Does a Computer Aided Drafting (CAD) system used to design and test custom equipment qualify for the sales-tax exemption for property used in research and development under section 1115(a)(10)?

Plain-English summary

Sybron Corporation's Pfaudler Division manufactures glassed-steel and specialized process equipment, 63% of it custom-built to a customer's specific order. It uses a Computer Aided Drafting (CAD) system in its engineering department to design that custom machinery, and asked whether the CAD system is exempt as property used directly and predominantly in research and development under Tax Law § 1115(a)(10).

The engineers use the CAD system to build a three-dimensional graphic model they can rotate and view in cutaway, then run calculations to decide whether the customer's precise performance, function and reliability requirements can be met and whether the design is economically feasible to produce. If not, the product is redesigned.

The Department held the CAD system qualifies for the R&D exemption only if over 50% of its use is function-and-reliability testing.

• Mere design does not qualify. "The use of a computer merely to design or redesign a new product does not by itself qualify as research and development."
• Testing to meet standards does qualify. Using the computer to test a new product's ability to meet function and reliability standards prior to manufacture is "the same as" the aircraft-testing in Example 4 of 20 NYCRR 528.11 — where an aircraft manufacturer assembles two airplanes for function and reliability tests before producing that type for sale, and the parts, equipment and fuel used in testing are exempt as used directly and predominantly in R&D.
• The 50% line decides it. R&D use must be predominant — over 50% of the time (20 NYCRR 528.11(c)(2)). If more than half the CAD system's use is attributable to such function-and-reliability testing, it qualifies for the § 1115(a)(10) exemption.

What this means for you

Design software is exempt only when it's really doing R&D — and testing is the dividing line. New York draws a sharp line between drawing/designing a product (not exempt on its own) and testing whether a design will actually work to the required standards (exempt). The same CAD/CAM box can fall on either side depending on what you mostly do with it.

Keep usage records if you claim the exemption. Because the exemption turns on over 50% R&D use, you need evidence of how the equipment's time is actually split between ordinary design/drafting and qualifying function-and-reliability testing. Without that, you can't support the exemption.

"Experimental or laboratory sense" is the standard. Qualifying R&D aims at basic research, advancing the technology, developing new products, improving existing products, or new uses for existing products (20 NYCRR 528.11(b)(1)). Routine engineering to fill a customer order, by itself, is not R&D.

Common questions

Q: We use CAD to design custom machinery to customer specs. Is it exempt?
A: Not just for designing. Designing or redesigning a product doesn't qualify on its own. It qualifies only if over half the system's use is testing whether the design meets function and reliability standards before you manufacture it.

Q: What counts as qualifying use?
A: Using the computer to experiment with configurations and test their ability to meet performance, function and reliability requirements before production — analogous to building test aircraft to run reliability tests before manufacturing them for sale.

Q: How do we prove the exemption?
A: You must show the equipment is used predominantly — over 50% of the time — directly in qualifying research and development.

Citations and references

Statute:

• Tax Law § 1115(a)(10) — exemption for tangible personal property used or consumed directly and predominantly in research and development in the experimental or laboratory sense

Regulations:

• 20 NYCRR 528.11(b)(1) — R&D in the experimental or laboratory sense: basic research, advancing technology, new products, improving existing products, new uses for existing products
• 20 NYCRR 528.11(c) — direct use in R&D; property is used predominantly in R&D only if over 50% of the time it is used directly in that function
• 20 NYCRR 528.11, Example 4 — test aircraft assembled for function and reliability testing before manufacture are used directly and predominantly in R&D

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_17s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(17)S
Sales Tax
June 12, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S831201B

On December 1, 1983 a Petition for Advisory Opinion was received from Sybron
Corporation, 1100 Midtown Tower, Rochester, New York 14604.
The issue raised is whether a Computer Aided Drafting (CAD) System purchased by the
Petitioner's, Pfaudler Division, qualifies for sales tax exemption as tangible personal property for use
or consumption directly and predominantly in research and development in the experimental or
laboratory sense within the meaning and intent of Section 1115(a)(10) of the Tax Law.
Pfaudler is a manufacturer of glassed steel equipment and machinery and specialized process
equipment and machinery. Petitioner states that 63% of all production is custom built and the
remaining 37% is split between standard and modified standard products. Each custom built glassed
steel system or processed equipment system is specifically designed, developed and produced for a
customer's specific order. The sole function of the CAD System as used by the petitioner's
engineering department is to develop and design custom built machinery.
Petitioner described the computer's use as follows:
The design engineer, through trial and error, develops a three dimensional graphic model on
the CAD. The CAD performs scientific calculations in order to produce a three dimensional graphic
model which can be examined on the CRT from numerous angles as a whole and from cutaway
viewpoints. From this model, calculations are then made by the CAD to determine if the customer's
precise equipment performance, function and reliability requirements can be met. If these
requirements can be met it is then determined if the design is economically feasible for commercial
production. If not, the product is redesigned on the CAD.
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 laboratory sense. . . .
Regulation section 528.11(b)(1) of the Tax Law states that research and development in the
experimental or laboratory sense means research which has its ultimate goal:
(i)
(ii)
(iii)
(iv)
(v)

basic research in a scientific or technical field of endeavor;
advancing the technology in a scientific or technical field of endeavor;
the development of new products;
the improvement of existing products;
the development of new uses for existing products.

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

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

-2­
TSB-A-85(17)S
Sales Tax
June 12, 1985

Paragraph (c) of this regulation defines direct use in research and development as actual use
in the research and development operation. Tangible personal property for direct use would broadly
include materials worked on, and machinery, equipment and supplied used to perform the actual
research and development work . . . (2) Tangible personal property is used predominantly in research
and development if over 50 percent of the time it is used directly in such 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 a computer merely to design or redesign a new product does not by itself qualify
as research and development. However, petitioner's use of its computer to test for a new product's
ability to meet function and reliability standards prior to manufacture is the same as the use of the
airplanes in Example 4 above. Accordingly, the computer is used directly and predominantly in
research and development if over 50% of the computer's use is attributable to such function and
reliability tests. If such is the case, it will qualify for the exemption afforded by section 1115(a)(10)
of the Tax Law.

DATED: May 14, 1985

FRANK J. PUCCIA
Director
Technical Services Bureau

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