When a securities broker-dealer spins off its software-development operations into a separate subsidiary and licenses its trading software back, does that reorganization trigger New York sales or use tax on the software?

Plain-English summary

ITG Inc., a registered securities broker-dealer providing automated trade execution and analysis services, uses two kinds of software in its business: POSIT Software, an electronic stock-crossing algorithm designed and built by a 50-50 joint venture (between an ITG affiliate and an independent California programmer) specifically for that affiliate's use and later assigned to ITG; and ITG Software, a suite of order-routing, order-management, and customer-facing "front-end" software ITG's own programmers built in-house. ITG doesn't charge customers separately for using ITG Software — customers pay only for trade execution based on shares traded — though ITG has, on two rare occasions, sold or given away a component of ITG Software.

ITG proposed reorganizing: it would contribute its whole software-development operation to a brand-new subsidiary ("Solutions") in exchange for 100% of Solutions' stock (a transaction meant to qualify as tax-free for federal income tax purposes), and then license ITG Software back from Solutions for a royalty, including the right to sublicense it to ITG's own customers. ITG asked the Department to confirm the sales/use tax treatment of six related questions spanning before and after this reorganization.

The Department's answers all track one theme: software custom-built to one purchaser's own specifications is exempt, as long as it isn't later resold to third parties as a standard product. Specifically: (1) POSIT Software, custom-built for the original licensee and later assigned to ITG, stays exempt under the intercompany custom-software rule. (2) ITG's own use of its in-house ITG Software isn't subject to use tax, because ITG's two rare, isolated sales of a software component don't add up to selling that kind of software "in the regular course of business" (which would otherwise trigger use tax on ITG's own internal use). (3) After the reorg, Solutions licensing ITG Software back to ITG (now built to ITG's specifications as the sole purchaser) stays exempt as custom software. (4) Contributing ITG Software to Solutions in exchange for 100% of its stock isn't a taxable "retail sale" at all — the Tax Law specifically excludes a transfer of property to a corporation upon its organization in exchange for stock. (5) and (6) Future upgrades and enhancements of both POSIT Software and ITG Software stay exempt as custom software too, as long as they're built to the specifications of the sole purchaser (Solutions, then ITG) and aren't resold to any third party — if ITG ever does resell an upgrade to an outside customer, that upgrade converts into ordinary taxable prewritten software from that point forward.

What this means for you

Financial services and technology companies restructuring software operations into a subsidiary

Spinning off in-house software development into a separate entity, and licensing the software back, can be structured to stay outside New York sales and use tax — but every step of the analysis depends on the software remaining genuinely custom (built for one purchaser's specifications) and not being sold or licensed to outside third parties as an off-the-shelf product. The moment custom software gets resold to someone other than the specific purchaser it was built for, it converts into taxable prewritten software going forward.

Businesses transferring software (or other property) to a new subsidiary for stock

A transfer of property to a newly organized corporation solely in exchange for its stock isn't a taxable retail sale under New York law — a useful, generally applicable rule for any tax-free incorporation or reorganization, not just software-specific transactions.

Accountants and tax professionals

The recurring guardrail throughout this opinion is the anti-abuse condition attached to the intercompany custom-software exemption (§ 1115(a)(28)): none of these exemptions apply if the transfer is part of a plan whose principal purpose is avoiding or evading sales/use tax. Also note the isolated-sale exception to the use-tax rule for self-authored software (TSB-M-93(3)S) — a company that only rarely and incidentally sells a software component it primarily uses internally isn't treated as "regularly" selling that software, preserving its own use-tax exemption.

Common questions

Q: Does licensing custom software between related companies always avoid sales tax?
A: Only if the software remains genuinely custom-built to the licensee's own specifications and the arrangement isn't structured principally to avoid tax. If the software is later resold to third parties as a standard product, it loses its custom-software status and becomes taxable.

Q: Is contributing software (or other property) to a new subsidiary in exchange for its stock a taxable sale?
A: No — New York's Tax Law specifically excludes a transfer of property to a corporation upon its organization in exchange for the corporation's stock from the definition of a taxable retail sale.

Q: Does occasionally selling a piece of internally-developed software trigger ongoing use tax on that software?
A: Not necessarily. If the sales are rare and isolated rather than part of the company's regular course of business, the company's own internal use of the software isn't treated as a taxable use.

Q: Can another company rely on this ruling for its own software reorganization?
A: No. This advisory opinion binds the Department only for ITG Inc. on the specific facts and proposed transaction described. A different ownership structure, licensing arrangement, or degree of software commercialization could change the analysis.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4) (definition of "retail sale"; exception for stock-for-property transfers)
• Tax Law § 1101(b)(5) (definition of "sale, selling or purchase")
• Tax Law § 1101(b)(6) (tangible personal property, incl. prewritten software)
• Tax Law § 1101(b)(7) (definition of "use")
• 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), (g) (use tax; author's-own-use exemption)
• Tax Law § 1115(a)(28) (intercompany custom-software transfer exemption)
• Tax Law § 1115(o) (exemption for services performed on computer software)
• 20 NYCRR § 526.7 (definition of "sale, selling or purchase")
• TSB-M-93(3)S, March 1, 1993 (taxability of computer software and related services)

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_6s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(6)S
Sales Tax
January 12, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000724B

On July 24, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from ITG Inc., 380 Madison Avenue, 4th Floor, New York, New York, 10017. Petitioner,
ITG Inc., submitted additional information with respect to the Petition on September 13, 2000.
The issues raised by Petitioner are as follows:
1) Whether, prior to the proposed plan of reorganization described below, POSIT Software
is exempt from sales and use tax.
2) Whether, prior to the proposed plan of reorganization, Petitioner’s use of ITG Software
is exempt from sales and use tax.
3) Whether, after the proposed plan of reorganization, ITG Software is exempt from sales
and use tax.
4) If ITG Software is deemed to be pre-written software after the proposed plan of
reorganization, whether the transfer of ITG Software from ITG to Solutions and the
simultaneous license of ITG Software from Solutions to ITG is exempt from tax.
5) Whether future upgrades and enhancements of POSIT Software will be exempt from sales
and use tax.
6) Whether future upgrades and enhancements of ITG Software will be exempt from sales
and use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner 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. Petitioner was formed as a wholly
owned subsidiary of Investment Technology Group, Inc. (ITGI), which was a wholly owned
subsidiary of Jeffries Group, Inc. In 1994, ITGI had its initial public offering and stock began
trading on a public market. Petitioner 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 Petitioner’s business requires Petitioner to continuously adapt to current and
evolving technologies. Accordingly, a division of Petitioner is responsible for the development and

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maintenance of software and other technologically-driven products, as well as creating and
protecting Petitioner’s intellectual property rights (hereinafter these activities will collectively be
referred to as “the Intellectual Property Operations.”)
Integral to Petitioner’s daily activities, Petitioner uses two different computer programs: (a)
POSIT Software and (b) a number of internally developed software programs designed to perform
functions such as the routing of orders, order management and decision support (such internally
developed software being collectively referred to as the “ITG Software”). POSIT Software is an
electronic stock crossing system based on an algorithm designed to effectuate the maximum number
of trades based upon the orders submitted to the system by Petitioner’s customers. Posit Software
was designed and developed by a 50-50 joint venture (the “POSIT Joint Venture”) between Jeffries
& Company, Inc. (“JCI”), a wholly owned subsidiary of Jefferies Group, Inc., and Programmer, an
independent third-party software programmer located in California. POSIT Software was initially
designed to the specifications of JCI for use in conducting its business. From its inception, POSIT
Software was licensed to JCI. JCI’s POSIT Joint Venture interest, and JCI’s interest as licensee of
POSIT Software, were assigned to Petitioner during 1993. Petitioner and Programmer each own
50% of POSIT Joint Venture. Petitioner pays the POSIT Joint Venture a licensing fee for the right
to use POSIT Software.
ITG Software was written and developed entirely by Petitioner’s programmers. ITG
Software includes internal architecture software as well as front-end software that is designed to act
as an interface between Petitioner’s customers and POSIT Software or other sources of liquidity (i.e.,
the NYSE or NASDAQ). The front-end software provides Petitioner’s customers portfolio analysis
capabilities, improved access to market liquidity and the ability to enhance their trading efficiencies.
Petitioner’s highly skilled programmers continually upgrade and enhance ITG Software to keep up­
to-date as the technological needs of market leaders and financial markets evolve.
Petitioner 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, Petitioner
owns the equipment and the software. Petitioner may “license” the right to use ITG Software to its
customers, but does not charge customers for the licensing right. Instead, Petitioner charges
customers for its trade execution services based on the number of shares traded. Thus, if a customer
does not trade, Petitioner does not receive payment for the use of its ITG Software.
ITG Software and POSIT Software are virtually never sold to customers. However,
Petitioner has transferred or sold the internal architecture component of ITG Software on two prior
occasions. In 1994, the internal architecture component was provided to one of Petitioner’s large
institutional customers without a fee. In 1998, the internal architecture component was sold to one
of Petitioner’s floor runners for a fee. The fee charged represents less than one half percent of
Petitioner’s annual operating revenues.

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Petitioner 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, Petitioner will contribute its Intellectual
Property Operations to ITG Software Solutions, Inc. (“Solutions”), a newly created wholly-owned
subsidiary, upon Solutions’ organization in exchange for 100 % of the stock of Solutions, 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 Petitioner’s broker-dealer activities will be conducted
by Petitioner and its Intellectual Property Operations will be segregated into Solutions. Solutions,
a Delaware Corporation, will maintain a regular place of business in California.
Included in the Intellectual Property Operations that will be contributed to Solutions in the
exchange for stock described above are Petitioner’s rights to the ITG Software. Subsequent to the
reorganization, Petitioner will enter into a licensing arrangement with Solutions whereby Solutions
will license ITG Software and other technology related products to Petitioner in return for a royalty
rate based on arm’s length rates, including the right for Petitioner to sublicense ITG Software to
Petitioner’s customers.
Petitioner submitted a sample copy of a “Hardware and ITG Software License Agreement”
(the Agreement) which is entered into by Petitioner 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 ITG,
and ITG agrees to license to Customer (i) certain software which services a
workstation-based analytics, information and routing system known as ITG Software
and the user documentation describing the operation and use of such system
(collectively, the “ITG Software”) and (ii) a workstation, terminal, PC or other
hardware and related modem (the “Hardware”) for use with a phone line for
communication with ITG.
1.

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

2.

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

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Customer shall use the ITG Software only on the Hardware provided
by ITG, and shall not use the ITG Software on any other computer
system or make the ITG Software available over a network or
otherwise permit use of the ITG Software by more than one user at a
time without the prior written consent of ITG. Customer shall grant
ITG access to the Hardware during normal business hours.
3.

Prohibited Uses. CUSTOMER SHALL NOT AND SHALL NOT
PERMIT ANY OTHER PARTY other than ITG to: (a) copy,
modify, alter, print, list, decompile, disassemble or otherwise seek to
reverse engineer the ITG Software whether in whole or in part or to
attach or otherwise connect the ITG Software to any computer
hardware other than the Hardware or other computer software without
ITG’s prior written consent given in its sole discretion; (b) allow
anyone other than its employees to access or have access to the ITG
Software or the Hardware; (c) sell, rent, lease, license, sublicense,
transfer or assign the ITG Software or permit a timesharing, service
bureau or similar arrangement using the ITG Software; (d) write or
develop any derivative software or any other software program based
on the ITG Software or any Proprietary Information (as defined in
Section 9); (e) use the ITG Software or the analytical data derived
from the ITG Software (the “Information”) to execute securities
trades of any kind, directly or indirectly, on any electronic trade
execution system other than the ITG Software without the prior
written consent of ITG, given in its sole discretion, or for any
purposes other than in connection with its own trading via ITG’s
brokerage services; or (f) remove the ITG Software from the
Hardware, central processing unit or any other location of original
installation without the prior written consent of ITG in each instance;
provided that Customer may move the ITG 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:
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(D) The transfer of property to a corporation upon its organization in
consideration for the issuance of its stock.
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(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....
(7) Use. The exercise of any right or power over tangible personal property
or over any of the services which are subject to tax under section eleven hundred ten
of this article or pursuant to the authority of article twenty-nine of this chapter, by the
purchaser thereof, and includes, but is not limited to, the receiving, storage or any
keeping or retention for any length of time, withdrawal from storage, any installation,
any affixation to real or personal property, or any consumption of such property or
of any such service subject to tax under such section eleven hundred ten or pursuant
to the authority of such article twenty-nine....

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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.
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 of the Tax Law provides, in part:
(a) 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.
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(g) For purposes of clause (F) of subdivision (a) of this section, the tax shall
be at the rate of four percent of the consideration given or contracted to be given for
the tangible personal property which constitutes the blank medium, such as disks or
tapes, used in conjunction with the software, or for the use of such property, and the
mere storage, keeping, retention or withdrawal from storage of computer software
described in such clause (F) by its author or other creator shall not be deemed a
taxable use by such person.
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
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:

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(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.
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...

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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

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• 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
  POSIT Software was designed and developed by POSIT Joint Venture, a 50-50 joint venture
  between JCI, which is a wholly owned subsidiary of Jeffries Group, Inc., and Programmer, an
  independent third-party software programmer located in California. Petitioner is a wholly owned
  subsidiary of ITGI, which, like JCI, is a wholly owned subsidiary of Jeffries Group, Inc. POSIT
  Software was designed and developed to the specifications of a specific purchaser, JCI. JCI was the
  original licensee of POSIT Software and paid POSIT Joint Venture a licensing fee for the right to
  use POSIT Software. JCI has since assigned its interest in POSIT Joint Venture, and its interest as
  licensee of POSIT Software, to Petitioner. The assignment by JCI to Petitioner in 1993 of JCI’s
  interest as licensee of POSIT Software and the fees paid for the POSIT Software by Petitioner under
  the license between Petitioner and POSIT Joint Venture are exempt under Section 1115(a)(28) of
  the Tax Law. Therefore, prior to the proposed plan of reorganization, the sale of the POSIT
  Software to Petitioner under the licensing agreement is not subject to sales and compensating use
  taxes. It should be noted that a transfer of software will only be exempt under Section 1115(a)(28)
  if the transfer is not in pursuance of a plan having as its principal purpose the avoidance or evasion
  of sales and compensating use tax.
  Issue #2
  ITG Software constitutes computer software which is manufactured, processed and
  developed by Petitioner and used by Petitioner in providing its customers with its trade execution
  services from which it receives a per share commission. Although Petitioner may license ITG
  Software to its customers, as indicated in the sample Agreement, the ITG Software appears to be
  incidental to the trade execution services provided by Petitioner, and there is no consideration

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attributable to such license. Therefore, the licensing of ITG Software by Petitioner 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 ITG Software
was sold or transferred do not result in the conclusion that such software is offered for sale in the
regular course of business by Petitioner. Therefore, Petitioner’s use of ITG 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. It should be noted that the previous sales of ITG Software may be
subject to sales tax. See Section 1101(b)(14) of the Tax Law.
Issue #3
Subsequent to the reorganization, ITG Software is software designed and developed to the
specifications of a specific purchaser, Petitioner. Therefore, the licensing of ITG Software by
Solutions to Petitioner is not subject to sales and compensating use taxes.
Issue #4
The transfer of ITG Software to Solutions 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 #5
Future upgrades and enhancements of POSIT Software by POSIT Joint Venture to the
specifications of Solutions 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
Solutions to Petitioner would be exempt under Section 1115(a)(28) of the Tax Law, provided that
Petitioner does not resell such upgrades and enhancements to any other person. If Petitioner 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. It should be noted that a transfer of software will only be exempt
under Section 1115(a)(28) if the transfer is not in pursuance of a plan having as its principal purpose
the avoidance or evasion of sales and compensating use tax.
Issue #6
Future upgrades and enhancements of ITG Software by Solutions to the specifications of
Petitioner as the sole purchaser would be exempt as custom software in accordance with

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TSB-M-93(3)S. If Petitioner 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: January 12, 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.