When a computer maker uses its own products, is the use tax based on its selling price or its cost, and are service-contract replacement parts bought for resale?

Plain-English summary

Barrister Information Systems both manufactures minicomputer CPUs and buys microcomputers, peripherals (keyboards, terminals, modems, printers), software, and supplies for resale. It asked how the compensating use tax applies when it pulls items from inventory for its own use, and whether the replacement parts it uses under service contracts are bought for resale.

The Department gave three answers:

• Units Barrister manufactured → use tax on the selling price. Producing the minicomputer CPUs is manufacturing and assembling (20 NYCRR § 531.2). Because Barrister sells more than 10% of the units it produces, when it withdraws one for its own use it is using property of the same kind it offers for sale, so it owes use tax under Tax Law § 1110 based on the price at which it sells that item — per its price list, catalog, or record of sale (§ 531.3(b)).
• Items bought for resale → use tax on cost. For a microcomputer, stand-alone component, software, or supplies it purchased for resale, withdrawing it for its own use triggers use tax based on the purchase price it paid the manufacturer (§ 531.3(a)(2), § 532.4(d)(3)). Barrister's relabeling, reconciling/upgrading (adding memory chips, graphics boards, hard drives), interface-checking, grouping items into systems, and installing on the customer's premises are not manufacturing, processing, assembling, or fabricating — so they don't raise the basis to Barrister's marked-up selling price.
• Service-contract parts and repairs → purchases for resale. Replacement or spare parts transferred to customers under the maintenance/service contracts are purchases for resale (§ 527.5(c)). "Cannibalizing" purchased components to stock the parts inventory does not change their resale status. And third-party charges to repair defective parts (pulled from customers' equipment and returned to inventory) are the purchase of services for resale (§ 527.5(b)(1)) — not taxable to Barrister.

What this means for you

If you both make and resell products and sometimes use them yourself: New York taxes your self-use differently depending on the item's origin. For things you manufactured and offer for sale, the use tax is measured by your selling price. For things you bought for resale, it's measured by what you paid — your cost — not your marked-up price.

"Value-added" reseller steps usually aren't manufacturing. Relabeling, adding memory or drives on request, flipping configuration switches, bundling components, and installing on site are treated as reseller activities, not manufacturing/assembling. So they don't convert a bought-for-resale item into something taxed at your selling price when you self-use it.

Maintenance-contract parts and outside repairs are for resale. Parts you hand customers under a taxable service contract are bought for resale, even if you obtained them by cannibalizing other components. Outside repair services you buy to refurbish parts headed back into resale inventory are likewise services purchased for resale.

Common questions

Q: We build some products and buy others to resell. If we use one ourselves, what's the use-tax basis?
A: For a unit you manufactured and also sell, it's your selling price. For an item you bought for resale, it's the price you paid — your cost.

Q: We relabel, add memory, and bundle the machines we resell. Does that make us a manufacturer?
A: No. The Department treated those as reseller activities, not manufacturing/assembling, so self-used bought-for-resale items are still taxed on cost.

Q: Are the replacement parts we give customers under service contracts taxable to us?
A: No. They're purchases for resale — including parts you cannibalize from components — and outside repairs to refurbish parts for inventory are services purchased for resale.

Citations and references

Statute and regulations:

• Tax Law § 1110 — compensating use tax, including on property manufactured/assembled by the user that is offered for sale
• 20 NYCRR § 531.2 — definitions of manufacturing and assembling
• 20 NYCRR § 531.3 — basis of use tax: cost for property purchased at retail/resale (§ 531.3(a)); selling price for property manufactured/assembled by the user and offered for sale (§ 531.3(b))
• 20 NYCRR § 527.5 — installing/repairing/servicing property; maintenance contracts; services performed for resale (§ 527.5(b), (c))
• 20 NYCRR § 532.4(d) — resale certificate; tax on purchase price if resale property is later used

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_11s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89(11)S
Sales Tax
April 27, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890104E

On January 4, 1989, a Petition for Advisory Opinion was received from Barrister Information
Systems, 45 Oak Street, Buffalo, New York 14203.
The issues raised are as follows:
1.
When Petitioner converts a minicomputer central processing unit, (minicomputer
CPU) which Petitioner has manufactured, to Petitioner's own use, what is the proper basis for use
tax: the cost of the individual parts that comprise the minicomputer's central process unit (e.g. the
various circuit boards, resistors, capacitors, cables, etc.) or the petitioner's sales price of the
assembled minicomputer CPU?
2.
When a microcomputer or a "stand-alone" computer component which Petitioner
purchased for resale from a third party manufacturer is converted to Petitioner's own use, what is the
proper basis for the use tax: the cost of the microcomputer or "stand-alone" component or the
"marked-up" price at which Petitioner sells these microcomputers and components to its customers?
3.
Are Petitioner's purchases of replacement or spare parts which are transferred to
customers in conjunction with Petitioner's computer component maintenance and repair service
excluded from sales tax as purchases for resale? Are third party charges to Petitioner for the repair
of defective parts acquired from customers by Petitioner's maintenance and repair service and then
placed into Petitioner's replacement or spare parts inventory after such repairs have been performed,
also excluded from tax as a purchase for resale?
The facts are as follows:
I. One of Petitioner's business activities is the production and sale of minicomputer central
processing units (minicomputer CPUs).
Petitioner's production process entails assembling an aluminum case into which various sub­
components and circuit board sub-assemblies are placed.
The sub-assemblies are designed and produced by Petitioner. Production of a sub-assembly
involves placing a blank circuit board in a machine which places (populates) certain standard
integrated circuits (chips) in the correct location on the board. The board is then passed through a
soldering machine and through an ultrasonic degreaser. Subsequently it is taken to a hand-assembly
area where specialized integrated circuits, resistors and capacitors are added, resulting in a completed
sub-assembly.
The completed sub-assemblies are connected by wires or integrated plugs to other sub­
components which include main power supplies, supplementary power supplies, etc. The sub­
components are either produced by Petitioner or purchased from outside vendors.

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The minicomputer CPUs are sold by Petitioner, either individually or with various other
components. Occasionally, Petitioner may remove a completed minicomputer CPU from inventory
for use in Petitioner's own operations.
II. Petitioner also purchases microcomputer central processing units (fully manufactured and
functional IBM-AT or XT clones) plus various stand-alone computer components (peripheral
equipment) such as keyboards, video display terminals (VDT), modems, and printers, all of which
are manufactured by other vendors and purchased by Petitioner for resale purposes. Petitioner sells
these items individually and also as a group. A typical grouping would include a keyboard, a VDT,
a printer and either a microcomputer or a Petitioner produced minicomputer.
Upon receipt of the microcomputers and the peripheral equipment, Petitioner tests each item
to insure it is operating properly. Testing merely involves connecting the item with the same type
of equipment it will encounter when the component is located at a client's place of business.
After testing, some of the large components are relabeled. Relabeling merely involves taking
Petitioner's logo, which has been embossed on plastic or silk screened on vinyl, and gluing it over
the actual manufacturer's logo. Petitioner has entered into licensing agreements with the
manufacturers which allow the relabeling of the components. Smaller components (e.g. modems)
are not relabeled.
Petitioner also purchases software and supplies, for resale purposes, from other
manufacturers.
Occasionally, some of the microcomputers, components (peripherals), software or supplies
are converted to Petitioner's own use and not resold to customers.
A portion of the microcomputers sold by Petitioner often require some form of reconciliation
(upgrading) due to customer desire for enhancement of the capabilities inherent in the basic model
microcomputer. Reconciliation may result in options such as increasing the amount of memory or
storage capacity and the addition of color graphics capabilities.
Reconciliation of microcomputers is a simple process. The microcomputer interior is
accessed by removing four screws which attach the outer cover to the chassis. Exposure of the
interior allows clear visibility of and access to the mother board of the microcomputer.
The computers memory is increased by installing additional memory chips on the mother
board. Likewise, monochrome or color graphics are obtainable by installing a monochrome or color
graphics board on the mother board. Each of these items are installed by placing the memory chip
or the graphics board over the proper receptacle on the mother board and applying downward
pressure.
Petitioner does not manufacture any of the chips or boards used in reconciliation activities.
These items are purchased from other manufacturers.

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Other components such as hard disk drives (ready-made and factory sealed) are also
purchased from another manufacturer. The installation of a hard disk drive requires attaching the
drive (with four screws) to the chassis of the microcomputer. The hard disk drive also comes
equipped with a controller board that is plugged into the mother board.
After the chips, boards and/or hard disk drive have been added, the outside cover is
refastened and the microcomputer is tested.
It is Petitioner's contention that reconciliations performed on a microcomputer are analogous
to a car dealer adding customer requested options, such as air conditioning, an upgraded stereo
system, cruise control or a rear window defogger, to a base-model car purchased "off-the-lot" from
the dealer's inventory by such customer.
Other manufacturer's computer components (peripherals) sometime require reconciliation
before being used with certain types of hardware. Reconciliation of a component usually involves
flipping various switches, located on the component, to insure that the component has the ability to
interface (communicate) with other components.
Some printers need to be "told" about the typeface requirements of a particular customer.
This usually involves flipping certain on-off or "dip" switches located on the chassis of the printer.
Although the switches are preset by the manufacturer, Petitioner's employees may have to reverse
some of the switches in order to insure that the printer's output matches the customer's requirements.
Other components purchased by Petitioner, such as laser printers, may require the substitution
of one type of computer chip for another. Upon locating the chip which is to be replaced, removal
is accomplished by grasping the chip and applying upward pressure. Installation of the substitute
chip is performed by positioning the chip over the spot vacated by the original chip and exerting
downward pressure until the chip is secured to the mother board.
Petitioner does not produce any of these chips but purchases them from a third-party supplier.
Petitioner also sells "groupings" that include the minicomputer central processing units which
are assembled by Petitioner along with various "stand-alone equipment produced by other
manufacturers. A typical "grouping" of this nature would include a minicomputer central processing
unit produced by Petitioner, and a video display terminal, keyboard, printer, modem and other
equipment produced by third-party manufacturers. Some minor reconciliation of the components
from the other manufacturers may be required to insure that they properly interface with the other
computer components.
Where the contract between Petitioner and the customer requires that Petitioner install the
computer system on the customer's premises, Petitioner will connect the computer and the various
components by use of applicable cables and plugs, as well as plugging the various components into
an electrical power source.

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III. Petitioner also contracts to provide maintenance and repair services to certain customers.
Under the terms of the service contracts, clients pay a fixed maintenance/service fee in return for
Petitioner's obligation to maintain the computer and computer components and to replace old and
defective parts at no additional charge. Petitioner collects sales tax on these maintenance fees.
Because Petitioner sells computers and computer components nationwide, Petitioner has over
30 service centers located throughout North America. Each service center has at least one service
technician and a local replacement or "spare" parts inventory. Petitioner's service headquarters and
main replacement parts inventory are located in Buffalo, N.Y..
Petitioner maintains both the main and the local replacement parts inventories to insure parts
availability resulting in prompt repair service. Parts which are not available locally must be shipped
by overnight express mail from the main parts inventory at Buffalo.
Petitioner obtains the parts comprising the replacement parts inventories from several
sources. Some parts are purchased directly from parts suppliers, while other parts are obtained by
purchasing complete components from other manufacturers and "cannibalizing" or breaking down
the components into their various "parts" such as circuit boards, mother boards, cases, switches,
power supplies, cables, video display terminal picture tubes, etc. Petitioner also acquires parts by
retaining defective parts from customers equipment, where such parts are replaced in accordance
with the terms of the service contracts between Petitioner and Petitioner's customer.
Pursuant to the service contracts, title and possession of the replacement parts transfers to
the customer at the time the service is performed, with Petitioner being granted the right to retain the
defective parts.
The defective parts are forwarded to Petitioner's Buffalo location for repair (when possible)
by Petitioner or by a third party repair service, and for subsequent transfer into the replacement parts
inventory.
Section 531.2(b) of the Sales and Use Tax Regulations defines manufacturing as:
[T]he production of tangible personal property that has a different identity from its
ingredients. Manufacturing includes the production of standardized items as well as
the production of items to a customer's specifications.
Example 5:

Company E combines metal, wood, glass, and other
component parts into structural panel sections which are
joined to form the bearing walls of a building. These panels
are manufactured products.

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Section 531.2(c) of the Sales and Use Tax Regulations defines assembling as:
[T]he coupling or the uniting of parts or materials as a manufacturing process or as
a step in the manufacturing process which results in a new product.
Example 1:

Company A purchases drilled angle iron from
Company B and steel shelving from Company C.
Company A then bolts the shelving to the angle iron,
to produce bookcases by assembly.

Section 1110 of the Tax Law states:
Imposition of compensating use tax.
Except to the extent that property or services have already or will be subject to the sales tax
under this article, there is hereby imposed on every person a use tax for the use within this
state ... except as otherwise exempted under this article, ... (B) of any tangible personal
property manufactured, processed or assembled by the user, if items of the same kind of
tangible personal property are offered for sale by him in the regular course of business ...
Section 531.1 of the Sales and Use Tax Regulations states:
Imposition of compensating use tax. (Tax Law § 1110.)
(b) Taxable uses. The uses enumerated herein are subject to tax.
(2) Tangible personal property manufactured, processed or assembled by the user if items
of the same kind are offered for sale by him in the regular course of business.
Section 531.3 of the Sales and Use Tax Regulations states:
Basis of tax.
(a) Tangible personal property purchased at retail.
(2) The compensating use tax is due upon the use of tangible personal property,
which was purchased for resale or an exempt use and is subsequently withdrawn
from or diverted to a taxable use by the purchaser.
Example 2:

A retail store purchased a dozen desks at $75 each for
sale to its customers at $125 each. It subsequently
withdrew one of the desks from inventory to be used
in its office. A compensating use tax is due for the
desk withdrawn from inventory. The tax is computed
on the $75.00 the store paid.

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(b) Tangible personal property manufactured, processed or assembled by the user.
(1)
A compensating use tax is imposed on the use of any tangible personal
property which was manufactured, processed or assembled by the user, if items of the
same kind of tangible personal property are offered for sale by him in the regular
course of business.
(i)
Items of the same kind mean that items belong to an
identifiable class, but need not be identical.
(ii)
Offered for sale in the regular course of business means that
a person sells in excess of 10 percent of his product for each 12
month period beginning December 1st .... When it is determined that
a person is selling in excess of 10 percent of his product in the regular
course of business ..., he will be considered a person required to pay
compensating use tax on the basis set forth in paragraph (3) of this
subdivision ...
*
*
*
(3)
Where the user sells items of the same kind to other persons in the regular
course of business, the basis of tax on the use of tangible personal property which is
manufactured, processed or assembled by the user is the price at which such items
are sold as evidenced by a price list, catalog price or record of sales. In the absence
of a catalog price or price list, the average of the prices charged various customers
will be deemed the price which the user would sell such item to the persons during
the regular course of business.
Example 6:

A desk manufacturer withdraws desks from its
inventory for use in its executive office. In the regular
course of business it sells the desk for $150. It pays a
compensating use tax on $150, the price at which it
sells such desks.

Section 532.4 of the Sales and Use Tax Regulations states:
Presumption of taxability.
(a)
General. It shall be presumed that all receipts from sales of property or
service of any type mentioned in subdivisions (a) ... (c) ... of section 1105 of the Tax
Law ... are subject to tax until the contrary is established.
*
*
*
(d)
Resale certificate. (1) A resale certificate is used to claim exemption from tax
on purchases of tangible personal property or services which will be resold or
transferred to a customer when the:

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(i)
tangible personal property is for resale as such or as a physical
component part of tangible personal property;
(ii) tangible personal property is for use in performing taxable
services under paragraph ... (3) ... of subdivision (c) of section 1105
of the Tax Law where such property becomes a physical component
part of the tangible personal property upon which the services are
performed or will be actually transferred to the purchaser of the
service in conjunction with the performance of the service; or
(iii) service is for resale.
Example 1:

A retail shoe store vendor will give his supplier a
resale certificate when he purchases shoes from him
for resale.

Example 3:

An auto service station operator will give his parts
supplier a resale certificate covering the purchase of
repair parts incorporated into customer's cars.

*
*
*
(3)
When property or services are intended for resale and purchased tax exempt
with a resale certificate, but later are used or consumed rather than resold, the
purchaser must pay a tax on the purchase price.
Section 527.5 of the Sales and Use Tax Regulations states:
Installing, repairing, servicing and maintaining tangible personal property. (Tax Law,
§ 1105[c][3])
*
*
(c) Maintenance and service contracts.
(1)

*

The purchase of a maintenance or service contract is a taxable transaction.

(2)
The vendor making sales of such contracts may purchase for resale any
tangible personal property which is transferred to his customer in connection with the
services rendered.
Section 527.5(b) of the Sales and Use Tax Regulations provides:
Exceptions. (1) The services of installing, maintaining, servicing or
repairing tangible personal property are not taxable if the services
were performed for resale ....

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Conclusions
The activities performed by Petitioner in producing minicomputer central processing units
for sale fall within the meaning of manufacturing and assembling as respectively defined in Section
531.2(b) and 531.2(c) of the Sales and Use Tax Regulations.
Petitioner's sales of minicomputer central processing units are in excess of 10% of the units
produced. Therefore, whenever a minicomputer central processing unit is withdrawn from inventory
for Petitioner's own use, Petitioner, in accordance with Section 531.3(b)(1) of the Sales and Use Tax
Regulations, is considered to be using an item of the same kind as offered for sale in Petitioner's
regular course of business. Accordingly, at that time, Petitioner is liable for a use tax as imposed
under Section 1110 of the Tax Law and Section 531.1 of the Sales and Use Tax Regulations. The
basis for computing the use tax due, in accordance with Section 531.3(b)(3) of the Sales and Use Tax
Regulations, will be the price at which such item is sold by Petitioner as substantiated by record of
sale, price list or catalog price.
Microcomputers, "stand alone" computer components, software and supplies which Petitioner
purchases from other manufacturers, are considered to be purchased for the purpose of resale. When
any of these items are withdrawn from inventory for use by Petitioner, Petitioner will incur a use tax
liability as imposed under Section 1110 of the Tax Law. The basis for the compensating use tax in
these instances, in accordance with Sections 531.3(a)(2) and 532.4(d)(3) of the Sales and Use Tax
Regulations, will be the purchase price of the item as paid to the manufacturer by Petitioner. The fact
that Petitioner relabels the microcomputers and components; performs reconciliations (upgradings)
of the microcomputers or components upon customer request, such as installing memory chips,
color graphic boards, hard disk drives, etc.; insures that all the components of a system (grouping)
have the ability to interface with each other; sells "groupings" made up of the microcomputer or the
Petitioner assembled minicomputer and other components; and, installs the systems on the
customer's premises, does not effect the basis on which Petitioner computes the use tax liability for
self-use of the microcomputers or components. The activities performed by Petitioner involving the
microcomputer and components are not to be
construed as production by manufacturing, processing or assembling, nor as fabricating.
In accordance with Section 527.5(c) of the Sales and Use Tax Regulations, Petitioner's
purchases of replacement or spare parts which are transferred to customers in conjunction with
Petitioner's maintenance and repair service and under the terms of the service contracts between
Petitioner and such customers, are considered to be purchases for resale. Petitioner's purchases of
components from other manufacturers are also considered to be purchases for resale. Petitioner's
"cannibalizing" of some of these components for the purpose of increasing the parts inventory will
not affect the resale status of the "cannibalized" items.

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In accordance with Section 527.5(b)(1) of the Sales and Use Tax Regulations, Petitioner's
purchases of third party repair services for the repair of defective parts are considered to be the
purchase of services performed for resale. The facts, that such defective parts are obtained by
Petitioner as a result of repairing a customer's equipment and that upon being repaired, by a third
party repair service or Petitioner, such parts are placed into Petitioner's parts inventory, have no
effect upon the sales tax status of the third party repair services or upon the defective parts.

DATED: April 27, 1989

s/FRANK J. PUCCIA
Director
Technical Services

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