Does laboratory furniture used to test incoming electronic equipment for quality control qualify for New York's research-and-development or production machinery sales-tax exemption?

Plain-English summary

Grumman Aerospace Corporation bought laboratory furniture (work stations, multi-wired legs, pedestals, etc.) for its avionics lab, where it tests incoming electronic equipment — made by Grumman or a subcontractor — against U.S. Navy specifications before the equipment is integrated into aircraft. Grumman asked whether the furniture qualifies for the research-and-development exemption (Tax Law § 1115(a)(10)) or the production machinery exemption (§ 1115(a)(12)).

The Department held it qualifies for neither — so it's taxable.

• Not research and development. Section 1115(a)(10) exempts property used directly and predominantly in R&D in the experimental or laboratory sense, defined by 20 NYCRR § 528.11(b) as research aimed at basic research, advancing technology, or developing new/improved products or new uses — and it expressly excludes testing or inspection of materials or products for quality control. Grumman's furniture is used for QC testing, not research, so it fails § 1115(a)(10).
• Not production machinery. Section 1115(a)(12) exempts machinery/equipment used directly and predominantly in production of tangible personal property for sale by manufacturing. Under 20 NYCRR § 528.13(b), testing incoming materials is an administrative activity, not production (Example 2: testing equipment used to test incoming materials is taxable). Because Grumman's furniture tests incoming electronic equipment, it isn't used in the production phase and fails § 1115(a)(12).
• Result: the laboratory furniture is subject to sales and use tax.

What this means for you

"Testing" isn't automatically research, and testing incoming goods isn't production. New York's R&D exemption is for genuine experimental research — basic research, advancing technology, developing or improving products — not quality-control testing or inspection. And the production/manufacturing exemption reaches equipment used in the production line; testing materials coming in the door is treated as administration, which is taxable.

Where the testing sits in the process matters. Equipment used for quality-control testing within the production phase can qualify for the § 1115(a)(12) exemption. But equipment (or furniture supporting it) used to test incoming materials before production is administrative and taxable.

Don't assume lab equipment is exempt. Whether it's exempt turns on the actual function — experimental research vs. QC testing, and pre-production vs. in-production — not on the fact that it lives in a "laboratory."

Common questions

Q: We test incoming parts in a lab against customer specs. Is our lab equipment R&D-exempt?
A: No. The R&D exemption excludes testing or inspection of materials or products for quality control. Testing to verify parts meet specs isn't experimental research.

Q: Could it qualify as production machinery instead?
A: Not for incoming-materials testing. New York treats testing of incoming materials as an administrative activity, not production, so that equipment is taxable (regulation Example 2).

Q: When would quality-control testing equipment be exempt?
A: When it's used directly and predominantly for QC testing within the production phase of manufacturing — then it can qualify under § 1115(a)(12).

Citations and references

Statute and regulation:

• Tax Law § 1115(a)(10) — exempts tangible personal property used directly and predominantly in research and development in the experimental or laboratory sense
• Tax Law § 1115(a)(12) — exempts machinery or equipment used directly and predominantly in producing tangible personal property for sale by manufacturing
• 20 NYCRR § 528.11(b) — defines R&D (basic research, advancing technology, new/improved products, new uses) and excludes testing or inspection of materials or products for quality control
• 20 NYCRR § 528.13(b) — distinguishes administration, production, and distribution; testing of incoming materials is administration (Example 1: unloading crane in production; Example 2: incoming-materials testing equipment is taxable), and QC testing within the production phase can qualify

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_23s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-88(23)S
Sales Tax
March 17, 1988

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S871125A

On November 25, 1987, a Petition for Advisory Opinion was received from Grumman
Aerospace Corporation B16-030, Bethpage, New York 11714.
The issue raised is whether certain laboratory furniture qualifies for exemption from sales
and use tax under either §1115(a)(10) or §1115(a)(12) of the Tax Law.
Petitioner purchased laboratory furniture including work stations, multi-wired legs and
pedestals, etc., which it utilizes in its avionics laboratory. The laboratory is used to test incoming
electronic equipment which is either manufactured by Petitioner or by an outside sub-contractor. If
tests and specifications set by the U.S. Navy are met, the equipment is then integrated into both
developmental and production type aircraft.
Section 1115(a)(10) of the Tax Law provides an exemption for "[t]angible personal property
purchased for use or consumption directly and predominantly in research and development in the
experimental or laboratory sense.
Section 528.11(b) of the sales tax regulations defines the term "research and development"
as follows for purposes of the research and development exemption under section 1115(a)(10) of the
Tax Law.
(b)
Research and development. (1) Research and development, in
the experimental or laboratory sense, means 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;

(2)

(iii)

the development of new products;

(iv)

the improvement of existing products; and

(v)

the development of new uses for existing products.

Research and development in the experimental or laboratory sense
does not include:
(i)

testing or inspection of materials or products for quality
control ....

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

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

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TSB-A-88(23)S
Sales Tax
March 17, 1988
Accordingly, Petitioner's laboratory furniture does not meet the requirements for exemption
for tangible personal property used in research and development in the experimental or laboratory
sense as contained in regulation section 528.11. Petitioner's furniture is not used for research or
experimentation but, rather, is used for testing of materials or products for quality control.
Section 1115(a)(12) of the Tax Law provides an exemption for "[m]achinery or equipment
for use or consumption directly and predominantly in the production of tangible personal property
... for sale, by manufacturing .... "
Section 528.13 (b), defines the term "production"
(b) Production.
(1) The activities listed in paragraph (a)(1) of this
section are classified as administration, production or distribution.
(i) Administration includes activities such as sales promotion general
office work, credit and collection, purchasing, maintenance, transporting,
receiving and testing of raw materials and clerical work in production such
as preparation of work, production and time records.
(ii) 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.
(iii) Distribution includes all operations subsequent to production,
such as storing, displaying, selling, loading and shipping finished products.
(2) The exemption applies only to machinery and equipment used directly
and predominantly in the production phase. Machinery and equipment partly used in
the administration and distribution phases does not qualify for the exemption, unless
it is used directly and predominantly in the production phase.
(3) The determination of when production begins is dependent upon the
procedure used in a plant. If on receiving raw materials, the purchaser weighs,
inspects, measures or tests the material prior to placement into storage, production
begins with placement into storage, and the prior activities are administrative. If the
materials are unloaded and placed in storage for production without such activities,
the unloading is the beginning of production.
Example 1:

A crane is used to unload raw materials,
which are immediately placed in storage at a

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TSB-A-88(23)S
Sales Tax
March 17, 1988
plant. From the storage site, the material
is placed on an assembly line without
testing. The crane is being used in
production.
Example 2:

Testing equipment used to test incoming
materials is not used in production and is
subject to tax.

(4) Production ends when the product is ready to be sold.
The testing or inspection of materials or products for quality control may take place during
either the administrative or production phase of an operation. To the extent that machinery or
equipment is used directly and predominantly for quality control testing in the production phase, it
will qualify for the exemption under section 1115(a)(12) of the Tax Law. However, as illustrated by
Example 2 of regulation section 528.13 above, testing equipment used to test incoming materials is
deemed to be used in administration rather than in production and, therefore, does not qualify for
exemption under section 1115(a)(12) of the Tax Law.
Accordingly, because Petitioner uses its laboratory furniture to test incoming electronic
equipment, it does not qualify for the production exemption under section 1115(a)(12) of the Tax
Law.

DATED: March 17, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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