Were customized insurance software delivered electronically and its required support-and-maintenance agreement subject to Florida sales tax?

Plain-English summary

An insurance-software provider licensed a base system for policy processing, claims, billing, and web functions. For this customer, it added extensive configurations and custom programming: customer-branded screens, claims forms, custom management reports, database changes, rating-engine and functionality changes, and a separate mobile-home park file and lookup system. The base system cost $300,000 and the added park-file feature cost $25,000.

Florida held that the software sale was not subject to sales tax. Even though the provider used a common base product, the contract required a detailed analysis and substantial customer-specific modification. The completed package was custom software, and installation occurred entirely by electronic transmission. The customer retained no tangible copy.

The required support-and-maintenance agreement was also nontaxable. It covered telephone support, training, defect resolution, enhancements, service packs, and customer-specific version upgrades, all handled electronically. The agreement neither delivered tangible property nor maintained taxable tangible property.

The customer had already paid tax to the dealer. Under the refund rules, the customer generally had to request repayment from the dealer, not directly from the Department. The Department could pay the customer directly only if the dealer assigned its refund right.

What this means for you

A common base can become a custom package

The vendor's own view that the base product was prewritten did not control. The Department looked at the integrated transaction and the significant modifications necessary for this customer.

Electronic delivery independently avoids a tangible transfer

No disk or other tangible copy changed hands. The software and all later updates were transmitted electronically to the customer's system.

Maintenance follows the property it supports

An agreement maintaining taxable canned software delivered in tangible form can be a taxable service warranty. This agreement supported custom, electronically delivered software and delivered nothing tangible, so it was not taxable.

Refunds usually flow through the collecting dealer

When a customer pays tax that was not due, Rule 12A-1.014 generally requires the customer to recover it from the dealer. The dealer then claims a credit or refund from the state, unless it assigns that right.

Common questions

Q: Was the base insurance software automatically taxable because other customers used it?
A: No. The Department treated the complete customer transaction as customized because of the detailed and necessary modifications.

Q: Did electronic installation matter?
A: Yes. The customer received no tangible copy, so there was no taxable conveyance of tangible personal property.

Q: Were quarterly support and maintenance charges taxable?
A: No. They covered the customized electronic system and delivered no taxable tangible property.

Q: Could the customer claim a refund directly from Florida?
A: Generally no. The customer first had to seek the refund from the dealer, unless the dealer assigned its refund right to the customer.

Citations and references

• Fla. Stat. §§ 212.02(14)-(16), 212.05, and 212.0506 (sales, tangible property, and service warranties)
• Fla. Stat. § 212.08(7)(v)1. (service transactions)
• Fla. Stat. §§ 215.26 and 213.22 (refunds and Technical Assistance Advisements)
• Fla. Admin. Code r. 12A-1.032(4) (customized software)
• Fla. Admin. Code r. 12A-1.014 (tax refunds and credits)
• American Telephone & Telegraph Co. v. Department of Revenue, 764 So. 2d 665 (Fla. 1st DCA 2000)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-035

Original ruling text

SUMMARY

QUESTION: Is the software package considered custom software in whole or in part
and what portions are taxable? What is the taxability of the support and maintenance
agreement?
ANSWER: Taxpayer’s Software sale to Customer and related maintenance agreement
are not subject to Florida sales tax. The Software is customized and delivered in
electronic form, and the maintenance agreement does not provide for the delivery of, nor
is it related to, taxable tangible personal property.

December 16, 2008

XXX

Re:

Technical Assistance Advisement 08A-035
Software Maintenance and Support
Sales and Use Tax
Sections 212.02, 212.05, 212.0506, 215.26, Florida Statutes (F.S.)
Rules 12A-1.032, 12A-l.014, Florida Administrative Code (F.A.C.)
XXX

XXX:
This is in response to your letter dated November 14, 2008, requesting this 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 above referenced matter and party. 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 a TAA.

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ISSUE
Is the software package considered custom software in whole or in part and what portions
are taxable? Also, what is the taxability of the support and maintenance agreement?
FACTS
Your letter provides in part:
[Taxpayer] is a computer software provider to the insurance industry. We produce
a software package called XXX [(“Software”)]. This software package is common
to all of our customers. The [Software] package provides the ability to process
policies, claims, and billing including a web feature to our customers. The
purchase of the [Software] product is completed through a contractual license
agreement.

In addition, we provide custom programming services including but not limited to
configuration, product enhancement, project management, data warehouse, data
system conversion, third party interfacing and general consulting.
Installation of all products is done via electronic transmission. On occasion, [a
Taxpayer] employee(s) is on site at the customer's premises during installation for
support and troubleshooting. The customer does not retain any tangible copies of
the software although the software is resident on their computer system.
Maintenance and Support issues are also handled and transmitted electronically[;]
however[,] an employee is not usually on site for this activity.
[Taxpayer] provides support and maintenance for all of the services above.
Support of the system includes but [is] not limited to, technical phone support,
training, defect resolution and/or system enhancements. Maintenance is defined as
those activities associated with providing service packs and version upgrades
initiated by [Taxpayer] to the base [Software] system. Support and maintenance
agreements are required for all [Software] purchased contractual agreements.
[Taxpayer] invoices XXX [(“Customer”)] for support and maintenance on a
quarterly basis. . . . All of the support and maintenance invoicing has sales tax
added to the total invoice amount. . . .
The included System Implementation and License Agreement provides in part:

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(1) General Terms
. . . [Taxpayer] shall sell and the [Customer] shall buy the Software and Services
as specified in the attached Schedule “A”, with the Configuration Options
described in Schedule “B”, and the Custom Programming Options described in
Schedule “C”.

Schedule ‘B’, System Configuration Options, provides in part:
The following changes, or configurations, to the Base [Software] System are
included:

All System Screens will be modified to reflect the [Customer] name.
Up to 10 company claims processing forms . . . will be included.

. . . [T]he Company will receive 10 additional, custom management reports based
on current database structure and field elements.

Schedule ‘C’, Custom Feature Options, provides in part:
Mobile Home Park File and Look-Up System, including:
The creation of the “Park File”
The creation of a “Park File” maintenance system, including the abilities
to Add, Modify, Delete, Open and Close Parks
The ability to Look-up “Park File” information during policy data entry
The ability to report the percentage of in-force policies in each Park
Schedule ‘F’ provides for the pricing of the Software system. The base system has a cost
of $300,000.00, and the additional Park File system has a cost of $25,000.00.
TAXPAYER POSITION
Your letter provides in part:
It is [Taxpayer’s] position that the base product, [Software], is prewritten
software. Customization and additional services were purchased at the request of

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[Customer] and are regarded as user enhancements because these changes are not
to the base [Software] product but rather additional software coding.
The maintenance portion of the support and maintenance charges however, are for
version upgrades that are made to the base [Software] product, which impacts the
entire [Taxpayer] customer base, not just [Customer]. We assert that the
maintenance charges are for the prewritten portion of the software and thus are
taxable. Since the contract between [Taxpayer] and [Customer] combines support
and maintenance as one annual fee which does not separate the support from
maintenance amounts we have applied sales tax to the entire transaction.
It is the assertion of the [Customer] that the entire software package should be
considered as a customized software package. The level of customization for
[Customer] required the creation of detailed specifications in all areas of the
[Software] base product, which can be provided as documentation of the
assertion. [Customer] further contends that these are not user enhancements, but
actually significant and necessary customized modifications. The customization
includes, but is not limited to, addition of database tables, rating engine,
functionality and product appearance.
To further support [Customer’s] claim, they wish it to be noted that [Customer]
pays to have copies of this customized code deposited in escrow . . . because the
product has been so extensively modified to meet the company's specific product
processing requirements. Whenever there is an upgrade to the product,
[Customer] receives a company specific upgrade installation package because the
software package continues to be modified to the company's specific needs.
[Customer] believes the support and maintenance should be entirely exempt
because they must be handled specifically by technicians who are familiar with
[Customer’s] customized needs. Thus, because the customized programming and
functionality are fully integrated into the base system, the entire software package
should be considered custom and thus according to Rule 12A-1.032 (4) all
charges for computer technician work should be exempt, including the support
and maintenance agreement.
APPLICABLE STATUTES AND RULES
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,

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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 part:
(14)(a) "Retail sale" or a "sale at retail" means a sale to a consumer or to any
person for any purpose other than for resale in the form of tangible personal
property or services taxable under this chapter . . . .

(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 . . . . (Emphasis added.)
Rule 12A-1.032(4), 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. (Emphasis added.)
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

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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 or if the parts and labor to
repair tangible personal property qualify for an exemption under this chapter, nor
does it include such contracts or agreements covering tangible personal property
which becomes a part of real property.

Section 215.26, F.S., provides in part:
(1) The Chief Financial Officer may refund to the person who paid same, or his or
her heirs, personal representatives, or assigns, any moneys paid into the State
Treasury which constitute:
(a) An overpayment of any tax, license, or account due;
(b) A payment where no tax, license, or account is due; and
(c) Any payment made into the State Treasury in error;

Rule 12A-l.014, F.A.C., provides in part:
(1) When a dealer refunds the sales, lease, or rental price of admissions, tangible
personal property, transient rentals, real property, or services upon which tax has
been paid by the purchaser or lessee to the dealer and remitted by the dealer to the
state, the dealer shall also refund the tax paid by the purchaser. If, in lieu of a
refund of the sale price, the dealer credits such amount on the purchaser's account,
a corresponding credit for sales tax previously paid by the customer shall be
made.
(2) A dealer who has paid tax on property acquired for use may take a credit, or
obtain a refund, for the amount of tax paid on the acquired property if:
(a) The dealer sells the property within 3 years from the date of payment of the
tax; and
(b) The dealer did not use the property prior to the date of sale.

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(3) Whenever a dealer credits a customer with tax on returned merchandise or for
tax erroneously collected, the dealer must refund such tax to the customer before
the dealer's claim to the State for credit or refund will be approved.
(4) A taxpayer who has overpaid tax to a dealer, or who has paid tax to a dealer
when no tax is due, must secure a refund of the tax from the dealer and not from
the Department of Revenue.
(5)(a) Any dealer entitled to a refund of tax paid to the Department of Revenue
may seek a refund by filing an Application for Refund-Sales and Use Tax (Form
DR-26S, incorporated by reference in Rule 12-26.008, F.A.C.) with the
Department. Form DR-26S must meet the requirements of s. 213.255(2) and (3),
F.S., and Rule 12-26.003, F.A.C.

(b) In lieu of a refund to which the dealer is entitled, the dealer may take a credit
on the dealer’s sales and use tax return within 3 years after the date the tax was
paid in accordance with the timing provisions of s. 215.26(2), F.S.
(6) Any dealer who takes a credit, or applies for a refund, for tax paid to the state
is required to keep and preserve all information and documentation necessary to
substantiate the dealer’s entitlement to a refund or credit of tax paid until tax
imposed under Chapter 212, F.S., may no longer be determined and assessed
under s. 95.091, F.S.
DISCUSSION
As provided in the statutory and regulatory provisions cited above, the sale of tangible
personal property is subject to tax. The term “sale” includes a license to use tangible
personal property. Service only transactions, except those authorized for taxation by
Chapter 212, F.S., are generally not subject to tax.
Software that is fully useable by a customer without modifications is considered canned
or prepackaged. See Rule 12A-1.032(4), F.A.C. The sale of canned or prepackaged
software delivered to a customer in tangible form, including but not limited to, on a disk
or via the load and leave method, is a sale of tangible personal property subject to sales
tax. See Section 212.05, F.S.
Conversely, a sale of customized software is a service transaction. Custom software is
where the vendor, at the customer's request, modifies or alters a prepackaged program to
the customer's specification. See Rule 12A-1.032(4), F.A.C. The basis for the exemption
applicable to customized software is found in Section 212.08(7)(v)1., F.S., which

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exempts ". . . professional, insurance, or personal service transactions that involve sales
as inconsequential elements for which no separate charges are made."
Likewise not subject to tax are sales of software, canned or customized, electronically
downloaded by the customer, as there is no taxable conveyance of tangible personal
property subject to tax under Section 212.05, F.S.
However, Section 212.02(16), F.S., defines the taxable “sales price” as the “total amount
paid for tangible personal property, including any services that are a part of the sale.”
Therefore, when tangible personal property and services are a part of the same sale, the
total amount is subject to tax. To determine if services are part of the sale of tangible
personal property, the Department first looks to whether the service provided is invoiced
with tangible personal property. Second, the Department determines whether the service
is intertwined or incidental to the sale of tangible personal property.
This determination was clarified in American Telephone and Telegraph Co. v.
Department of Revenue, 764 So.2d 665 (Fla. 1st DCA 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 666.
The court relied on s. 212.02(16), F.S., and determined that “the ‘services that are part of
the sale’ language is not limited to only those services that must be purchased with
tangible personal property.” Id. at 667. The court said that "[g]iven the Legislature
chose not to limit the sales tax to services that must be purchased with tangible personal
property, we have no authority do so." Id. 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 669.
Therefore, charges for services that are part of the sale of taxable tangible personal
property are a part of the sales price and subject to sales tax. As provided above, the sale
of customized software is a service transaction. As a result, when custom software
services are part of the sale of taxable software or hardware, the total amount charged is
subject to tax. Likewise, electronically downloaded software is subject to sales tax when
it is part of the sale of taxable tangible personal property.
Here, however, Taxpayer does not sell software delivered in tangible form. Further,
Taxpayer and Customer’s agreement provides for customized software that is modified to
meet the Customer’s needs. Therefore, the software is not subject to Florida sales tax.
With regard to maintenance and support charges, Section 212.0506, F.S., indicates that an
agreement that covers the cost of maintaining, repairing, or replacing canned or

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prepackaged software (tangible personal property) is subject to sales tax. However, an
agreement that covers the cost of maintaining, repairing, or replacing only customized
software or electronically downloaded software, and does not itself involve the sale of
tangible personal property, is not subject to sales tax.
Here, the maintenance agreement relates to the custom, electronically delivered software.
Further, the maintenance agreement provides for telephone support and electronically
delivered updates. The maintenance agreement does not provide for anything delivered

in tangible form. Therefore, like the Software, the maintenance agreement is not subject
to Florida sales tax.
Provisions for obtaining a refund are stated in Section 215.26, F.S., and Rule 12A-1.014,
F.A.C. As stated in subsection (4) of the rule, a taxpayer who has paid tax, when tax is
not due, must secure a refund of the tax from the dealer and not from the Department of
Revenue. Therefore, the Customer should seek any refund due from Taxpayer and not
from the Department. Nonetheless, should the Taxpayer assign its right of refund to the
Customer, the Department will make any refund due directly to the Customer.
CONCLUSION
Taxpayer’s Software sale to Customer and related maintenance agreement are not subject
to Florida sales tax. The Software is customized and delivered in electronic form, and the
maintenance agreement does not provide for the delivery of, nor is it related to, taxable
tangible personal property.
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

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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,

H. French Brown, IV
Attorney
Technical Assistance and Dispute Resolution
(850) 922-4708
HFB/
Ctrl# 54647