Were software support and required postal updates for mail-sorting production equipment exempt from Florida sales tax?

Plain-English summary

The business used fixed mail-sorting equipment to read addresses, apply barcodes, sort printed mail by ZIP code, and prepare it for delivery to the U.S. Postal Service. Its support agreement included telephone and email help, remote diagnostics, maintenance releases, documentation, enhancements, and current postal directories and tables delivered online.

Florida treated the support charges as repairs to qualifying industrial machinery used to prepare tangible personal property for shipping. The business's printing activity fell within a qualifying industry group, and the equipment would not function or satisfy postal requirements without the software.

The Department therefore found the charges exempt under section 212.08(7)(xx). It explained that computer and software repair charges could qualify when the machinery, industry, fixed-location, and production-use conditions were met.

What this means for you

Software-related support was not exempt merely because it arrived electronically. The ruling tied the result to its repair function and the qualifying use of the underlying production equipment.

Common questions

Were the software support charges taxable? No, on the stated facts.

Why did they qualify? They were treated as repairs to fixed machinery used by a qualifying printing business to prepare printed material for shipping.

Did the ruling say all software support is exempt? No. It described a case-by-case test based on the business classification and actual equipment use.

Citations and references

• Fla. Stat. §§ 212.08(7)(xx) and 212.0506, as discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-036

Original ruling text

SUMMARY
QUESTION: Do the charges for certain software support qualify for the exemption
provided in section 212.08(7)(xx), F.S.
ANSWER — Based on the Facts Below: Yes. Based on the information provided, The
charges for the software support qualify for the exemption provided in section
212.08(7)(xx), F.S., as they are repairs to equipment and machinery that are used to
prepare printed material for shipping.

July 2, 2009
XXX
Re:

Technical Assistance Advisement 09A-036
Software Updates for Manufacturing Equipment
Sales and Use Tax
Sections 212.08 and 212.0506, Florida Statutes (F.S.)

Dear XXX:
This is in response to your letter dated March 23, 2009, 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., concerning the taxability of end-of-life services
offered by your company. 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 of a TAA.
ISSUE
Whether the charges for the Software Support qualify for the exemption provided in
section 212.08(7)(xx), F.S.
FACTS
Your letter dated, February 11, 2009, provides the following in part:
Please find copies of our monthly Software Subscription Service invoice and our
Software Support Agreement. Currently, we are paying sales tax on our monthly
software updates, but we believe that since the software updates are for
manufacturing equipment, the updates should be sales tax exempt just like repair
parts. When we purchased this equipment we paid sales tax on the software as
well as the physical equipment. The software must be updated in order for the
equipment to continue to function, just like if a bearing or a belt failed it must be

Technical Assistance Advisement
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replaced in order for the equipment to function. All software updates are also
required by the United States Postal Service.
In addition, the software updates are provided to us via the Internet so we do not
receive any of these update on physical media.
In addition to your request for a Technical Assistance Advisement dated March 23, 2009,
you provided copies of the monthly Software Subscription Service invoice, the Software
Support Agreement, the Master Equipment Service and Software Support Agreement and
page 3 of your Federal Corporate Tax Return.
The Software Support Schedule that was enclosed with your letter provides the following
in part:
THIS SOFTWARE SUPPORT SCHEDULE (the “Schedule”).. . is entered into
pursuant to the terms and conditions of that certain Master Equipment Service and
Software Support Agreement. . . dated 1/1/2004 as amended from time to time
(the “Agreement”), which is incorporated by reference herein.

2) Service Coverage. Software Maintenance and Subscriptions Services are
described below.
2.1) “Software Maintenance Service” will consist of the following:
2.1.A) “Telephone and E-Mail Assistance”.
2.1.B) “Remote Diagnostic Service”.
2.1.C) “Maintenance Releases” XXX may periodically prepare and provide to
Customer software fixes or patches that are otherwise not separately marketed or
priced (the “Maintenance Releases”). Customer will be solely responsible for
integrating Maintenance Releases into Customer’s Equipment and Software
environment. XXX may[,] at its sole discretion charge a fee for Maintenance
Releases that provide new functionality.
2.1.D) “Documentation Configuration Management”....
2.1.E) “Enhancement Releases”....
2.2) “Software Subscription Service” For an annual fee, XXX will provide
updates to Customer of the latest USPS CASS directories and current USPS tables

Technical Assistance Advisement
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3) Service Fees. Customer shall pay to XXX the Annual Service Fee.... The
Annual Service Fee is exclusive of applicable taxes, which will be invoiced with
Service Fee.

Page 3 of the enclosed 2007 Federal 1120, provides a Business Activity Code of “XXX,”
a Business Activity of “Printing/Mail Sorting,” and lists the Product or Service of “Mail
Sorting.”
Review of your website, “XXX” provides the following list of the products and services
your company offers Coupon Payment Books, Mailing Services and Commercial
Printing.
During a telephone discussion on April 10, 2009, you verified the equipment is used to
prepare printed material for shipping. As a result of that conversation, you provided the
following statement dated, April 13, 2009:
The equipment that is covered under the software supports agreement is our
XXX. This equipment is used in the mail manufacturing process to sort and
barcode the mail. The equipment reads the address on the mail piece, sprays a
barcode on the mail piece, and then sorts the mail piece to zip code order for
delivery to the US Post Office. The process and software is required by the US
Postal Service. Without this software the sorters would not function and the mail
would not be compliant with the US Postal Service.

The Department conducted an audit of your company’s books and records for the period
of July 1, 1999, through June 30, 2002. After touring your production facilities and
reviewing the company’s records, the Department’s auditor determined that your
company qualified for the exemption provided in section 212.08(7)(ff), F.S., which
provides that charges for electricity or steam, used to operate machinery and equipment
for specific industries, is exempt. The exemptions provided in section 2l2.08(7)(ff), F.S.,
and section 212.08(7)(xx), F.S., apply to industries classified under the same XXX XXX
XXX XXX numbers.
APPLICABLE AUTHORITY AND DISCUSSION
Section 212.08(7)(xx), F.S., provides an exemption for “. . . all labor charges for the
repair of, and parts and materials used in the repair of and incorporated into, industrial
machinery and equipment which is used for the manufacture, processing, compounding,
production, or preparation for shipping of items of tangible personal property at a fixed
location within this state.”
The statutory language contains numerous limitations on the exemption:

Technical Assistance Advisement
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•

It applies only to charges for labor or for parts and materials that are
incorporated into qualifying machinery and equipment in the course of a
repair. It does not apply to any other expenses related to a repair transaction.
For example, rentals of equipment used in making repairs and purchases of
consumable supplies that are not incorporated into the machinery or
equipment being repaired are not exempted by this statute.

•

The taxpayer must use the machinery and equipment being repaired in an
activity described in the specified SIC Major Group numbers 10, 12, 13, 14,
20, 22, 23,24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, and 39 and
Industry Group Number 212.

•

The machinery and equipment must be used to manufacture, process,
compound, or produce tangible personal property or to prepare tangible
personal property for shipping.

•

The machinery and equipment must be used at a fixed location in Florida.

Specific charges for repairs to computer equipment and software will be exempt if the
above conditions are met.
Section 212.0506, F.S., provides that an agreement that covers the cost of maintaining,
repairing, or replacing tangible personal property is subject to sales tax. However, the
section also provides that the term “service warranty” does not include contracts or
agreements to repair, maintain, or replace tangible personal property, if the parts and
labor to repair tangible personal property qualify for an exemption.
The determination of whether a business may qualify for an exemption on repairs to
machinery and equipment must be made on a case-by-case basis based on the SIC code
of that business activity and the actual usage of production machinery and equipment A
business activity is classified under a particular SIC code based on the primary activity of
that business. It is presumed that the primary activity of your business is the production
of printed materials for sale. Printing businesses are properly classified under SIC Major
Group 27. That group is one of the business activities that qualifies for exemption under
section 212.08(7)(xx), F.S.
Conclusion
The charges for the Software Support qualify for the exemption provided in section
212.08(7)(xx), F.S., as they are repairs to equipment and machinery that are used to
prepare printed material for shipping.
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

Technical Assistance Advisement
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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 section 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,

Brinton Hevey
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 488-7157
BH/1p
61978