Is a company's service of testing computer circuits taxable when the circuits will be assembled into products held for resale?

Plain-English summary

Aacton, Inc. only tests computer circuits. After circuits are manufactured, they're sent to Aacton, which tests 100% of them (charging by the number of points tested); the circuits that pass are then assembled by Aacton's customers into products that are later sold. Aacton asked whether its testing service is subject to sales and use tax.

The Department said the testing is not taxable on these facts. Testing/diagnostic work is generally a taxable service on tangible personal property under Tax Law § 1105(c)(3) — Reg. § 527.5 treats "servicing" as covering all activities to keep property in a condition of fitness, efficiency, readiness, or safety, and its Example 6 says a diagnostic-only appliance test is taxable. But § 527.5(b)(2) exempts servicing when the property serviced is held for sale in the regular course of business (its Example 1: reconditioning boat motors a dealer will resell is not taxable). Because the circuits Aacton tests will be assembled into products held for sale, the testing is servicing property destined for resale, so it is not subject to sales and use tax — provided Aacton receives a properly completed New York State Resale Certificate from the customer.

What this means for you

Testing, inspection, and diagnostic service providers

A standalone testing or diagnostic charge is normally taxable as servicing tangible personal property. The escape hatch is the resale posture of what you're testing: if the item being tested is held for sale by your customer (including as a component assembled into a product for sale), your service can be non-taxable — but you must collect and keep a properly completed resale certificate. Without that certificate, treat the testing charge as taxable.

Component manufacturers and assemblers

If you send components out for testing before assembling them into products you'll sell, give your testing vendor a resale certificate so the testing isn't taxed. The exemption follows the fact that the components are held for sale.

Accountants and tax professionals

The analysis runs through § 1105(c)(3) (taxable servicing) and the resale exemption in Reg. § 527.5(b)(2) / § 526.6(c)(8): servicing property held for sale in the regular course of business is not taxable, conditioned on a valid resale certificate. Example 6 (taxable diagnostic test) versus Example 1 (non-taxable reconditioning of resale inventory) frames the line.

Common questions

Q: Is a testing or diagnostic service taxable in New York?
A: Generally yes — testing is servicing tangible personal property under § 1105(c)(3). But it's not taxable when the property tested is held for sale in the regular course of business.

Q: What makes Aacton's circuit testing non-taxable?
A: The circuits are assembled by customers into products held for sale, so the testing is servicing resale-bound property. The Department conditioned this on Aacton receiving a properly completed New York State Resale Certificate.

Q: What happens without a resale certificate?
A: The exemption depends on the resale certificate. Without a properly completed certificate, the testing charge should be treated as a taxable service.

Q: Can another taxpayer rely on this opinion?
A: No. An advisory opinion binds the Department only as to the petitioner and the facts described; another taxpayer with different facts cannot rely on it.

Citations and references

Statutes and authorities:

• Tax Law § 1105(c)(3) (tax on servicing tangible personal property not held for sale in the regular course of business)
• Sales and Use Tax Regulations § 527.5 (installing, maintaining, servicing, repairing tangible personal property; Example 6 — taxable diagnostic test; § 527.5(b)(2), Example 1 — non-taxable servicing of property held for sale)
• Sales and Use Tax Regulations § 526.6(c)(8) (services performed for resale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_67s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (67) S
Sales Tax
September 21, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920721B

On July 21, 1992, a Petition for Advisory Opinion was received from Aacton, Inc., 414
Maple Avenue, Westbury, New York 11590.
The issue raised by Petitioner, Aacton, Inc., is whether the service of testing computer
circuits is subject to sales and use taxes.
Petitioner is solely engaged in the testing of computer circuits. After circuits are
manufactured, the circuits are sent to Petitioner for testing. The circuits that pass the test are then
assembled by Petitioner's customers into products that will be later sold.
Petitioner's service is not part of quality control. Petitioner tests computer circuits for a
variety of companies in a number of states, including some located in New York. Petitioner
computer tests 100% of the circuits before they are assembled in products by its customers.
Petitioner charges its customers based on the number of points on the circuit tested.
Section 1105(c)(3) of the Tax Law imposes sales tax, in part, on the servicing of tangible
personal property which is not held for sale in the regular course of business.
Section 527.5 of the Sales and Use Tax Regulations provides, in part, as follows:
*
*
*
(3) Maintaining, servicing and repairing are terms used to cover all activities
that relate to keeping tangible personal property in a condition of fitness, efficiency,
readiness or safety or restoring it to such condition.
*
*
*
Example 6: A company operates a diagnostic service in which it tests an
appliance for a set fee, but does not repair the appliance. The charge for the
diagnostic service is taxable.
(b) Exemptions. (1) The services of installing, maintaining, servicing or
repairing tangible personal property are not taxable if the services were performed
for resale. See section 526.6(c)(8) of this Title.

TP-9 (9/88)

-2­
TSB-A-92 (67) S
Sales Tax
September 21, 1992

(2) Maintaining, servicing or repairing tangible personal property is not
taxable if the property maintained, serviced or repaired is held for sale in the regular
course of business.
Example 1: A repair shop charges a boat dealer for
reconditioning boat motors which the dealer will resell. The
reconditioning of the motors is not taxable because the motors are for
resale. (emphasis added)
The computer circuits being tested by Petitioner will be assembled by its customers in
products held for sale. Accordingly, pursuant to Section 1105(c)(3) of the Tax Law and Section
527.5 of the Sales and Use Tax Regulations since Petitioner is servicing tangible personal property
which will subsequently be held for sale in a regular course of business, such testing of circuits is
not subject to sales and use taxes provided a properly completed New York State Resale Certificate
is received.

DATED: September 21, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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