Sales Tax Articles
Sales Tax State Activity Update - March 2005
Florida Rules on Services Attached to Software License Agreements
In a Technical Assistance Advisement the Florida Department of Revenue stated that consulting and other services included in a software licensing agreement were not incidental, and therefore were part of the total sales price subject to tax.
The taxpayer requested advice on the following three questions:
- Is a vendor required to charge Florida sales tax on consulting services when the services are itemized and included with a taxable software license agreement?
- Is a vendor required to charge Florida sales tax on consulting services when they are contracted for and invoiced separately? The services are contracted contemporaneously with a separate contract for a taxable software license.
- Is vendor required to charge Florida sales tax on consulting services when they are contracted for and invoiced separately at a time subsequent to the sale of a taxable software license agreement?
In part the license agreement provided for training, consulting, and other services at standard hourly rate, and reimbursement of travel expenses. The agreement made no guarantees as to the total cost of the system implementation, and success rested with the licensee. The licensee could terminate any work upon three days advance notice, and could be charged a cancellation fee if work was terminated.
With respect to question one the Department cited section 212.02(16), F.S. that defines sales price. The section in essence states the total amount paid for tangible personal property, including services that are part of the sale, makes up the total consideration when the transaction required both labor and material. As a result tax is due on the transaction presented in question one.
The department came to the same conclusion as they did with question one, with respect to question two because the agreement stated that the services described therein were incorporated fully, and made part of the agreement by reference.
With respect to question three the Department pointed out that in the agreement the implementation costs includes an unknown total that includes training charges, and no specific date of completion. As a result the Department concluded the consulting services were not optional. Also, the licensee may not hire the taxpayer's consultants. The agreement also called for the use of work orders to perform various services, and it was clear that it was the client's option to determine the exact amount of the services that were necessary for successful implementation. It was also clear that by the terms of the agreement that both parties intended that the work orders would be binding, and not contingent on a separate agreement. The Department went on to cite several court cases, which basically ruled when two or more documents (work orders and license agreement) are executed by the same parties at or near the same time, and in the course of the same transaction they will be read and construed together. The Department also ruled that tax was due on the transaction described in question three.
Read the full advisement here.
(Florida Department of Revenue, Technical Assistance advisement, No. 04A-069 December 21, 2004)
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