Sales Tax State Activity Update - August 2005

Florida Declares - All Software Not Created Equal

The Florida Department of Revenue issued a Technical Assistance Advisement (TAA) stating that the development costs of software customization were exempt. This advisement was issued after a detailed analysis was performed of the agreement between the taxpayer and their customer, and the customer's unique performance requirements for the software in question.

An IT Consulting Agreement, between taxpayer and the customer for development and customization of the software program was executed prior to the sale of the software itself. The service to produce custom software is considered a professional service and is exempt pursuant to Pursuant Rule 12A-1.105 (5). It was also ruled that any maintenance costs associated with this software would also be exempt. Rule 12A-1.105(b) 2 excludes maintenance costs if the property when sold at retail is not subject to tax.

The taxpayer at the time the TAA was requested had only one customer for this software. The software cannot be installed or used by a customer or any contemplated customer without substantial customization by the taxpayer. In the case of the current customer, approximately four man years of customization has taken place. In addition, this customization will continue for at least another 12 months.

The customer has procured the services of the taxpayer under a retainer agreement for a three year period because of the need for further customization.

The software is only capable of processing input data in a specific proprietary format and producing outputs in a different proprietary format. Every installation involves developing custom software to acquire the input data and deliver the output events to personnel and obtaining feedback from them. The software provides no value to a customer without these customizations. In the case of customer installation, the taxpayer developed part of the customizations and customer developed other parts.

To read the full TAA click here.

(Technical Assistance Advisement, No. 05A-028, Florida Department of Revenue, June13, 2005)

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