Are stock-for-stock exchanges, contributions of assets to a corporation's capital, and the transfer of custom software in a corporate reorganization subject to New York sales tax?

Plain-English summary

Nomura Securities International, Inc. (NSI) planned to restructure its operations in three steps and asked whether the asset transfers involved were excluded from the definition of "retail sale" under Tax Law § 1101(b), and therefore not subject to sales tax under § 1105(a). NSI's assets included its "Tradepro" computer system — prewritten software it bought for $2,500,000 and then spent an additional $23,500,000 to customize to its own trading specifications — plus furniture and equipment.

The Department held that none of the transfers is a taxable retail sale:

• Transaction 1 — stock for stock. The Japanese parent forming a new U.S. holding company and swapping NSI stock for the holding company's stock is not a "sale" as defined in 20 NYCRR § 526.7 (a transfer of title/possession of tangible personal property for consideration). No tangible property changes hands, so § 1105(a) does not apply.
• Transaction 2 — contribution to capital. NSI transferring computer hardware and other equipment to the holding company, if the books document it as a legitimate contribution to capital, is not a retail sale under 20 NYCRR § 526.6(d)(8)(ii) (property transferred to a corporation as a capital contribution, without issuance of stock, is not a retail sale).
• Transaction 3 — assets for stock on organization. The holding company transferring those assets to a newly formed subsidiary in exchange for the subsidiary's stock is not a retail sale under 20 NYCRR § 526.6(d)(1)(iv) (property transferred to a corporation upon its organization for the issuance of stock).
• The custom software sale is exempt. NSI's sale of the customized software (transferring the copyright, know-how, and proprietary rights) is exempt because software that required an analysis of the buyer's requirements or adaptation by the vendor is treated as intangible personal property under Technical Services Bureau Bulletin 1978-1(S) — not a sale of tangible personal property, and so outside the sales tax.

What this means for you

Corporate reorganizations usually aren't retail sales

Moving assets around in a genuine reorganization — swapping stock, contributing property to a subsidiary's capital, or transferring property to a corporation on its organization for stock — generally falls outside the definition of a retail sale, so no New York sales tax attaches. The key is that these are capital/ownership transactions, not sales of property for a price.

Document the substance, not just the label

The Department conditioned the capital-contribution ruling on the transaction being documented on the books as a legitimate contribution to capital. Paper the transaction to match its substance; a transfer dressed up as a contribution but functioning as a sale for consideration could be treated differently.

Custom software is intangible — canned software is not

Software that the vendor analyzed and adapted for a specific buyer is intangible personal property and its sale is exempt. By contrast, prewritten ("canned") software sold without that customization is taxable tangible personal property. The line drawn in Bulletin 1978-1(S) is the same one the Department applies elsewhere: what matters is whether the program was tailored to the customer, not the medium it's delivered on.

Common questions

Q: Do we owe sales tax when we contribute equipment to a subsidiary's capital?
A: Not if it's a genuine contribution to capital documented as such — that isn't a retail sale under the regulations.

Q: Is a stock-for-stock exchange a taxable sale?
A: No. A pure exchange of stock isn't a transfer of tangible personal property for consideration, so it isn't a "sale" and isn't subject to the tax.

Q: We're selling software we had customized for us. Is that taxable?
A: If the software was analyzed for or adapted to your requirements by the vendor, it's intangible personal property and its sale is exempt; unmodified prewritten software would be taxable.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b) — definition of retail sale
• Tax Law § 1105(a) — tax on receipts from retail sales of tangible personal property
• 20 NYCRR § 526.7 — definition of sale, selling, purchase, and consideration
• 20 NYCRR § 526.6(d)(1)(iv) — transfer to a corporation upon organization for stock is not a retail sale
• 20 NYCRR § 526.6(d)(8)(ii) — contribution to capital without issuance of stock is not a retail sale

Cited authority:

• Technical Services Bureau Bulletin 1978-1(S) (Feb. 6, 1978) — software analyzed for or adapted to the buyer is intangible personal property, exempt; canned software is taxable

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_1s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(1)S
Sales Tax
December 19, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890324B

On March 24, 1989, a Petition for Advisory Opinion was received from Nomura Securities
Inc., 180 Maiden Lane, New York, New York 10038.
The issue raised is whether the certain corporate transfers and sales will be excluded from
the definition of retail sale under Section 1101(b) of the Tax Law and thus will not be subject to sales
tax under Section 1105(a) of the Tax Law.
Nomura Securities International, Inc, hereinafter referred to as NSI, a Delaware corporation
subject to tax under Article 9-A of the New York State Tax Law, is considering restructuring its
various operations. NSI currently holds two classes of assets, Group I and Group II assets. Group I
assets are principally computer hardware and software comprising NSI's "Tradepro" system. This
computer system is still under development and is expected to be used in their securities trading
operations. The computer software was originally acquired by NSI as a prewritten program for
$2,500,000. Such prewritten program required an analysis of NSI's requirements by the supplier
thereof prior to NSI purchasing it. NSI then spent an additional $23,500,000 to have the program
customized to its specifications for use in its securities trading operations. This customization is not
fully completed; therefore, NSI and U.S. Sub will incur additional programming costs. NSI's
ownership of the software is evidenced by a copyright. Group II assets consist of furniture and
equipment used in the ordinary course of business. Group I and Group II assets are located in New
York.
The Nomura Securities Co., Ltd., hereinafter referred to as NSC, is a corporation formed
under the laws of Japan. NSC owns 100% of the stock of NSI. NSC is not engaged in business in
New York State. NSC intends to, in transaction 1, form a new United States corporation, hereinafter
referred to as USHC, in exchange for 100% of the stock of USHC and contribute the NSI stock to
the capital of USHC.
NSI, thereafter, in transaction 2, will distribute to USHC only that portion of Group I assets
consisting of computer hardware and operating system and all of Group II assets.
Thereafter, in transaction 3, USHC will form a United States subsidiary, hereinafter referred
to as U.S. Sub, and contribute the Group I assets received from NSI to the capital of U.S. Sub solely
in exchange for 100% of the common stock of U.S. Sub. NSI will then sell the remaining assets in
Group I (i.e., the customized computer software) by transferring the copyright for such assets to U.S.
Sub at the fair market value, which at this time is believed to approximate its cost of $26,000,000.
TP-9 (9/88)

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Sales Tax
December 19, 1989

Also being transferred with the copyright are the intangible technological know-how and other
proprietary rights in the software (collectively the "Customized Computer Software").
NSI would retain the right and continue to use, in New York, the "Tradepro" system
(including any subsequent modifications or improvements) in its trade or business on a fee basis.
Section 526.7 of the New York State sales and use tax regulations defines "Sale, selling or
purchase, (a) . . .
(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.
(b). . . 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."
Section 526.6(d) of the Sales and Use Tax Regulations provides:
(1) The following transfers of property are not retail sales:
*

*

*

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

*

*

(8)(ii) The transfer of property to a corporation, as a contribution to
capital, at a time other then its organization, without the issuance of
stock or other consideration, is not a retail sale.
*

*

*

The tax status of receipts from computer program ("software") sales and services is explained
in Department of Taxation and Finance Technical Services Bulletin 1978-1(S), issued February 6,
1978 as follows:
"Software [means] instructions and routines which, after analysis of
the customer's specific data processing requirements, are determined
necessary to program the customer's electronic data processing
equipment to enable the customer to accomplish specific functions

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Sales Tax
December 19, 1989

with his EDP system.To be considered exempt 'software' for purposes
of this bulletin, one of the following elements must be present:
A.

Preparation or selection of the program for the customer's use
requires an analysis of the customer's requirements by the
vendor.
or

B.

The program requires adaptation, by the vendor, to be used in
a specific environment i.e., a particular make and model of
computer utilizing a specified output device. For example, a
software vendor offers for sale a pre-written sort program
which can be used in several computer models. Prior to
operation, instructions must be added by the vendor which
specify the particular computer model in which the program
will be utilized.

The software may be in the form of:
a.

Systems programs (except for those instruction codes
which are considered tangible personal property in
paragraph 1 above) - programs that control the
hardware itself and allow it to compile, assemble and
process application programs.

b.

Application programs - programs that are created to
perform business functions or control or monitor
processes.

c.

Pre-written programs (canned) - programs that are
either systems programs or application programs and
are not written specifically for one user.

d.

Custom programs - programs created specifically for
one user.

Software meeting the above criteria, whether placed on cards, tape, disc pack or other
machine readable media or entered into a computer directly, is deemed to be
intangible personal property for sales tax purposes, and as such its sale is exempt
from New York State and local sales and use taxes. Software or programs which do
not meet the criteria are subject to tax.
An application of the above rules to the facts as stated by the Petitioner results in the
following conclusions:

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Sales Tax
December 19, 1989

Transaction 1, will be an exchange of stock for stock which is a transaction that is not a sale
as defined in Section 526.7 of the Sales and Use Tax Regulations and thus is not subject to the tax
imposed under Section 1105(a) of the Tax Law.
In transaction 2, if the entries on the books of USHC document the acquisition of the assets
as a legitimate contribution to capital, such transaction will not be subject to the tax imposed under
Section 1105(a) of the Tax Law because the transfer is not a retail sale in accordance with the
meaning and intent of Section 526.6(d)(8)(ii) of the Sales and Use Tax Regulations.
Transaction 3, in which USHC upon forming its subsidiary will exchange assets for stock,
is a transfer that is not subject to the tax imposed under Section 1105(a) of the Tax Law because it
is not a retail sale in accordance with the meaning and intent of Section 526.6(d)(1)(iv) of the Sales
and Use Tax Regulations. The sale of the software as described by Petitioner meets the criteria set
forth in Technical Services Bureau Bulletin 1978-1(S) and is therefore exempt since it is not a sale
of tangible personal property.

DATED: December 19, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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