Sales Tax on Managed IT Services

As businesses increasingly rely on technology, Managed IT Service Plans have become a popular option to efficiently manage and secure IT infrastructure. For clients of WOM Technology Management Group, it may come as a surprise to see sales tax charged on their Managed IT Service Plans and related add-on services. In this article, we will explore in detail the reasons behind charging sales tax and how it aligns with Florida’s Sales Tax laws. We will delve into the concept of “Canned Software” and its relation to taxable components like service warranties, while also discussing the practical challenges faced by businesses in tracking and documenting software distribution. To ensure transparency, each tax rule discussed will be cited with references to the Florida Administrative Code and Florida Statutes.

Playing it Safe

While some of the verbiage could be interpreted differently from individual to individual, It’s our goal to err on the side of caution (which is typically what our clients are looking for in an IT management partnership). Since 2009, tax laws have been modified and updated and our finance team does our utmost to ensure strict compliance with all Florida Statues and other applicable regulations. Over the years, multiple experts (tax attorneys, accountants, etc.) have advised our leadership to “play it safe” by charging sales tax on our managed services as the current 6% sales tax is a much more financially safe option than non-compliance is. For our managed services contracts, we’ve adopted the famous tagline of Frank’s Red Hot sauce (if you don’t know what I’m talking about, ask a friend). While we don’t put it on all of our services (service calls without tangible goods, remote support sessions, etc.), our managed services billing all include a charge for sales tax.

Why “Canned Software” Is Taxable

Canned Software refers to pre-packaged, off-the-shelf software that is ready for use without customization. For IT service providers like WOM Technology Management Group, canned software includes essential tools such as Remote Monitoring and Management (RMM) systems, Anti-Virus Applications, Microsoft 365 Applications, and other technology management and cybersecurity tools.

Florida’s Sales Tax laws stipulate that certain canned software may be exempt from sales tax under specific conditions. When the canned software is delivered electronically, it is often considered a service and is exempt from sales tax. However, when canned software is transferred physically, such as on CDs or USB drives, it becomes unquestionably subject to sales tax under Florida law.

Florida Administrative Code Rule 12A-1.032 Computer Software:

The charge for a customized software package is construed to be a service and is not subject to tax. Retail sales of prepackaged software sold in a tangible form, where the programs are fully useable by the customer without modifications, are taxable as sales of tangible personal property. However, where the vendor, at the customer’s request, modifies or alters a prepackaged program to the customer’s specification and charges the customer for a single transaction, the charge is for a customized software package and is not subject to tax.

Furthermore, when exempted canned software is bundled with taxable components like service warranties, the entire transaction becomes taxable.

Taxation of Service Warranties

In Florida, service warranties are considered taxable. Managed IT Service Plans often include IT support services that involve the maintenance and repair of tangible personal property, such as computers and network equipment. Under Florida law, tangible personal property involved in a service contract is subject to sales tax when value-added services are provided.

Florida Administrative Code Rule 12A-1.105 (1)(b) “Service Warranty”

The term “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, whether or not the contract provides for the furnishing of parts. The term “service warranty” includes motor vehicle warranties issued under part I of chapter 634, F.S., and service warranties issued under part III of chapter 634, F.S.

Florida Administrative Code Rule 12A-1.105 (1)(b)(d) Maintenance Contracts for Computers

Example: A maintenance contract covering the cost of labor only to repair or maintain computer hardware is a service warranty.

Practical Challenges in Tracking and Documentation

WOM Technology Management Group frequently sends out tangible media, such as CDs or USB drives, for clients to use for self-deployment or software installation when necessary. Distinguishing clients who received canned software digitally from those who used physical media could be challenging and cumbersome. Tracking the return of physical media to prove exemption during an audit could create administrative burdens and lead to potential errors or discrepancies.

Safer for Our Clients: Avoiding Costly Consequences of Non-Compliance

Collecting and paying sales tax on all Managed IT Service Plans and related add-on services not only ensures compliance with Florida’s Sales Tax laws but also protects our clients from potentially significant financial and reputational consequences that may arise in the event of non-compliance. In certain situations (again – with no shortage of nuance) a business can be held liable for sales taxes not paid for taxable purchases in the State of Florida. Thus, it the safe bet on behalf of our clients’ potential exposure as well. Being out of compliance in any way with sales tax regulations can cause major complications for businesses and their owners from penalties to fines and even jail time.

Avoiding Costly Audits and Penalties

If WOM Technology Management Group failed to properly collect sales tax from clients on taxable services, it could lead to the discovery of non-compliance during a Florida Department of Revenue audit. In such a scenario, our company and our clients may face extensive audits that scrutinize financial records, sales transactions, and tax returns.

Audits can be costly and time-consuming for businesses. Parties involved would be required to invest substantial resources in gathering documentation and cooperating with auditors, taking focus away from core business operations. Additionally, any discrepancies found during the audit could lead to tax assessments and potential penalties for the unpaid sales tax.

Reputational Damage and Loss of Trust

Non-compliance with tax laws can have severe consequences for a business’s reputation and customer trust. News of non-compliance can quickly spread among customers, partners, and competitors, tarnishing the company’s image and integrity.

Clients who work with WOM Technology Management Group expect a high level of professionalism, transparency, and adherence to all applicable laws. Failure to collect sales tax accurately could lead to a loss of trust in the company’s financial management practices and its commitment to ethical business conduct.

Legal Consequences and Fines

In cases where non-compliance is deemed intentional or due to negligence, clients may face legal consequences and fines imposed by the Florida Department of Revenue. These fines could add significant financial strain to the business, impacting cash flow and hindering growth opportunities.

Disruption to Business Operations

Addressing the consequences of non-compliance during an audit can disrupt normal business operations, diverting valuable time and resources away from core activities. Uncertainty and potential financial liabilities can cause unnecessary stress and impact overall business productivity.

By diligently charging sales tax on all taxable components, WOM Technology Management Group aims to create a safer and more secure environment for our clients. Compliance with Florida’s Sales Tax laws protects WOM and our clients from costly audits, penalties, and legal repercussions, ensuring transparency, trust, and reputational integrity.

Through transparent and consistent invoicing practices, we demonstrate our dedication to providing reliable and compliant services while safeguarding our clients’ interests. With the knowledge that sales tax is appropriately collected and remitted, our clients can confidently partner with WOM Technology Management Group for all their IT service needs.

By Derreck Ogden

Sources:

Relevant Florida Statutes Regarding Sales Tax:

http://www.leg.state.fl.us/Statutes./index.cfm?App_mode=Display_Statute&Search_String=&URL=0200-0299/0212/Sections/0212.06.html#:~:text=(8)(a)%20Use%20tax,presumed%20that%20tangible%20personal%20property

Business Owner’s Guide for the Major Florida Taxes: https://floridarevenue.com/Forms_library/current/gt300015.pdf

Florida Administrative Code & Florida Administrative Register: https://www.flrules.org/gateway/ChapterHome.asp?Chapter=12A-1