Does custom-built trading software stay exempt from sales and use tax as 'custom software' after a corporate reorganization moves it into a separate subsidiary and licenses it back, and does giving customers free access to related front-end software trigger tax?

Plain-English summary

A registered securities broker-dealer (referred to as "XYZ" in the redacted ruling) relies on two custom-built computer systems: "JV Software," an algorithm that maximizes trade execution based on customer orders, built by a 50/50 joint venture between XYZ and an independent California programmer to XYZ's specifications and licensed exclusively to XYZ; and "XYZ Software," internal architecture plus customer-facing front-end trading software written entirely by XYZ's own programmers. XYZ provides customers hardware and a license to use XYZ Software at no charge -- instead, it earns revenue only from per-share trading commissions. XYZ Software and JV Software are "virtually never" sold to outsiders (the internal architecture component was given away once and sold once, in a minor transaction).

XYZ planned a tax-free (IRC § 351) reorganization spinning off its software-development operations into a new wholly owned subsidiary in exchange for 100% of that subsidiary's stock, then licensing both software products back to XYZ for arm's-length royalties. KPMG, on XYZ's behalf, asked the Department to confirm the sales/use tax treatment of the software across seven scenarios spanning before and after the reorganization, plus future upgrades.

New York's custom-software exemption covers software designed and developed to the specifications of a specific purchaser -- as opposed to taxable "prewritten" software built for the general market. The Department found JV Software qualifies as custom software both before and after the reorganization, since it was (and remains) built by the joint venture specifically for XYZ (and, after the reorg, for the new subsidiary as sole purchaser). The stock-for-assets contribution itself doesn't trigger tax either, since transferring property to a new corporation in exchange for its stock upon organization is expressly excluded from the definition of a taxable "retail sale." XYZ Software is likewise custom software created and used by XYZ (and, after reorg, licensed back from the subsidiary) -- and because XYZ doesn't charge customers anything for their license to use it (revenue comes only from trading commissions), that free license isn't a taxable "sale" at all, since there's no consideration for it. The two isolated, minor instances where XYZ transferred the internal-architecture component didn't establish that XYZ regularly offers the software for sale, so no use tax applies either. Future upgrades built to the specifications of the (post-reorg) sole purchaser stay exempt under the same custom-software analysis -- but if XYZ ever resells an upgrade to a third party, that upgrade loses its custom-software status and becomes taxable prewritten software from that point forward.

What this means for you

Financial-technology and trading-platform companies

Building software in-house or through a joint venture to your own specifications, and providing customer access without separately charging for the software itself (recovering revenue instead through a separate taxable or non-taxable service), can keep that software in exempt "custom software" territory -- but track how you bill customers carefully, since even nominal, non-recurring sales of the software to outsiders can undercut the "not offered for sale" analysis for use-tax purposes.

Companies planning an IRC § 351 or similar tax-free reorganization involving proprietary software

Contributing custom software (or a license to it) to a new subsidiary in exchange for stock doesn't itself trigger New York sales/use tax, and the software can retain its exempt custom-software status afterward as long as it continues to be developed/licensed to the specifications of the same specific purchaser (or purchasers within the affiliated group, under § 1115(a)(28)). But if the reorganized entity ever offers the same software for sale to third parties, that changes the analysis going forward.

Accountants and tax professionals

This ruling is a useful template for how the custom-software exemption survives (1) a joint-venture development structure, (2) a tax-free corporate reorganization and subsequent sublicense-back arrangement, and (3) free-to-customer software bundled with a separately charged taxable/non-taxable service. Note the sharp trigger point for losing exempt status: reselling even a future upgrade to a third party converts that specific upgrade to taxable prewritten software going forward, without affecting the exempt status of the underlying original software licensed to the original specific purchaser.

Common questions

Q: Does moving custom software into a new subsidiary as part of a reorganization trigger sales tax?
A: No, when the transfer is made to a newly organized corporation in exchange for its stock -- that's expressly excluded from the definition of a taxable retail sale, and the software can keep its custom-software exemption afterward if it continues to be developed to a specific purchaser's specifications.

Q: If a company gives customers free use of software but charges for a related service, is the free software license taxable?
A: Not under these facts -- since there's no separate consideration paid for the software license itself (revenue comes only from the separately charged service), it isn't a taxable "sale" under the statute's consideration requirement.

Q: What happens if custom software is later sold to an outside third party?
A: It loses its custom-software exemption and becomes taxable prewritten software, at least as to that later sale -- though isolated, non-recurring sales don't necessarily establish that the software is regularly "offered for sale" for use-tax purposes.

Q: Can another company rely on this ruling?
A: No. It binds the Department only as to this petitioner's facts, though it applies generally stated Department policy (TSB-M-93(3)S) on custom vs. prewritten software.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4)(i), (iv)(D) (definition of "retail sale"; exclusion for property transferred to a corporation upon organization for stock)
• Tax Law § 1101(b)(5) (definition of "sale, selling or purchase," including software license/right to reproduce)
• Tax Law § 1101(b)(6) (definition of "tangible personal property," including prewritten computer software)
• Tax Law § 1101(b)(14) (definition of "pre-written computer software")
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1110(a) (compensating use tax, including the software-author use-tax exemption)
• Tax Law § 1115(a)(28) (exemption for custom software transferred within an affiliated group or qualifying partnership)
• Tax Law § 1115(o) (exemption for services performed on computer software)
• 20 NYCRR § 526.7 (definition of "sale"; consideration)
• TSB-M-93(3)S, Mar. 1, 1993 (state and local sales/use taxes on computer software)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_18s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(18)S
Sales Tax
April 21, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S991201A

On December 1, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from KPMG LLP, 345 Park Avenue, New York, New York, 10154. Petitioner,
KPMG LLP, submitted additional information with respect to such Petition on December 27, 1999.
The issues raised by Petitioner are as follows:
1) Whether, prior to the proposed plan of reorganization described below, JV Software is
exempt from sales and use tax as custom software.
2) Whether, after the proposed plan of reorganization, JV Software is exempt from sales and
use tax as custom software.
3) Whether, prior to the proposed plan of reorganization, XYZ’s use of XYZ Software is
exempt from sales and use tax.
4) Whether, after the proposed plan of reorganization, XYZ Software is exempt from sales
and use tax as custom software.
5) If XYZ Software is deemed to be pre-written software after the proposed plan of
reorganization, whether the transfer of XYZ Software from XYZ to XYZ Sub and the simultaneous
license of XYZ Software from XYZ Sub to XYZ is exempt from sales and use tax.
6) Whether future upgrades and enhancements of JV Software will be exempt from sales and
use tax.
7) Whether future upgrades and enhancements of XYZ Software will be exempt from sales
and use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
XYZ is a corporation organized under the laws of the State of Delaware, with its principal
place of business located in the State of New York. XYZ was originally a wholly owned subsidiary
of XYZ Parent. In 1994, XYZ had its initial public offering and its stock began to be traded on the
public market. XYZ is engaged in business as a registered securities broker-dealer and provides
automated trade execution and analysis services to institutional investors. The automated nature of
XYZ’s business requires XYZ to continuously adapt to current and evolving technologies.

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Accordingly, a division of XYZ is responsible for the development and maintenance of software and
other technologically-driven products, as well as creating and protecting XYZ’s intellectual property
rights (hereinafter these activities will collectively be referred to as “the Intellectual Property
Operations.”)
Integral to XYZ’s daily activities, XYZ uses two different computer programs, JV Software
and XYZ Software. JV Software is computer software based on an algorithm designed to effectuate
the maximum number of trades based upon the orders submitted to the system by XYZ’s customers.
JV Software was designed and developed by JV Partnership, a joint venture between XYZ and
Programmer, an independent third-party software programmer located in California. XYZ and
Programmer each own a 50% interest in JV Partnership. JV Software was initially designed to the
specifications of XYZ’s Parent for XYZ’s use in conducting its business. XYZ pays JV Partnership
a licensing fee for the right to use JV Software. From its inception, the JV Software was licensed
to XYZ.
XYZ Software includes internal architecture software as well as front-end software that is
designed to act as an interface between XYZ’s customers and JV Software or other sources of
liquidity (i.e., the NYSE or NASDAQ). The front-end software provides XYZ’s customers the
ability to enhance their trading efficiencies and portfolio analysis capabilities and improves their
access to market liquidity. XYZ Software was written and developed entirely by XYZ’s
programmers. XYZ’s highly skilled programmers continually upgrade and enhance XYZ Software
to keep up-to-date as the technological needs of market leaders and financial markets evolve.
XYZ provides its customers various equipment and/or software, but does not charge
customers for the equipment and/or software. For tax and financial statement purposes, XYZ owns
the equipment and the software. XYZ may “license” the right to use XYZ Software to its customers,
but does not charge customers for the licensing right. Instead, XYZ charges customers for its trade
execution services based on the number of shares traded. Thus, if a customer does not trade, XYZ
does not receive payment for the use of its XYZ Software.
XYZ Software and JV Software are virtually never sold to customers. However, XYZ has
transferred or sold the internal architecture component of XYZ Software on two prior occasions.
In 1994, the internal architecture component was provided to one of XYZ’s large institutional
customers without a fee. In 1998, the internal architecture component was sold to one of XYZ’s
floor runners for a fee. The fee charged represents less than one half percent of XYZ’s annual
operating revenues.
XYZ has made a business decision to segregate its Intellectual Property Operations into a
new entity to facilitate technological development and for legal and management reporting purposes.
Pursuant to a proposed plan of reorganization, XYZ will contribute its Intellectual Property
Operations to XYZ Sub, a newly created wholly-owned subsidiary, upon XYZ Sub’s organization

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in exchange for 100 % of the stock of XYZ Sub, in a transaction intended to qualify for tax-free
treatment under Internal Revenue Code (“IRC”) § 351. The net result of the restructuring will be
that XYZ’s broker-dealer activities will be conducted by XYZ and its Intellectual Property
Operations will be segregated into XYZ Sub. XYZ Sub, a Delaware Corporation, will be in
California and will maintain a regular place of business in California.
Included in the Intellectual Property Operations that will be contributed to XYZ Sub in the
exchange for stock described above are XYZ’s rights as licensee of the JV Software. Subsequent
to the reorganization, XYZ will enter into a sublicense agreement with XYZ Sub to use the JV
Software for an arm’s-length royalty fee. Also, XYZ will enter into a licensing arrangement with
XYZ Sub whereby XYZ Sub will license XYZ Software and other technology related products to
XYZ in return for a royalty rate based on arm’s length rates, including the right for XYZ to license
XYZ Software to XYZ’s customers.
Petitioner submitted a sample copy of a “Hardware and XYZ Software License Agreement”
(the Agreement) which is entered into by XYZ and the purchaser of its automated trade execution
and analysis services. Such Agreement states, in part:
Subject to the terms of this Agreement, Customer agrees to license from
XYZ, and XYZ agrees to license to Customer (i) certain software which services a
workstation-based analytics, information and routing system known as XYZ
Software and the user documentation describing the operation and use of such system
(collectively, the “XYZ Software”) and (ii) a workstation, terminal, PC or other
hardware and related modem (the “Hardware”) for use with a phone line for
communication with XYZ.
1.

Installation. XYZ will, free of charge, deliver and install the
Hardware and XYZ Software (the “Installation”) on
Customer’s premises. The Hardware and XYZ Software shall
remain the property of XYZ.

2.

License to Hardware and XYZ Software. Subject to the terms
of this Agreement, XYZ hereby grants Customer a revocable,
non-assignable, non-transferable, nonexclusive license to use
the XYZ Software in object code form but solely for use in
direct connection with XYZ’s brokerage services on the
Hardware. Customer will use the XYZ Software only under
the terms and conditions of this Agreement and all rights not
expressly granted hereunder are reserved by XYZ. Customer
shall use the XYZ Software only on the Hardware provided
by XYZ, and shall not use the XYZ Software on any other

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computer system or make the XYZ Software available over a
network or otherwise permit use of the XYZ Software by
more than one user at a time without the prior written consent
of XYZ. Customer shall grant XYZ access to the Hardware
during normal business hours.
3.

Prohibited Uses. CUSTOMER SHALL NOT AND SHALL
NOT PERMIT ANY OTHER PARTY other than XYZ to:
(a) copy, modify, alter, print, list, decompile, disassemble or
otherwise seek to reverse engineer the XYZ Software whether
in whole or in part or to attach or otherwise connect the XYZ
Software to any computer hardware other than the Hardware
or other computer software without XYZ’s prior written
consent given in its sole discretion; (b) allow anyone other
than its employees to access or have access to the XYZ
Software or the Hardware; (c) sell, rent, lease, license,
sublicense, transfer or assign the XYZ Software or permit a
timesharing, service bureau or similar arrangement using the
XYZ Software; (d) write or develop any derivative software
or any other software program based on the XYZ Software or
any Proprietary Information (as defined in Section 9); (e) use
the XYZ Software or the analytical data derived from the
XYZ Software (the “Information”) to execute securities trades
of any kind, directly or indirectly, on any electronic trade
execution system other than the XYZ Software without the
prior written consent of XYZ, given in its sole discretion, or
for any purposes other than in connection with its own trading
via XYZ’s brokerage services; or (f) remove the XYZ
Software from the Hardware, central processing unit or any
other location of original installation without the prior written
consent of XYZ in each instance; provided that Customer
may move the XYZ Software to other like hardware in the
same location solely in the event of a Hardware failure....

Applicable Law and Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:

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*

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(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical component part of tangible
personal property...
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*

(iv) The term retail sale does not include:
*

*

*

(D) The transfer of property to a corporation upon its organization in
consideration for the issuance of its stock.
*

*

*

(5) Sale, selling or purchase. Any transfer of title or possession or both,
exchange or barter, rental, lease or license to use or consume (including, with respect
to computer software, merely the right to reproduce), conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration
or any agreement therefor.
(6) Tangible personal property. Corporeal personal property of any nature.
However, except for purposes of the tax imposed by subdivision (b) of section eleven
hundred five, such term shall not include gas, electricity, refrigeration and steam.
Such term shall also include pre-written computer software, whether sold as part of
a package, as a separate component, or otherwise, and regardless of the medium by
means of which such software is conveyed to a purchaser....
*

*

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(14) Pre-written computer software. Computer software (including pre­
written upgrades thereof) which is not software designed and developed by the author
or other creator to the specifications of a specific purchaser. The combining of two
or more pre-written computer software programs or pre-written portions thereof does
not cause the combination to be other than pre-written computer software. Pre­
written software also includes software designed and developed by the author or
other creator to the specifications of a specific purchaser when it is sold to a person
other than such purchaser. Where a person modifies or enhances computer software

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of which such person is not the author or creator, such person shall be deemed to be
the author or creator only of such person’s modifications or enhancements. Pre­
written software or a pre-written portion thereof that is modified or enhanced to any
degree, where such modification or enhancement is designed and developed to the
specifications of a specific purchaser, remains pre-written software; provided,
however, that where there is a reasonable, separately stated charge or an invoice or
other statement of the price given to the purchaser for such modification or
enhancement, such modification or enhancement shall not constitute pre-written
computer software.
Section 1105(a) of the Tax Law provides for the imposition of sales tax on the receipts for
every retail sale of tangible personal property, except as otherwise provided in Article 28 of the Tax
Law.
Section 1110(a) of the Tax Law provides, in part:
Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state on and after June first, nineteen hundred seventy­
one except as otherwise exempted under this article, (A) of any tangible personal
property purchased at retail, (B) of any tangible personal property (other than
computer software used by the author or other creator) manufactured, processed or
assembled by the user, (i) if items of the same kind of tangible personal property are
offered for sale by him in the regular course of business...(F) of any computer
software written or otherwise created by the user if the user offers software of a
similar kind for sale as such or as a component part of other property in the regular
course of business.
Section 1115(a) of the Tax Law provides, in part:
Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
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*

(28) Computer software designed and developed by the author or creator to
the specifications of a specific purchaser which is transferred directly or indirectly
to a corporation which is a member of an affiliated group of corporations within the
meaning of subparagraph six of paragraph (b) of subdivision seventeen of section
two hundred eight of this chapter except for clauses (ii) and (iii) of such

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subparagraph that includes such purchaser, or to a partnership in which such
purchaser and other members of such affiliated group have at least a fifty percent
capital or profits interest (but only if the transfer is not in pursuance of a plan having
as its principal purpose the avoidance or evasion of tax under this article), but in no
case including computer software which is pre-written, as defined in paragraph six
of subdivision (b) of section eleven hundred one of this article and available to be
sold to customers in the ordinary course of the seller’s business.
Section 1115(o) of the Tax Law provides:
Services otherwise taxable under subdivision (c) of section eleven hundred
five or under section eleven hundred ten shall be exempt from tax under this article
where performed on computer software of any nature; provided, however, that where
such services are provided to a customer in conjunction with the sale of tangible
personal property any charge for such services shall be exempt only when such
charge is reasonable and separately stated on an invoice or other statement of the
price given to the purchaser.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
(a) Definition. (1) The words sale, selling or purchase mean any
transaction in which there is a transfer of title or possession, or both, of tangible
personal property for a consideration.
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(b) Consideration. The term consideration includes monetary consideration,
exchange, barter, the rendering of any service, or any agreement therefor.
Monetary consideration includes assumption of liabilities, fees, rentals, royalties or
any other charge that a purchaser, lessee or licensee is required to pay.
Opinion
Technical Services Bureau Memorandum TSB-M-93(3)S, dated March 1, 1993, entitled State
and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software
provides, in part:
Effective September 1, 1991, State and local sales and compensating use
taxes are imposed on the sale or use of prewritten computer software and certain
related services.

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The effect of this change in the Tax Law is to broaden the types of computer
software that are subject to sales and use taxes. Prior to September 1, 1991,
“custom” software was exempt from tax as described in Technical Services Bulletin
1978-1(S). However, certain software previously considered “custom” may now be
considered prewritten computer software and subject to such taxes. References in
the 1978 bulletin to exempt software are largely obsolete and should be disregarded.
The only software that is exempt from sales and use taxes under the new law is
software designed and developed to the specifications of a specific purchaser.
Prewritten computer software is any computer software that is not designed
and developed by the author or other creator to the specifications of a specific
purchaser.
The sale of prewritten software includes any transfer of title or possession,
any exchange, barter, rental, lease or license to use, including merely the right to
reproduce, for consideration. Thus, a payment made by a customer on or after
September 1, 1991, for a license to use, or for the rental or lease of prewritten
software is subject to sales or use tax...
Software that was originally designed and developed to the specifications of
a specific purchaser (i.e., “custom” software) loses its identity as such and becomes
prewritten software, subject to tax, if and when it is sold to someone other than the
person for whom it was specifically designed and developed. (See section
“Exemptions from Tax” for certain exceptions.)
Prewritten software is subject to tax whether sold as part of a package or
separately. Software created by combining two or more prewritten programs or
portions of prewritten programs is still prewritten software subject to tax....
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Sale of Software Upgrades
Generally, the sale of a revision or upgrade of prewritten software is subject
to tax as the sale of prewritten software. If, however, the software upgrade is
designed and developed to the specifications of a specific purchaser, its sale to that
specific purchaser would be exempt as custom software.
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Use Tax Exemption
Use tax generally applies to taxable uses of prewritten computer software in
the same manner that the use tax applies to uses of other tangible personal property,
except that: (1) no use tax is imposed on software used by its author if the author
does not offer similar software for sale in the regular course of business, and (2)
where software is used by its author and the author does sell the same or similar
software in the regular course of business, use tax applies and is computed on the
cost of the medium (floppy disk, magnetic tape, etc.) that contains or is used in
conjunction with the program.
Transfers of Software To Certain Corporations and Partnerships
Computer software designed and developed by the author or other creator to
the specifications of a specific purchaser is exempt from tax under section
1115(a)(28) of the Tax Law when subsequently sold or transferred, directly or
indirectly, by the purchaser of the software either

• to a corporation that is a member of an affiliated group of
  corporations which includes the original purchaser of the
  software; or
• to a partnership in which the original purchaser of the
  software and other members of such an affiliated group have
  at least a 50 percent capital or profits interest.
  However, the exemption does not apply if the sale or transfer of the software
  is part of a plan to avoid or evade the tax. The intragroup transfer exemption also
  does not apply to prewritten software that is available to be sold to customers in the
  ordinary course of the seller’s business. The term “affiliated group” has the same
  meaning as it has in section 1504 of the Internal Revenue Code except that references
  to “at least 80 percent” shall be read as “more than 50 percent” for purposes of this
  sales tax exemption.
  Issue #1
  JV Software was designed and developed by JV Partnership, a joint venture between XYZ
  and Programmer, an independent third-party software programmer located in California. Based on
  the facts of the Petition, JV Software constitutes software that is designed and developed by JV
  Partnership for XYZ which purchases the software via the licensing agreement with JV Partnership.
  Accordingly, the JV Software in the hands of JV Partnership and as sold under the licensing

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agreement to XYZ does not constitute “Pre-written computer software” as such term is defined in
Section 1101(b)(14) of the Tax Law and in accordance with the policy articulated in TSB-M-93(3)S.
Therefore, prior to the proposed plan of reorganization, the sale of the JV Software to XYZ under
the licensing agreement is not subject to sales and compensating use taxes as it is not a sale of
tangible personal property.
Issue #2
As stated in the conclusion of Issue #1, prior to the reorganization, JV Software is exempt
from sales and use tax based on the overall determination that it is not pre-written computer software
as defined in Section 1101(b)(14) of the Tax Law and therefore it does not constitute tangible
personal property. Subsequent to the reorganization, JV Software continues to be software designed
and developed by JV Partnership for a specific purchaser, XYZ. Therefore, the reorganization will
not cause the licensing of JV Software to XYZ to be subject to sales and compensating use taxes.
In addition, the transfer by XYZ of its rights as licensee of the JV Software to XYZ Sub upon its
organization in exchange for 100% of its stock would not be subject to sales and compensating use
taxes as it would not constitute a “retail sale” in accordance with the exception provided in Section
1101(b)(4)(iv)(D) of the Tax Law.
Issue #3
XYZ Software constitutes computer software which is manufactured, processed and
developed by XYZ and used by XYZ in providing its customers with its trade execution services
from which it receives a per share commission. Therefore, XYZ Software is considered to be custom
software as created and used by XYZ. Although XYZ may license XYZ Software to its customers,
as indicated in the sample Agreement, there is no consideration attributable to such license and,
therefore, the licensing of XYZ Software by XYZ to its customers does not constitute a “sale, selling
or purchase” within the meaning and intent of Section 1101(b)(5) of the Tax Law and Section 526.7
of the Sales and Use Tax Regulations.
Also, the two isolated instances where the internal architecture component of XYZ Software
was sold does not result in the conclusion that such software is offered for sale in the regular course
of business by XYZ. Therefore, XYZ’s use of XYZ Software is not subject to the use tax imposed
under Section 1110(a) of the Tax Law. See the Use Tax Exemption section as found in
TSB-M-93(3)S.
Issues #4
As stated in the conclusion of Issue #3, prior to the reorganization, XYZ Software is exempt
from sales and use taxes based on the overall determination that it is custom software and does not
constitute tangible personal property. Subsequent to the reorganization, XYZ Software remains

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software designed and developed to the specifications of a specific purchaser, XYZ. Therefore, the
licensing of XYZ Software by XYZ Sub to XYZ is not subject to sales and compensating use taxes.
Issue #5
The transfer of XYZ Software to XYZ Sub upon its organization in exchange for 100% of
its stock would not be subject to sales and compensating use taxes as it would not constitute a “retail
sale” in accordance with the exception provided in Section 1101(b)(4)(iv)(D) of the Tax Law.
Issue #6
Future upgrades and enhancements of JV Software by JV Partnership to the specifications
of XYZ Sub as the sole purchaser would be exempt as custom software in accordance with
TSB-M-93(3)S. Also, the subsequent sublicensing of such upgrades and enhancements from XYZ
Sub to XYZ would be exempt under Section 1115(a)(28) of the Tax Law, provided that XYZ does
not resell such upgrades and enhancements to any other person. If XYZ does resell any such
upgrades and enhancements to a third party, the upgrade or enhancement would lose its character
as custom software and become pre-written software, the sale (including licensing) of which would
be a retail sale.
Issue #7
Future upgrades and enhancements of XYZ Software by XYZ Sub to the specifications of
XYZ as the sole purchaser would be exempt as custom software in accordance with TSB-M-93(3)S.
If XYZ subsequently sells such upgrades or enhancements to third parties, the upgrade or
enhancement would lose its character as custom software and become pre-written software.

DATED: April 21, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.