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Business Taxes Law Guide—Revision 2024
Sales and Use Tax Annotations
A B C D E F G H I J L M N O P R S T U V W X
R
477.0000 Research and Development Contracts—Regulation 1501.1
Annotation 477.0775
477.0775 Computer-Assisted Design (CAD). A taxpayer is in the business of producing photoplots, which are manufacturing aids (tooling) used to produce printed circuit boards (PCBs). To create the photoplots, the taxpayer uses its computers and computer-aided design (CAD) software to design and layout the electronic components on PCBs, from paperwork and schematics provided by its customers. The CAD software is used to manipulate data and generate the optimum design for the boards. The taxpayer's photo lab then uses the CAD program to create the photoplots.
The taxpayer uses the photoplots to produce the printed circuit boards for its customer. The taxpayer's CAD design charges are separately stated from the charges for the photoplots (tooling). Customers' purchase orders either state that title to tooling transfers to the customer, that the tooling becomes the customer's property once the customer paid for it, or that title passes to the customer after a use of the tooling is already made.
Under Regulation 1501.1(b)(3), "CUSTOM-MADE ITEMS," tax applies to the entire contract price without regard to the fact that research, design, and development charges may be separately stated. In other words, the full costs of producing the tooling must be considered. Separately stated design charges do not change this. The photoplot is a mirror image of the PCBs which it produces. All the necessary engineering for the PCBs would have already occurred at the point in time when the photoplot is produced. Accordingly, the charges for the photoplot as well as the separately stated charges for CAD design are subject to tax.
Since some of the purchase orders contain clauses which only pass title to the customer after a use of the tooling is already made, a taxable use occurs before title transfers. Therefore, in those instances, tax is due on the taxpayer's material cost. If the taxpayer already paid tax on cost, it would not be entitled to a tax-paid purchases resold deduction on its subsequent sale of tooling. 2/26/97.