Does a CAD/CAM computer used to design machine parts and to experiment with new designs qualify for the sales-tax exemption for production machinery or for research-and-development property?

Plain-English summary

Houdaille Industries, Inc. uses a Computer Aided Design/Computer Aided Manufacturing (CAD/CAM) computer two ways. First, when a customer orders a machine part, an operator draws the part on the screen, adjusts it to the required specifications, and the computer sends the finished specs to a plotter that produces a blueprint used to make the part. Second, Houdaille uses the computer to develop new products — drawing a hypothetical part, then experimenting with its configuration to see whether it functions properly and meets design standards, and improving existing parts the same way. Houdaille asked whether the CAD/CAM qualifies for the production-machinery exemption (§ 1115(a)(12)) or the research-and-development exemption (§ 1115(a)(10)).

Point I — Not exempt production machinery. Section 1115(a)(12) exempts machinery used directly in production, which under 20 NYCRR 528.13(c) means acting on the material, having an active causal relationship in production, handling/storing/conveying the product, or packaging it. The CAD/CAM fails all of these:

• it does not act on material to form a product — the blueprints it produces are not sold;
• it has no active causal relationship in production — neither the computer nor its blueprints play an active role (contrast Example 10, where a lathe that makes production machinery is exempt because of the "direct, unbroken chain of action" of the lathe on the machinery and the machinery on the product); and
• it is not used to handle, store, or package the product.

So the CAD/CAM is not used directly in production and does not qualify under § 1115(a)(12).

Point II — May qualify as R&D. Section 1115(a)(10) exempts property used directly and predominantly in research and development in the experimental or laboratory sense (20 NYCRR 528.11: basic research, advancing technology, new products, improving products, new uses). Using the CAD/CAM merely to draw machine parts to fill customer orders is "nothing more than the ordinary design and drafting of machine parts" — not R&D. But using it to experiment with different configurations and test their ability to meet design standards falls within Example 4 (test aircraft used for function/reliability testing before manufacture) and is deemed direct R&D use. Accordingly, if the CAD/CAM is used predominantly — more than 50% of the time — for such qualified purposes, it qualifies for the § 1115(a)(10) exemption.

What this means for you

A CAD/CAM system usually isn't "production machinery" in New York. Even though design and blueprinting are important steps toward making a part, the computer doesn't physically act on the product, and the blueprints aren't sold — so there's no unbroken chain of action linking it to the finished goods. That's the same reason a lathe is exempt but a design computer is not.

The R&D exemption is the better path — but only for genuine experimentation. Routine drafting to fill a customer's order is not research and development, no matter how sophisticated the software. What qualifies is experimenting with new configurations and testing whether they meet performance/design standards before manufacture.

It comes down to the over-50% test. The same machine can be taxable or exempt depending on how it's mostly used. Keep records showing that qualifying experimental/testing use exceeds 50% if you claim the § 1115(a)(10) exemption. (Compare TSB-A-85(17)S, decided the same period, applying the identical test to a CAD system used to test custom equipment designs.)

Common questions

Q: Our CAD/CAM produces the blueprints our shop uses to make parts. Isn't that production machinery?
A: No. The blueprints aren't sold and the computer doesn't act on the product, so there's no direct, unbroken chain of action on the goods — unlike a lathe. It doesn't qualify under § 1115(a)(12).

Q: Can the same computer be exempt as R&D property?
A: Yes, potentially. Using it to experiment with new configurations and test their ability to meet design standards is R&D. If that qualifying use is over 50% of the total, it's exempt under § 1115(a)(10).

Q: Does designing parts to customer order count as R&D?
A: No. Ordinary design and drafting to fill an order is not research and development, even on a CAD/CAM system.

Citations and references

Statutes:

• Tax Law § 1115(a)(12) — exemption for machinery/equipment used directly and predominantly in production by manufacturing
• Tax Law § 1115(a)(10) — exemption for property used directly and predominantly in research and development in the experimental or laboratory sense

Regulations:

• 20 NYCRR 528.13(c) — "directly" for production machinery (act on material, active causal relationship, handling/storage/conveyance, or packaging); Example 10 (lathe exempt due to direct, unbroken chain of action)
• 20 NYCRR 528.11 — R&D in the experimental or laboratory sense; predominant use is over 50%; Example 4 (test aircraft used for function/reliability testing before manufacture are direct R&D use)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_13s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(13)S
Sales Tax
May 20, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S830525A

On May 25, 1983 a Petition for Advisory Opinion was received from Houdaille Industries,
Inc., 12975 Clarence Center Road, Akron, New York 14001.
The issues raised are (1) whether the petitioner's CAD/CAM computer is machinery or
equipment for use or consumption directly and predominantly in the production of tangible personal
property by manufacturing, processing, generating or assembling and qualifies for exemption
pursuant to section 1115(a)(12) of the Tax Law or (2) whether such computer qualifies for
exemption in accordance with section 1115(a)(10) of the Tax Law as tangible personal property for
use or consumption directly and predominantly in research and development in the experimental or
laboratory sense.
Petitioner describes the use of his Computer Aided Design/Computer Aided Manufacturing
computer (hereinafter "CAD/CAM") as follows: After receiving a customer request or purchase
order for a machine part, a computer operator draws the relative dimensions of the machine part on
the computer screen. The operator then can manipulate the drawing in a variety of ways in order to
conform it's dimensions to the required specifications. Once the needs of the customer are satisfied,
the CAD/CAM computer transfers the machine part's specifications and information to another
device called a plotter. This device then produces a detailed blueprint-like drawing which is used
for production of the machine part. Once information about the part is placed in the memory of the
computer, this information can be recalled in a matter of minutes in order that modifications or
improvements can be made, if necessary.
Petitioner also uses this computer to develop new products. To do this, a computer operator
must first draw a hypothetical machine part on the computer screen. The operator is then able to
manipulate the configuration of the machine part to determine whether it functions properly and how
it reacts to certain situations. The CAD/CAM enables the computer operator to experiment with
different configurations and to test the ability of the configurations to achieve design standards.
Existing parts are also improved in the same manner.
It is the petitioner's first contention that the computer should qualify for sales tax exemption
as machinery and equipment used in production (Tax Law section 1115(a)(12)), since the original
design and blueprinting of the item to be manufactured is an integral part of the production process.
In the alternative, the petitioner contends this computer should qualify for sales tax exemption as
tangible personal property used in research and development (Tax Law section 1115(a)(10)), since
it's use meets certain criterion contained in regulation section 528.11(b)(1) which defines use in
research and development in the experimental or laboratory sense.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(13)S
Sales Tax
May 20, 1985
Point I
Section 1115(a)(12) of the Tax Law provides an exemption from the sales tax for machinery
or equipment used directly and predominantly in the production for sale of tangible personal property
by manufacturing.
Regulation section 528.13 provides that "production" includes the production line of the plant
starting with the handling and storage of raw materials at the plant site and continuing through the
last step of production where the product is finished and packaged for sale. Paragraph (c) of Section
528.13 states that the term "directly" means that the machinery or equipment must, during the
production phase of a process,
(i) act upon or effect a change in material to form the product to be sold, or
(ii) have an active causal relationship in the production of the product to be sold, or
(iii) be used in the handling, storage, or conveyance of materials or the product to be sold,
or
(iv) be used to place the product to be sold in the package in which it will enter the stream
of commerce.
Although the initial designing and blueprinting of a product may be an important step in the
manufacturing process, the CAD/CAM is not directly used in the production process,
First, the CAD/CAM does not act upon material to form a product for sale since the
blueprints produced by the CAD/CAM are not sold.
Secondly, the CAD/CAM has no active causal relationship in the production of the product
sold since neither the CAD/CAM nor the blueprints produced by the CAD/CAM play an active role
in the production process. By way of comparison, Example 10 contained in regulation section
528.13(c)(3) provides that a lathe used to make machinery which is used to make tangible personal
property for sale is deemed to be used directly in production. This is so because of the direct,
unbroken chain of action of the lathe on the machinery and the machinery on the product to be sold.
Since this direct chain of action is absent in the case of the CAD/CAM, it does not satisfy this
condition.
Finally, the CAD/CAM is clearly not used in the handling or storage of materials or the
packaging of products.
Since the CAD/CAM is not used directly in production within the meaning and intent of the
Tax Law, it does not qualify for exemption under section 1115(a)(12).
Point II
Section 1115(a)(10) of the Tax Law provides an exemption from the sales tax for tangible
personal property purchased for use or consumption directly and predominantly in research and
development in the experimental or laboratory sense.

-3­
TSB-A-85(13)S
Sales Tax
May 20, 1985
Regulation section 528.11 defines research and development in the experimental or
laboratory as research which has as its ultimate goal;
(i) basic research in a scientific or technical field of endeavor;
(ii) advancing the technology in a scientific or technical field of endeavor;
(iii) the development of new products;
(iv) the improvement of existing products;
(v) the development of new uses for existing products.
It also provides that tangible personal property is used predominantly in research and
development only if over fifty percent of the time it is used directly in a research and development
function.
Example 4 contained in regulation section 528.11 provides:
An aircraft manufacturer assembles two airplanes, which it uses for function and
reliability tests prior to manufacturing this type of airplane for sale. The parts,
equipment, instrumentation and fuel used on the airplanes during the testing phase
are exempt as they are used directly and predominantly in research and development.
The use of the CAD/CAM by Petitioner to draw the relative dimensions of machine parts
pursuant to customer request as described above contains no element of research or development and
is nothing more than the ordinary design and drafting of machine parts. However, the use by
Petitioner of the CAD/CAM for purposes of experimenting with different configurations to test the
ability of the configurations to comply with design standards falls with the purview of Example 4
as cited above and is, therefore, deemed to be used directly in research and development.
Accordingly, if the CAD/CAM is used predominantly (more than 50% of the time) for such
qualified purposes, it will qualify for the exemption provided by section 1115(a)(10) of the Tax Law.

DATED: May 1, 1985

FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.