Can a business exclude, from its taxable receipt, credits it gets for trading in old computer hardware and for unused prepaid maintenance services when it buys new hardware from the same vendor?

Plain-English summary

A corporate purchaser had a long-running relationship with a computer hardware seller, including a five-year prepaid maintenance contract signed in 2003 and hardware purchases in both 2003 and 2004. The 2003 purchases were tax-exempt because the purchaser had a New York City Industrial Development Agency (IDA) sales tax exemption in effect at the time; by the time the 2004 hardware purchase happened, that IDA exemption had expired, so the seller collected sales tax on both the new hardware and new prepaid maintenance. Under the 2004 deal, the seller reimbursed the purchaser for (1) the trade-in value of the older 2003-era hardware being replaced, and (2) the unused portion of the 2003 prepaid maintenance covering that older hardware — both credited against what the purchaser owed for the 2004 hardware and new maintenance. On top of that, for an extra charge, the seller let the purchaser keep using the old ("Trade-in") hardware for a transition period even after the seller took back legal title to it.

The Department split this into two different tax outcomes. The hardware trade-in credit does qualify as an excludable trade-in allowance, because the seller effectively resold (or rented) the old hardware back to the purchaser during the transition period — that continued-use arrangement showed the seller intended to resell the traded-in property, which is exactly what New York's trade-in exclusion requires. (The extra charge the seller collected for that continued transition-period use is itself a separate taxable receipt.) But the credit for unused prepaid maintenance services doesn't qualify as a trade-in at all, because services aren't "tangible personal property" — the trade-in exclusion in Tax Law § 1101(b)(3) only covers property, not services, and there's no comparable services trade-in provision. Instead, that maintenance credit looks more like a refund for a cancelled sale of the remaining service, meaning the purchaser might be entitled to a refund of the tax it paid on that unused portion through the cancelled-sale refund process, not through a reduced receipt on the new purchase.

What this means for you

Businesses trading in old IT equipment on a new purchase

A trade-in credit for old hardware can reduce your taxable receipt on the new purchase — but the seller generally needs to actually be reselling (or, as here, renting back) the traded-in property, not simply taking it back for disposal with no further commercial use. Continued-use arrangements after trade-in, even for a fee, can be exactly the evidence that supports trade-in treatment.

Businesses with prepaid maintenance contracts that get partially unused

Don't expect a credit for unused prepaid maintenance to reduce the taxable receipt on an unrelated new purchase the way a hardware trade-in would — services aren't eligible for the trade-in exclusion. Instead, look at whether the unused portion can be treated as a cancelled sale, which has its own separate refund/credit process and time limits.

Accountants and tax professionals

This is a useful illustration of the trade-in exclusion's tangible-property limitation (Tax Law § 1101(b)(3); 20 NYCRR § 526.5(f)) alongside the cancelled-sale refund mechanism (20 NYCRR § 534.6(a)) as the correct alternative route for prepaid services credits — two different statutory paths to relief that shouldn't be conflated even when they arise from the same transaction.

Common questions

Q: Does a trade-in credit for old computer hardware reduce the taxable receipt on new hardware?
A: Yes, when the seller is effectively reselling (or renting back) the traded-in hardware — here, evidenced by letting the buyer keep using it for a fee during a transition period.

Q: Is the extra charge for continuing to use the old hardware during the transition period taxable?
A: Yes — that's a separate receipt from the sale (or rental) of the traded-in hardware back to the buyer, taxable under § 1105(a).

Q: Does a credit for unused prepaid maintenance reduce the taxable receipt the same way a hardware trade-in does?
A: No. Services aren't tangible personal property, so there's no trade-in exclusion for them — but the unused portion may separately qualify as a refund for a cancelled sale.

Q: How would the purchaser get money back for the unused prepaid maintenance, if not through a reduced receipt?
A: Through the cancelled-sale refund/credit process, which the seller and/or purchaser may be able to use for the tax paid on the unused portion, subject to its own filing rules and time limits.

Q: Can any business rely on this exact analysis for its own hardware trade-in deal?
A: No. This opinion binds the Department only as to this petitioner's specific facts and can't be relied on by any other taxpayer.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3), (5) (receipt; trade-in exclusion; sale/purchase)
• Tax Law § 1105(a) (imposition on retail sales)
• Tax Law § 1132(e) (cancelled sales; refund/credit)
• 20 NYCRR § 525.2 (nature of sales tax)
• 20 NYCRR § 526.5(f) (trade-in allowance)
• 20 NYCRR § 526.7(a), (c) (sale; rental)
• 20 NYCRR § 534.6(a) (cancelled sales and returned merchandise)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_34s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-08(34)S
Sales Tax
July 24, 2008

Office of Tax Policy Analysis
Taxpayer Guidance Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S070327A

On March 27, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Ernst & Young LLP, 5 Times Square, New York, New York 10036.
Petitioner, Ernst & Young LLP, furnished additional information with respect to the Petition on
July 16, 2007.
The issue raised by Petitioner is whether the value of hardware and related services
traded in on the purchase of new hardware and related services may be excluded from the receipt
subject to New York sales and use tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
A purchaser corporation (Purchaser) has a continuing business relationship with a seller
corporation (Seller) for the purchase of computer hardware and related services.
On June 30, 2003, Purchaser and Seller entered into a five-year prepaid maintenance
contract (Maintenance Agreement), whereby Purchaser agreed to prepay for maintenance
services on certain equipment previously acquired or to be acquired from Seller.
In December 2003, Purchaser entered into an agreement (2003 Purchase Agreement) with
Seller to purchase computer hardware to upgrade its computer technology. This hardware was
subject to the Maintenance Agreement.
When the Maintenance Agreement and the 2003 Purchase Agreement were executed,
Purchaser had an agreement with the New York City Industrial Development Agency (IDA) in
which Purchaser was entitled to sales and use tax exemptions for the purchase and use of
computer equipment and the installation, maintenance, repair, and replacement of such
equipment and other property acquired under the agreement at certain approved locations where
Purchaser conducted business. The authorization letter for sales tax exemption was issued by the
IDA on June 27, 2002, and was effective through June 30, 2004. As provided by the IDA
exemption letter, Purchaser’s prepayment of maintenance services under the Maintenance
Agreement and the subsequent purchase of computer hardware under the 2003 Purchase
Agreement were exempt from sales and use tax.
In December 2004, Purchaser entered into a new agreement with Seller (2004 Purchase
Agreement) to purchase additional computer hardware for Purchaser’s upgrade to newer
technology. Included in the 2004 Purchase Agreement was a new agreement for prepaid
hardware maintenance services. The computer hardware was shipped to Purchaser on or about

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December 31, 2004, and installed on or about January 31, 2005. In the same manner as the 2003
Maintenance Agreement, Purchaser prepaid maintenance costs on such hardware.
When the 2004 Purchase Agreement was executed, Purchaser’s IDA exemption letter
was no longer in effect. Thus the Seller collected sales tax on the purchase of new hardware and
maintenance services.
The purchase price under the 2004 Purchase Agreement was offset by reimbursements
for the trade-in values of certain equipment (the Trade-in Hardware) purchased under prior
agreements with Seller and for unused prepaid maintenance (Unused Maintenance) on such
Trade-in Hardware (collectively, the Purchase Reimbursements). The 2004 Purchase Agreement
further provided that Purchaser was entitled to apply these reimbursements toward the payment
of any Seller invoice.
Seller issued the Purchase Reimbursements to Purchaser, and Purchaser applied the
Purchase Reimbursements toward the payment for the new hardware under the 2004 Purchase
Agreement and toward the payment for the newly purchased prepaid maintenance.
For an additional charge provided in the 2004 Purchase Agreement, Seller allowed
Purchaser to use the Trade-in Hardware after Seller took back title to the Trade-in Hardware.
The 2004 Purchase Agreement also provided a schedule outlining the transition period during
which Purchaser could continue to use the Trade-in Hardware and the scheduled dates for
Purchaser to deliver the Trade-in Hardware to Seller.
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:
*

*

*

(3) Receipt. The amount of the sale price of any property and the charge for any
service taxable under this article, including gas and gas service and electricity and electric
service of whatever nature, valued in money, whether received in money or otherwise,
including any amount for which credit is allowed by the vendor to the purchaser, without
any deduction for expenses or early payment discounts and also including any charges by
the vendor to the purchaser for shipping or delivery . . .but excluding any credit for
tangible personal property accepted in part payment and intended for resale. . . .
*

*

*

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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 there for, including the
rendering of any service, taxable under this article, for a consideration or any agreement
therefor.
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby imposed
and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
Section 1132(e) of the Tax Law provides, in part:
The commissioner may provide, by regulation, for the exclusion from taxable
receipts . . . of amounts representing sales where the contract of sale has been cancelled
. . . or, in case the tax has been paid upon such receipt . . . for refund of or credit for the
tax so paid.
Section 525.2 of the Sales and Use Tax Regulations provides, in part:
Nature of tax. (a) Sales tax. (1)(i) Except as specifically exempted or excluded,
sales tax is imposed on the receipts from:
(a) every retail sale of tangible personal property, as provided in section 1105(a)
of the Tax Law;
(b) every sale, other than a sale for resale, of specifically enumerated services, as
provided in sections 1105(b) and (c); . . .
*

*

*

(2) Except as specifically provided otherwise, the sales tax is a "transactions tax,"
with the liability for the tax occurring at the time of the transaction. Generally, a taxed
transaction is an act resulting in the receipt of consideration for the transfer of title to or
possession of (or both) tangible personal property or for the rendition of an enumerated
service. The time or method of payment is generally immaterial, since the tax becomes
due at the time of transfer of title to or possession of (or both) the property or the
rendition of such service . . . .

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Section 526.5(f) of the Sales and Use Tax Regulations provides, in part:
Trade-in. Any allowance or credit for any tangible personal property accepted in
part payment by a vendor on the purchase of tangible personal property or services and
intended for resale by such vendor shall be excluded when arriving at the receipt subject
to tax. Only the net sale price of tangible personal property or the charge for services
would be subject to tax.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
(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.
(2) Among the transactions included in the words sale, selling or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property.
*

*

*

(c) Rentals, leases, licenses to use. (1) The terms rental, lease and license to use
refer to all transactions in which there is a transfer for a consideration of possession of
tangible personal property without a transfer of title to the property. Whether a
transaction is a "sale" or a "rental, lease or license to use" shall be determined in
accordance with the provisions of the agreement. . . .
Section 534.6(a) of the Sales and Use Tax Regulations provides, in part:
Cancelled sales and returned merchandise. (1) Exclusion from return. Where a
contract of sale has been cancelled or the property returned within the reporting period in
which the sale was made, a vendor of tangible personal property or services . . . may
exclude such receipts . . . from his sales and use tax return.
(2) Credit where tax previously remitted. Where a contract of sale has been
cancelled or the property returned and the tax collected thereon refunded to the customer,
and such tax had been paid and reported on a return by the vendor of tangible personal
property or services . . . an application for refund or credit for the tax paid upon such
receipt, charge, or rent shall be filed with the Department of Taxation and Finance within
three years from the date when the tax was payable by such person to the Department of
Taxation and Finance. The applicant may, as part of the application for credit, take the
credit on the return which is due coincident with or immediately subsequent to the time
such application is filed. The application for refund or credit shall be subject to the

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provisions of subdivisions (a), (b) and (c) of section 1139 of the Tax Law and section
534.2 of this Part.
Opinion
Purchaser entered into agreements in 2003 to purchase computer hardware and related
prepaid maintenance services from Seller. Seller and Purchaser entered into a new agreement in
2004 for the purchase of new computer hardware and a new agreement for prepaid maintenance
services. Seller agreed to allow Purchaser to trade in hardware originally sold to Purchaser by
Seller. Pursuant to the terms of the 2004 Purchase Agreement, reimbursements for the value of
the Trade-in Hardware are allowed by Seller to Purchaser against the purchase price of the new
hardware. Further, Seller gave Purchaser an offset in the amount of the unused 2003 prepaid
maintenance. For an additional charge, Seller also allowed Purchaser to continue to use the
Trade-in Hardware for a period of time after Seller took title to the Trade-in Hardware.
Pursuant to section 1101(b)(3) of the Tax Law, any allowance or credit for any tangible
personal property accepted in part payment by a vendor on the purchase of tangible personal
property or services and intended for resale by such vendor shall be excluded when arriving at
the receipt subject to sales tax. When Seller allowed Purchaser to continue to use the Trade-in
Hardware for an additional charge, Seller was reselling (or renting) the Trade-in Hardware to
Purchaser. Therefore, Seller’s receipt subject to sales tax for the sale of the new hardware would
exclude the amount of credit allowed for the Trade-in Hardware. Seller’s additional charge for
the use of the Trade-in Hardware is a receipt from the sale of tangible personal property subject
to sales tax under section 1105(a) of the Tax Law. See section 526.7(c) of the Sales and Use Tax
Regulations.
The unused prepaid maintenance services described in Petitioner’s facts are not
considered to be tangible personal property. Though section 1101(b)(3) of the Tax Law provides
for an exclusion from taxable receipts for a trade-in allowance for tangible personal property
accepted in trade and held for resale, there are not any similar provisions for a trade-in allowance
for services. Even were the trade-in provision applicable to a service being offered in trade by
Purchaser, the unused portion of the maintenance services were not purchased by Seller with the
intent that such unused maintenance would be resold by Seller. Therefore, the amount of the
reimbursement allowed in regard to unused services that were initially prepaid under the 2003
Maintenance Agreement is not excluded from Seller’s receipts from the new purchases of
hardware and maintenance under the 2004 Purchase Agreement as a trade-in allowance.
It does appear, however, that Seller’s reimbursement to Purchaser for the amount prepaid
by Purchaser for the unused balance of the maintenance services under the 2003 Maintenance
Agreement could be considered a cancelled sale of the remaining portion of such maintenance
services. Purchaser may be entitled to a refund of any sales tax paid attributable to the amount
reimbursed for such unused prepaid maintenance. Seller may be allowed a refund or credit of
the amount of sales tax collected and remitted for the unused portion of the prepaid maintenance

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services to the extent the tax is reimbursed to Purchaser. See section 534.6(a) of the Sales and
Use Tax Regulations. As discussed above, any reimbursement by Seller to Purchaser for such
unused prepaid maintenance does not reduce the amount of the receipts subject to tax or the
amount of tax due on the purchase of the new computer hardware and the new maintenance
agreement.

DATED: July 24, 2008

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.