services. An examination of your letter has established that you
have complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is
hereby granting your request for issuance of a TAA.
Facts
According to the information and supporting documentation that you have provided, on XY-X, Purchaser entered into
a Master Software License Agreement with Vendor for the license to use software and for Technical Services ftom
Vendor, which included software installation and integration assistance and user training. Purchaser also entered into
an agreement to purchase hardware from the Vendor on the same date. During 2004 and 2005 additional Technical
Services were provided by Vendor and billed to Purchaser.
You provided the following documentation for review:

1. Master Software License Agreement
2. Amendment to the Master Software License Agreement
3. Statement of Work/Work Order No. 01
4. XXX Document

5. Invoices for additional Technical Services
On May 24, 2006, pursuant to a request for additional information, you also provided the following:

1. Hardware purchase agreement
2. Invoices for hardware
   The Master Software License Agreement provides in pertinent part:
   The terms and conditions of this Agreement are incorporated and made a part of the [Vendor] Master Software
   License Agreement. By Customer's signature below, Customer acknowledges that Customer has carefully read and
   understands all term and conditions hereof and agrees to all such terms and conditions....
3. Payment: ... (0) All extend services whether provided outside [Vendor] location or done at [Vendor] location shall be
   billed at the current contracted rates. All custom services shall be billed on a weekly basis and invoices are due and
   payable upon receipt. A XX% retainer of the project time (XX hours @ $XX per hour) is required to initiate your
   extended services agreement and will be applied against each of the initial weekly invoices....
   Section 9., Paragraph (0) was amended to read:
   All extended services whether provided outside [Vendor] location or done at [Vendor] location shall be billed at the
   agreed upon contract rates ....
   The Statement of Work - Work Order No. 01, dated XX, provides the following in pertinent part:
   [Vendor] will provide On-Site Technical Services as described below in the Scope of Services to assist customer with
   the On-Site implementation of their project. "On-Site Technical Services" may include, but is not limited-to, the
   following: Analysis, database and program design, coding, documentation, de-bugging and related issue resolution,
   installation and/or installation issues, deployment and/or deployment issues, training, and ongoing customer support
   (including emails, customer phone calls, and other contact events). Customer is responsible for project management
   and for any results achieved.
   The On-Site time authorized by you and specified below does not imply or commit a fixed price contract. If [Vendor]
   determines that it is necessary to exceed the estimated time, we will inform customer as soon as practical. In
   such an event, customer agrees to pay [Vendor] for actual time expended through the termination of the
   project. (Emphasis Added)
   Scope of Services:
   We will provide XX XXX $XX.00 per hour increments to assist you On-Site with your project, as described below:
   Page 17, of the XXX Document provides in pertinent part:
   Project Change Summary

Professional Services: The initial Work Order covers XXX towards this project. We estimate it will require XX to
complete this project, however some of the tasks could be completed by the client (please discuss which with
[Vendor]) to reduce the man-hours. This budgetary amount for Professional Services is based on the specifications
set forth in this document; however you will be billed for actual hours based on $XX per hour.
Requested Advisement and Taxpayer Position
You seek advisement on the taxability of the additional charges for Technical Services, which you believe are exempt
as professional services.
Applicable Authority
Section 212.05, F.S., provides in part:
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 part:
(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....

(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 ....
Rule 12A-1.032, F.A.C., provides:
(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.
(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
At issue is whether or not the charges for additional Technical Services are considered to be part of the original sale.
Section 212.05, F.S., imposes sales tax on the "sales price" of each article of tangible personal property when sold at
retail in this state. Section 212-0206), F.S., defines "sales price," in part, to mean the total amount paid for tangible
personal property including any services that are a part of the sale. 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 Telegrgph Compgny v. Department
of Revenue, 25 F.L.W. D1216 (Fla. IDCA 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. Id. at 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., said that "... the Legislature chose not to limit the sales tax to services that must be purchased
with tangible personal property Id. at 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." The court distinguished the Fifth District Court
of Appeal opinion in Department of Revenue v. B&L Concepts, 612 So.2d 720 (Fla. 5th DCA 1993), which found no
tax was due on the charge for delivering furniture. The court in American Telephone and Telegraph stated that the test
is not whether such charges are optional. The real question is whether the sale of the service is incidental to the sale
of the property, whether the services are subordinate, having a minor role. In American Telephone and Telegraph,
since the trial court found that the engineering services were clearly not incidental to the sale of the switching
equipment, the services were part of the sales price of the equipment. 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. Id. at page 4.
As evidenced by the documentation provided, at the time of executing the software license and hardware purchase
agreement, Purchaser agreed to pay Vendor for Technical Services exceeding 92 hours, if they became necessary to
complete the project. In applying the cited tax law, rules, and case law to the facts presented herein, it is concluded
that the additional charges for Technical Services are not incidental elements of the transaction. These services are
inextricably intertwined with the original transaction and are subject to Florida sales tax.
Section 212.08(7)(v)l., F.S. exempts from tax professional, insurance, or personal service transactions that involve
sales as inconsequential elements for which no separate charges are made. See also Rule 12A-1.032(5), F.A.C. The
tangible personal property involved in this case is not an inconsequential element of the original transaction and the
sale involves separate charges. Therefore, section 212.08(7)(v)l., F.S., and Rule 12A-1.032(5), F.A.C., do not apply.

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 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.
Sincerely,
Heather S. Miller
Senior Tax Specialist
Technical Assistance and Dispute Resolution
(850) 922-4835
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