When a bank sells its auto-finance business to another bank before a custom software project is finished, does transferring the unfinished software contract trigger New York sales or use tax?

Plain-English summary

In late 1997, Citibank contracted with a third-party software company ("XYZ") to build customized credit-application-processing software for its auto finance business, with payments due as customization milestones were completed. Citibank made only its first payment, due at contract signing. In April 1999, Citibank sold its entire auto finance business to another bank ("ABC") before XYZ had finished, delivered, or been fully paid for the software — Citibank had never received any version of the software, even in a partial or test form. As part of the sale, ABC agreed to take over the remaining software contract with XYZ, release Citibank from it, assume the remaining payments, and reimburse Citibank for what it had already paid. That gave ABC the right to have the software finished to its own specifications going forward.

New York exempts software that's designed and developed to the specifications of a specific purchaser — but that exemption can be lost if custom software is later sold to someone other than the original purchaser after it's actually been built and delivered. The Department found that didn't happen here: because the software was never completed or delivered to Citibank in any form, it never took on a completed identity as "Citibank's custom software" that could later be improperly resold. Instead, ABC simply stepped into Citibank's shoes as the contract's new specific purchaser before any software actually existed. So Citibank's transfer of its contract rights to ABC wasn't a taxable sale, and when XYZ eventually finishes and delivers the software (now built to ABC's specifications as the new purchaser), that delivery won't be taxable either.

What this means for you

Businesses selling a division or business line with an in-progress custom software contract

If a custom software project hasn't been completed or delivered yet at the time you sell the business it was being built for, transferring your rights under that contract to the buyer — who then becomes the new "specific purchaser" the software is built for — can stay outside New York sales and use tax. The key facts here were that no version of the software (not even a partial or test build) had been delivered, and the buyer took over the contract to have the software finished to its own specifications.

Software vendors working on projects that outlive their original customer relationship

If your customer's business is sold mid-project, before your custom software is finished and delivered, the new owner effectively becomes your contract's specific purchaser going forward — the custom-software exemption analysis follows the undelivered contract to its new counterparty rather than treating the transaction as a resale of already-built software.

Accountants and tax professionals

The critical fact pattern here is incompleteness: no delivered software, no completed customization, no full payment. Had Citibank actually received a working (or even partial/test) version of the software before the sale, the analysis could well have been different, since delivered custom software resold to someone other than the original purchaser can lose its exempt status.

Common questions

Q: Does selling a business always trigger tax on any related software contracts?
A: Not if the software hasn't been completed or delivered yet — an unfinished custom-software contract can be transferred to the new owner (who becomes the new specific purchaser) without triggering sales or use tax.

Q: Would the answer change if Citibank had already received part of the software before the sale?
A: Potentially, yes — this ruling turned specifically on the fact that no version of the software had been delivered to Citibank in any form before the business sale.

Q: Can another company rely on this ruling for a similar business sale?
A: No. This advisory opinion binds the Department only for Citibank, N.A. on the facts described. A company with a partially-delivered software project should confirm its own facts before assuming the same tax treatment.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4) (definition of "retail sale")
• Tax Law § 1101(b)(6) (tangible personal property, incl. prewritten software)
• Tax Law § 1101(b)(14) (definition of "pre-written computer software")
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a01_2s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(2)S
Sales Tax
January 10, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000623A

On June 23, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Citibank, N.A., 80 Baylis Road, Melville, New York 11747.
The issue raised by Petitioner, Citibank, N.A., is whether the sale of Petitioner’s auto finance
business to another bank will subject the transfer of the rights to an incomplete and unused software
program to State and local sales and use taxes.
Petitioner submits the following facts as the basis for this Advisory Opinion.
In November 1997, Petitioner entered into a contract with a third party computer software
company (“XYZ”). Pursuant to the contract, XYZ would provide Petitioner with a customized credit
application processing software for its auto finance business. The contract contained a payment
schedule which established that Petitioner would make payments to XYZ after the completion of
certain stages in the customization process. Petitioner made one payment to XYZ pursuant to the
payment schedule, when the contract was executed.
In April 1999, Petitioner sold its auto finance business to another bank (“ABC”). The
software customization contract between Petitioner and XYZ had not been completed, implemented,
or paid in full by Petitioner at the time of the sale of the auto finance business to ABC. Petitioner
had not received any version of the custom software developed by XYZ or component part of such
software, either in completed form or in an intermediate testing stage.
As part of the sale agreement, ABC provided Petitioner an assumption letter stating that ABC
would assume the remainder of the software customization contract with XYZ, releasing Petitioner
from the contract. ABC also assumed the remaining payments due on the contract, and agreed to
compensate Petitioner for payments already made. ABC, by assuming the contract entered into
between Petitioner and XYZ, has the right to have the software developed and designed to its
specifications.
Applicable Laws
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:

-2­
TSB-A-01(2)S
Sales Tax
January 10, 2001

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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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(6) Tangible personal property. Corporeal personal property of any
nature...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
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. (Emphasis added)
Section 1105(a) of the Tax Law provides for the imposition of sales tax on the receipts from
every retail sale of tangible personal property, except as otherwise provided in Article 28 of the Tax
Law.

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TSB-A-01(2)S
Sales Tax
January 10, 2001
Opinion
In this case, Petitioner entered into a contract with XYZ to purchase customized credit
application processing software for its auto finance business. Petitioner later sold its auto finance
business to ABC before the contract between Petitioner and XYZ had been completed, implemented,
or paid in full by Petitioner. Petitioner had not received any version of the custom software
developed by XYZ. As part of the sale agreement, ABC provided Petitioner an assumption letter
stating that ABC would assume the remainder of the software customization contract with XYZ,
releasing Petitioner from the contract.
Pursuant to Section 1101(b)(14) of the Tax Law, the sale of computer software which is
designed and developed by the author or other creator to the specifications of a specific purchaser
is not subject to State and local sales and use taxes. The incomplete and unused custom software
which was designed for Petitioner did not lose its identity as custom software upon the transfer of
the rights from Petitioner to ABC, since the contract between Petitioner and XYZ had not been
completed, implemented, or paid in full by Petitioner, and Petitioner had not received any version
of the custom software developed by XYZ. ABC, by assuming the contract entered into between
Petitioner and XYZ, assumed the rights to have the software developed and designed to its
specifications. Therefore, the transfer by Petitioner to ABC of the rights to the contract with XYZ
was not subject to State and local sales and use taxes. Moreover, the transfer of the custom software
from XYZ to ABC pursuant to the contract will not be subject to sales tax.

DATED: January 10, 2001

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

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