Florida Court Says Software Seller Must Assume Risk of Denied Sales Tax Refund Claim

By: Michael Colavito, SALT Director

At a glance

• The main takeaway: A recent Florida court opinion illustrates how sellers can be left in a risky position of having to refund sales tax to a customer before being able to pursue a refund from the state.
• Assess the impact: The process for obtaining sales tax refunds and contesting denials of those claims is complex and varies by state, thereby creating potential traps for the unwary.
• Take the next step: Aprio’s State and Local Tax (SALT) team can assist sellers in obtaining refunds by following the applicable processes in each state as well as provide guidance to help your business comply with its sales and use tax obligations.

Schedule a free consultation today to learn more!

The full story

The rules for determining the taxability of computer software and other technology-related goods and services has become more complex over the years as technological advancement has outpaced the states’ capabilities to provide timely sales and use tax guidance. As a result, sellers are left to make judgement calls that may cause them to collect and remit sales tax on transactions that are later determined to be exempt. The next step is to pursue a refund.

Unfortunately, at that point, the parties are left to navigate a complex, unclear, and burdensome set of procedures for requesting and securing a refund of those taxes. In some cases, sellers can find themselves in an awkward and risky position as reflected in a recent Florida District Court of Appeals case, where the Court affirmed Florida’s denial of a refund claim because the seller (i.e., dealer), Oracle America, Inc. (Oracle), was not the “taxpayer.”[1]

A closer look at the case

In most states, sales tax applies to sales of tangible personal property and certain services with the tax being imposed on the sale to the customer (the end consumer). Sellers are generally required to collect sales tax from the customer and then remit the tax to the state through the filing of periodic (typically monthly or quarterly) sales tax returns. Florida sales tax law refers to sellers as “dealers” and provides that the moment a dealer collects sales tax from a customer the tax becomes funds of the state. Thus, a dealer is generally viewed as an agent of the state when it collects sales from its customers. 

In this case, Oracle incorrectly collected sales tax from its customers on certain sales of electronically delivered software. Although the Department agreed that the software sales were not subject to Florida’s sales and use tax, it concluded that it could not approve the refund application. The specific statutes and regulations analyzed by the Court in the casedeal with somewhat complex tax imposition and jurisdictional rules in terms of which party has the right to file a claim for refund and the ability to contest a denied claim. However, the crux of the Court’s decision was that such rules prohibited Oracle from either receiving a refund of sales tax prior to it refunding the over-collected tax to its customer or from contesting the denied refund claim because Oracle was not the “taxpayer.”

The Court conceded that the applicable Florida statute and regulations were somewhat in “tension” as to laying out the applicable procedure for seeking a sales tax refund. Arguably, the Court could have described those rules as being confusing and somewhat vague as well. For example, Florida law provides that a sales tax refund may be issued to “the person who paid” the tax and “that person must file an application for refund.”[2] Although it’s possible the term “person” could have been interpreted broadly to include a “dealer,” the court reasoned that a dealer is not the person that pays the tax and is instead the person that collects the tax from the “taxpayer” (i.e., the end consumer). 

Making sense of the ruling

The Court’s conclusion was somewhat supported by prior Florida decisions which ruled that a sales tax refund claim must be initiated by the person bearing the burden of the tax, which is ultimately the end customer. However, Florida’s sales tax regulations[3] are somewhat in conflict with that process, as those regulations require the end customer to obtain the refund from the dealer and the dealer to file the refund claim with the state. The regulations make it clear that “the dealer must refund [the] tax to the customer before the dealer’s claim to the State for credit or refund will be approved.”  

Oracle’s main contention in the case was that this process left them with having to refund the tax to its customer and then bear the risk of losing those funds if the state subsequently denied the refund claim. Oracle proposed a process whereby the state could conditionally approve a refund claim, and once approved, the dealer would then refund its customers and become entitled to the refund from the state. The Court did imply that there may be a less risky process for a dealer seeking a refund claim but held that there was no basis under current Florida law that would permit a “conditionally approved” tax refund.

Whether Florida law does not allow for conditional approval of a refund claim may be debatable. The provision cited by the court supporting its decision merely states that state funds are “not subject to refund absent proof that such funds have been refunded previously to the purchaser.”[4] This language does not seem to specifically prohibit a conditional refund claim process like the one proposed by Oracle. 

The bottom line

Although the refund claim process in Florida may seem rather unfair to sellers, especially in the context of increasingly complex taxability issues, the requirement of having to first refund the tax to the customer is not uncommon across states. The risk that this process puts on sellers highlights the importance of a seller ensuring the correct sales tax treatment of its products and services prior to collecting sales tax in a given state. This is especially the case with sales of software, software-related services, and digital products, as the rules in this sector vary significantly from state-to-state and are not always clear. 

Aprio’s SALT team has experience analyzing the taxability of sales in many different industries, including sales made by businesses selling software. Aprio can also assist sellers with assessing and filing refund claims of over-collected sales tax. Our goal is to help ensure that your business complies with its sales and use tax obligations and does not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Oracle of America, Inc. v. Florida Department of Revenue, Nos. 1D2023-0987, 12/4/2024.

[2] See Fla. Stat. § 215.26.

[3] See Fla. Admin. Code R. 12A-1.014.

[4] See Fla. Stat. § 215.756.