Did transferring an entire software-licensing business and its inventory to a new subsidiary qualify for Texas sales-tax exemptions?

Plain-English summary

Corporation B sold computer hardware and developed, marketed, and licensed software. It planned to move the entire software-licensing business to a new subsidiary, Corporation C, after which B would no longer own or license software.

The Comptroller said the licensing business was an identifiable segment because its income and expenses were separately ascertainable before transfer. Moving all operating assets to one purchaser in one transaction appeared to qualify as an occasional sale. Retaining assets used for general business purposes did not invalidate the exemption.

Inventory was not an operating asset, but its transfer was separately exempt as a sale for resale under the stated facts.

What this means for you

The exemption depended on transferring a separately traceable operating segment in one transaction to one buyer. General-purpose assets could remain behind, while inventory needed its own exemption analysis.

Common questions

Was the software-licensing activity an identifiable segment? Yes, because its income and expenses were separately ascertainable.

Did retaining general business assets defeat the exemption? No.

Was transferred inventory an operating asset? No, but it was exempt as a sale for resale.

Citations and references

• Texas Tax Code § 151.304 — occasional-sale exemption identified in the request
• 34 Tex. Admin. Code Rule 3.316(d) — identifiable-segment occasional sales
• Texas Comptroller Hearing Nos. 26,443 and 19,078 — inventory is not an operating asset

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9104L1100A03

Original ruling text

April 9, 1991

Dear ***:

I am writing to amend my letter of April 8, 1991. The entire original response
is included, followed by a discussion of transfer of inventory.

Thank you for your recent phone calls, and your FAX. According to the facts
provided, Corporation B is in the business of selling computer hardware and
developing, marketing and licensing computer software. Corporation B intends to
spin off the software licensing business to a newly formed subsidiary,
Corporation C. Corporation B will no longer own or license software after the
transfer.

The transfer of the entire operating assets of the software licensing business
to Corporation C appears to qualify as an occasional sale. The licensing
business itself, as described, is an identifiable segment of Corporation B's
operations. Both the income and expenses directly attributable to the licensing
portion of the business are separately ascertainable from the books and records
of Corporation B prior to the transfer, according to your facts. I understand
that other assets used for general business purposes will be retained by
Corporation B, but this does not invalidate the exemption. Finally, I
understand that the sale will occur in a single transaction, with Corporation C
being the sole purchaser. See Rule 3.316 (d) for more information.

I understand, per your phone call today, that Corporation B will transfer to
Corporation C certain items of inventory as well. It is well-settled that
inventory is not included in operating assets (see Hearing 26,443, citing
Hearing 19,078). However, the transfer of inventory is itself exempt as a sale
for resale, according to the facts you have provided.

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

April 5, 1991

Mr. John Christian
Tax Administration Division
Comptroller of Public Accounts
Capitol Station
Austin, Texas 78774

Re: Confirmation of Texas Sales Tax Advice

Dear Mr. Christian:

The purpose of this letter is to request confirmation of certain Texas sales
tax advice provided by you in connection with the following transaction:

Corporation A owns 100% of the stock of Corporation B. Corporation B owns
certain computer software. For valid business purposes, Corporation B desires
to transfer of ownership of the software to a wholly owned subsidiary of
Corporation B, Corporation C. Corporation C will be newly formed for the
purpose of receiving the software.

Corporation B is in the business of selling computer hardware and of
developing, marketing and licensing computer software. Corporation B desires to
transfer all of its computer software and computer software licensing activity
to Corporation C. After the transfer, Corporation B will no longer own or
license any computer software as these activities will then be handled by
Corporation C. Corporation B, under contract with Corporation C, will provide
certain marketing and software development services to Corporation B for a fee.
Corporation B may also provide software maintenance services to customers of
Corporation C on behalf of Corporation C, and for which Corporation B will
receive a fee from Corporation C.

Prior to the transfer to Corporation C of the computer software business, the
income and expenses directly attributable to that business could be separately
ascertained from the books and records of Corporation B. Additionally, the real
or ultimate ownership of the software will be substantially similar before and
after the transaction, because corporation A will continue to own 100% of
Corporation B, which will own 100% of Corporation C.

In our telephone conversation yesterday, you advised that the transaction
described above would be exempt from Texas sales and use tax pursuant to the
occasional sale exemption provided in Section 151.304 of the Texas Tax Code.

Your documentation of this Texas sales and use tax advice will be appreciated.
Two originals of this letter are enclosed. Please confirm the advice described
above by (1) signing one of the duplicate originals in the space provided below
my signature and returning it to me, or (2) if you prefer, by separate letter
to me.

Thank you for your attention to this matter.

Sincerely,