Was a corporation's software-license transfer to a joint venture tax-free when the venture acquired it solely to relicense it to customers?

Plain-English summary

Corporation A planned to transfer an exclusive software license to a joint venture in exchange for a 75% venture interest and cash contributed by another venture member. The venture acquired the software solely to relicense it to consumers and intended to collect tax from those customers.

The Comptroller said the transfer was a sale for resale. The venture had to obtain a sales-tax permit and could give Corporation A a resale certificate instead of paying tax on the acquired software.

Software the venture purchased for its own use, rather than resale, remained taxable.

What this means for you

The ownership structure and noncash consideration did not defeat resale treatment because the stated sole purpose was customer relicensing. Own-use software was outside that result.

Common questions

Was the transfer to the joint venture taxable? No, as a sale for resale.

Did the venture need a sales-tax permit? Yes.

What document supported the upstream exemption? A resale certificate issued to Corporation A.

Was software for the venture's own use exempt? No.

Citations and references

• The letter did not cite a numbered statute, regulation, or case.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9104104L

Original ruling text

April 29, 1991

Dear ** and **:

Thank you for your recent letter. You requested our opinion regarding the
taxability of the following transaction: CORPORATION A will form a joint
venture (COMPANY B) with a newly formed limited partnership (COMPANY C).
CORPORATION A will transfer to the COMPANY B an exclusive license in certain
software in exchange for a 75% interest in the COMPANY B and $**
that was contributed to the COMPANY B by COMPANY C. COMPANY C will own a 25%
interest in the COMPANY B.

According to the facts presented, the COMPANY B is buying the software from
CORPORATION A for the sole purpose of re-licensing the software to consumers.
The COMPANY B intends to collect tax from consumers to whom the COMPANY B
licenses the software.

Question: Is the transfer of software from CORPORATION A to the COMPANY B
exempt from Texas sales and use tax as a sale for resale?

Answer: Yes. The given facts clearly indicate a sale for resale is taking
place. The COMPANY B must obtain a sales tax permit for its software sales, and
may issue a resale certificate to CORPORATION A instead of paying tax on the
software acquired for resale. The COMPANY B must pay tax on software purchased
for its own use, and not for resale.

This opinion is based on the facts presented. Different facts, though similar,
might lead to different answers. If you have further questions, feel free to
write or call 1-800-252-5555. My direct extension is 3-3889.

Sincerely,

John Christian, Attorney
Tax Administration