Is a CAD/CAM computer used to design custom manufactured products exempt as production machinery?

Plain-English summary

Buffalo Forge Company manufactures fabricated metal equipment (air/gas handling, pumps, and metal-forming machines). It uses a CAD/CAM computer to produce individualized design drawings so its manufacturing group can build equipment to each customer's requirements, and the system can also generate numerical-control (NC) machine tapes that drive production equipment. It asked whether the CAD/CAM qualifies for the production-machinery exemption under § 1115(a)(12).

The Department held the design use is not exempt — but the NC-tape use can be.

• The exemption is for machinery used "directly" in production. Section 1115(a)(12) exempts machinery used directly and predominantly in producing tangible personal property for sale. "Production" runs from handling raw materials through finishing and packaging, and "directly" means the machine must act on the material, have an active causal relationship in production, or handle/store/convey/package the product (20 NYCRR 528.13).
• Designing isn't "direct." Although design and blueprinting are an important step, the CAD/CAM (i) doesn't act on material — the blueprints it makes aren't sold; (ii) has no active causal relationship in production — neither it nor its blueprints play an active role in making the product. The regulation's Example 10 (a lathe that makes a machine that makes the product is "direct" because of the unbroken chain of action) shows the difference: that direct chain is missing for design work. And the CAD/CAM isn't used to handle, store, or package. So its design use fails the exemption.
• NC tapes are different. If the tapes are used to control machinery that produces a product for sale, then the equipment producing the tapes can qualify under § 1115(a)(12). But because machinery must be used more than 50% of the time directly in production to be exempt, the CAD/CAM qualifies only if over half its use is producing NC tapes.

What this means for you

Engineering and design usually aren't "production" for the exemption. Even essential steps like drafting, blueprinting, and specifying come before production and don't act on the material or drive the making of the product. Design-only equipment generally doesn't qualify under § 1115(a)(12).

"Directly" requires an unbroken chain of action on the product. The test is whether the machine (or the machine it builds) acts on the material that becomes the product. A lathe making a production machine qualifies; a computer making drawings that people then read to build the product does not.

Dual-use equipment turns on the 50% line. If your CAD/CAM also outputs numerical-control tapes that run production machinery, that portion is production use — but the whole machine is exempt only if that qualifying use is more than half of its total use. Track usage to support the claim.

Common questions

Q: Our CAD system designs the products we manufacture. Is it exempt production machinery?
A: Generally no. Designing and blueprinting aren't "directly" in production — the drawings aren't sold and don't act on the material — so the design use doesn't qualify under § 1115(a)(12).

Q: Why does a lathe qualify but our design computer doesn't?
A: A lathe that makes a machine that makes the product has an unbroken chain of action on the product (Example 10). A design computer produces drawings that people interpret — that direct causal chain is missing.

Q: We also generate numerical-control tapes. Does that help?
A: Yes, potentially. Producing NC tapes that drive production machinery is a qualifying use — but the computer is exempt only if more than 50% of its use is producing those tapes.

Citations and references

Statute and regulation:

• Tax Law § 1115(a)(12) — exempts machinery/equipment used directly and predominantly in the production of tangible personal property for sale by manufacturing
• 20 NYCRR 528.13 — scope of "production"; meaning of "directly" (act on material / active causal relationship / handle-store-convey / package) and "predominantly" (over 50%); Example 10 (lathe making a production machine is "direct")

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_26s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(26)S
Sales Tax
June 26, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S860318A

On March 18, 1986, a Petition for Advisory Opinion was received from Buffalo Forge
Company, 490 Broadway, Buffalo, New York 14204.
The issue is whether Petitioner's CAD/CAM computer is exempt from the sales and use taxes
imposed under Articles 28 and 29 of the Tax Law pursuant to the provisions of section 1115(a)(12)
of the Tax Law as machinery or equipment for use directly and predominantly in the production of
tangible personal property for sale.
Petitioner uses its CAD/CAM computer directly and predominantly to produce individualized
drawings which enable its manufacturing group to build equipment for sale to customer
requirements.
Petitioner is engaged in the business of manufacturing fabricated metal equipment for
industrial and commercial use. Such equipment comprises three classes of products which: (1)
handle, condition and control air and other gases, (2) pump water and other fluids, and (3) bend,
punch and drill metal.
Each of these product areas, because of the specialized nature of the product, the specialized
requirements of Petitioner's customers, the size of apparatus or the placement of such apparatus,
require individualized design drawings to enable petitioner's manufacturing group to build to the
customer's requirements. In some cases the product is standard or repetitive in nature, however,
numerous revisions to manufacturing specifications or standardizations of manufacturing techniques
are made requiring new drawings to be issued to petitioner's manufacturing group to build the units
properly.
In addition, the CAD/CAM has the capability to directly generate numerical control machine
tapes that are used to drive manufacturing equipment.
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

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-86(26)S
Sales Tax
June 26, 1986
(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 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).
Regarding the production of numerical control tapes, if the tapes are used to control
machinery or equipment that is used to produce a product for sale, the machinery and equipment
used to produce the tape would qualify for the exemption provided under 1115(a)(12) of the Tax
Law.
However, because machinery and equipment must be used 50% or more of the time directly
in production to be exempt from tax, the CAD/CAM will qualify only if over 50% of its use is
producing numerical control tapes.

DATED: June 26, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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