96-023
Response
January 31, 1996
Request
Dear
XXXXX,
I
have been advised to write to you to get an advisory opinion on a question I
have concerning sales tax. Our business
is a design verification service. We
employ an engineer who is able to do computer-aided, product design work,
convert two-dimensional engineering drawings to three-dimensional computer
drawings, and build plastic prototype parts from a machine that is
computer-driven. Most of our customers
come to us with the product design and drawings done in some format, but
specifically want a prototype part built to verify their drawings. Because our part building process requires a
computerized drawing, we are often required to do the conversion from a
two-dimensional to three-dimensional drawing, or to modify the existing design
slightly to improve the production quality of the prototype part. We also have several customers that come to
us with little more than a product idea, whereby our engineer will design the
new product, produce CAD drawings and supply the customer with a prototype part
that they can use to verify the exactness of the design. This is considered by us as product
development and usually includes the prototype piece as part of the “package,”
as opposed to being hired to produce a prototype but not being supplied any
drawings for the idea.
My
question becomes, is the design portion of the work or any of the engineering
(the conversion of drawings, for example),which we do call out and charge for
at varying rates on our invoices, taxable items or do they fall under the
category of professional services and not require sales tax? Or perhaps does
each circumstance change with intent?
I'd appreciate any clarity you could afford, and advice of what steps to
take if, indeed, we have in the past charged sales tax on non taxable services,
or failed to collect when we should have.
If
you need any further information from me, please don't hesitate to call. I can be reached from 11:00 a.m. until 3:00
p.m. at XXXXX and after that at XXXXX.
Thank you for your time and efforts.
XXXXX
XXXXX
RE:
Advisory Opinion - Application of sales tax to charges for converting drawing
to computer drawings.
Dear
XXXXX,
We
have received your request for an advisory opinion regarding the sales tax
treatment of charges for converting two-dimensional drawings to computer
drawings. You have described two
general types of transactions: one in which the customer designs the product
and supplies the drawings that will be converted to computer drawings and one
in which the customer merely describes an idea, then relies on your company to
design the prototype and develop the computerized drawings. We find as follows:
Any
service rendered by a manufacturer as part of the manufacturing process is
considered a component part of the finished product. If the finished product is tangible personal property, the total
charge for the item is taxable.
From
your description, your company performs a variety of services in its
manufacturing process, including design services and services to convert drawings
or ideas to computer- readable form.
The end product of the manufacturing process is a prototype, which is an
item of tangible personal property. The
sale of the prototype, then, is a sale of tangible personal property and the
entire charge for that product is subject to sales tax.
Please
let us know if you have additional questions.
For
the Commission,
Alice
Shearer
Commissioner