Fl Dep’t of Revenue: Sale of Software w/out Modifications Is Deemed Canned Software, and Liable to Sales Tax

The Florida Department of Revenue (“DOR,” or “Department”) has issued a Technical Assistance Advisement (“TAA”) on the issue of whether sales of computer software and associated services are subject to sales and use tax.

Specifically, the Department held that software for use by a customer without modifications is considered canned or prepackaged. The sale of canned or pre-packaged 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.

By way of background,  Taxpayer is a Florida-based corporation that develops, markets and provides training and support services for its computer software licenses. This software, called XXX XXX [“Software”], is used by lawyers, in-house counsel and other entities for managing their legal files and billing for their services. The software license is typically sold with 20-100 hours of training and implementation services as it is highly configurable to meet the needs of each specific client. The software licenses are for a period of one year and may be renewed annually.

Taxpayer has requested clarification as to the Department’s position when, if ever, computer software licenses and the associated services would be considered subject to Florida State Sales Tax.

In response, the Department cited Rule 12A-1.032, Florida Administrative Code, or “FAC, “ which requires modification or alteration to the software package before rising to the level of an exempt service.

According to the Department, under the facts and circumstances Taxpayer provided, Taxpayer’s Software is generally sold as canned or pre-packaged software that is fully useable by the customer without modifications. This includes installation and configuration only, which Taxpayer provides is not mandatory. The sale of canned or pre-packaged software delivered via tangible form is subject to sales and use tax, explained the Department.

The Department added that Taxpayer does not complete a detailed analysis in selecting or preparing the programs for each customer, because 1) the customer contacts Taxpayer to purchase the program, Taxpayer is not hired by the customer to select a program(s) to fit its needs, and 2) the same program is prepared and provided to all customers, there is no special preparation of the program based on a detailed analysis of the customer.

Therefore, the sale of the software license under these facts and circumstances is generally subject to sales tax as canned or pre-packaged software.

However, Taxpayer has provided that modification and alteration to the software may occur when this Taxpayer creates custom SQL statements, reports, and service authorizations to an individual customer’s specifications. When Taxpayer modifies Software as part of the sale of the license, and does not sell other tangible personal property, then the transaction is not subject to sales and use tax. Taxpayer will have the burden of documenting that modification or alteration of the Software occurs under any given transaction.

In addition, annual license renewals are required to continue use of the licensed programs. These renewals, according to the Department,  are typically provided via the internet.

The question posed before the Department is,  if any of the sales themselves were taxable events, are the fees collected as license renewals viewed as taxable events subject to Florida Sales Tax?

The Department replied that the annual license renewals are renewals of the initial transaction. Therefore, if the initial transaction was subject to sales tax, the sale of canned or pre-packaged software delivered via tangible form, then the subsequent renewal of that transaction is subject to sales tax.

But if the initial transaction was not subject to sales tax, the sale of modified or altered software or electronically downloaded software, then the subsequent renewal of that transaction is not subject to sales tax.

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