96-031
Response
February 12, 1996
Request
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
Ms.
Alice Shearer, Office of the Commission
210
North 1950 West
Salt
Lake City, Utah 84134
February
8, 1996
Dear
Ms. Shearer,
After
receiving your response to my sales tax query, I still find myself unclear on
whether to charge sales tax in one specific instance. As per the advice you
gave in our recent telephone conversation, I'll try to be very specific and
detailed.
Our
company is not a manufacturing entity in the business sense. We normally produce only a single product (a
prototype) for each customer. All
equipment is used in, and considered, office equipment. The machine that produces our prototypes
sits on a desktop, is automatic and has no byproducts or waste. It is similar in concept to a computer
printer. We do design work on the
computer and then “print” a three dimensional, physical model of what was
designed. The computer program directly
drives the prototype machine.
My
area of question pertains to one customer in particular. We are currently doing work for an
individual who has come to us with a concept and some two dimensional drawings
of his idea. He is developing a product that has multiple pieces and confers with
our engineer on design. Our engineer
then creates a three dimensional drawing of the piece on our computer. Occasionally, the design of a part will need
to be verified for fit, and we will build a prototype of that part. This by no means happens to all the
component pieces of the product, and the prototyped piece is used primarily by
our engineer to verify his own design work.
Once the design of any given part is deemed acceptable by the customer,
the computer file is electronically transferred to a separate
manufacturer. We may then be involved
in design iterations, but we have no part in the actual manufacturing process
of this customer's product. Aside from
the occasional prototype that we build to verify our own design process, the
customer has not received any tangible goods from us.
I'm
unclear from your letter of January 31st whether we are considered part of the
overall product development “manufacturing process” for this individual, and
because he will eventually be receiving a tangible good from someone
else, our services are taxable as well; or if you mean by “manufacturing
process” only those services that we, specifically, provide to this individual.
Also,
please correct me if I've misunderstood another portion of your letter. As I understand it, the taxable status of
goods or services depend upon the final product that we would provide our
customer. If that final product is
tangible personal properly it becomes a taxable item, along with all the
component parts needed to achieve the end result; but if the final product or
service is not tangible personal properly, then sales tax does not apply to
either the final product or to any of the component steps (whether they were
tangible or not) in creating the final product.
I
know this may well be a murky, gray area, but I would appreciate any direction
you could give me. We have been
charging this customer sales tax for several months now, and if it appears that
we are in error, I'll also need to know the steps to rectify the past mistake. Thank you so much for your efforts on this
one.
XXXXX
XXXXX
RE:
Advisory Opinion - Sales tax on services to convert drawings to
computer-readable form
Dear
XXXXX,
We
have received your recent request for clarification regarding the application
of sales tax to your company's services.
From the additional description provided in your letter, it appears that
XXXXX sells design consultation and computer-generated drawings. In some cases, XXXXX may manufacture a
prototype of the product. However, the
prototype is not the object of the transaction. It is merely used to check the accuracy of the drawings the
design specifications.
From
your description, we better understand XXXXX's services. That leads us to a different analysis in
evaluating your inquiry. Under Utah
Administrative Rule R865-19S-92, the sale of computer generated output is taxable
if the primary object of the sale is the output and not the services rendered
in producing the output.”
Computer-generated output may come in many forms, including paper,
discs, tapes or other tangible media, such as a physical prototype. It may also come in the form of
computer-readable instructions that may be down loaded from one computer to
another. To determine whether XXXXX's
services are taxable, we must determine if the customer is buying taxable
computer-generated output or nontaxable product design services.
Each
of XXXXX's transactions involve some degree of consultation, depending upon the
sophistication of your customer's initial design drawings. However, the essence or object of the
transaction appears to be the drawings, not the design service. Therefore, charges to your customers are
taxable.
Hopefully,
this response clarifies the application of the sales tax law in your particular
case. Of course, we are happy to
address any additional questions that you have.
For
the Commission,
Alice
Shearer
Commissioner