Are a product-testing lab's testing fees, sales of test-swatches, and lab equipment purchases subject to New York sales tax?

Plain-English summary

Scientific Services provides testing and consulting to the detergent, household product, and chemical specialty industries -- running standardized performance tests on products like detergents, cleaners, and cosmetics, and issuing confidential reports of the results. It also manufactures specialized test materials, like dust-sebum and ground-in-clay soiled fabric swatches and specially soiled/stained items, which clients use to run their own testing in-house. Scientific Services asked about the tax treatment of (1) its testing service and reports, (2) its sales of these test materials, and (3) its own purchases of lab supplies and equipment used to provide its services.

The Department separated the analysis into three pieces. First, the product-testing service itself -- and the reports summarizing test results -- isn't a specifically enumerated taxable service, so none of that revenue is subject to sales or use tax. Second, the physical test swatches and soiling/staining materials Scientific Services sells to clients ARE ordinary tangible personal property, taxable when delivered within New York -- unless the client is using them directly and predominantly in its own qualifying research and development (in which case the client can give Scientific Services a properly completed exempt use certificate), or the items are delivered to the client outside New York State. Third, Scientific Services' own purchases of lab supplies (reagents, tools, equipment, soiling materials, a rented deionizer) can qualify for New York's research-and-development exemption, but only to the extent they're actually used more than half the time in genuine research and development -- meaning work aimed at developing new products, improving existing ones, or finding new uses for existing products, not merely routine quality-control testing. If Scientific Services' work for a given client is really just testing (not R&D in that sense), its own supply purchases for that work stay taxable. Stationery and computer supplies used to prepare client reports are always taxable, since report-writing itself is part of Scientific Services' nontaxable service, not qualifying research and development.

What this means for you

Product-testing labs and similar contract research providers

Your testing service and result reports are outside New York's enumerated-services tax, but be careful to separately track and tax any physical test materials, swatches, or samples you sell to clients -- those are ordinary taxable sales unless the client buys them for its own qualifying R&D or takes delivery out of state.

Labs buying supplies and equipment for a mix of testing and true R&D work

Whether your own lab supply purchases qualify for the research-and-development exemption depends on whether that specific work meets the R&D definition (developing/improving products or new uses) more than half the time -- ordinary quality-control testing doesn't count, even if it happens in the same lab using similar equipment.

Accountants and tax professionals

This ruling is a useful three-part template (nontaxable service vs. taxable tangible sales vs. conditionally exempt R&D supply purchases) for any contract testing or consulting lab whose work spans both routine product testing and genuine experimental research and development.

Common questions

Q: Are a testing lab's service fees and result reports taxable in New York?
A: No -- product testing and the resulting reports aren't specifically enumerated taxable services.

Q: Are physical test materials (like soiled swatches) that a lab sells to clients taxable?
A: Yes, as ordinary tangible personal property -- unless the client buys them for its own qualifying research and development (with a properly completed exempt use certificate) or they're delivered to the client outside New York.

Q: Does a lab's own equipment and supply purchases qualify for the R&D exemption?
A: Only to the extent they're used more than 50% of the time in genuine research and development (developing new products, improving existing ones, or finding new uses) rather than routine testing or quality control.

Q: Does this ruling apply to my testing lab or research services business?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your own services, sales, and purchases would need their own analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_51s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(51)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.

S940930B

On September 30, 1994, a Petition for Advisory Opinion was received from
Scientific Services S/D, Inc., 41 Main Street, P.O. Box 778, Sparrow Bush, N.Y.
12780.
The issues raised by Petitioner, Scientific Services S/D, Inc., are:
1.
Whether Petitioner is required to collect sales tax on the receipts from
charges to clients for product testing services and the subsequent reports issued
to the clients reflecting the results of the product testing;
Whether Petitioner's sales of research materials (i.e., dust-sebum and
2.
ground-in-clay soiled swatches and special soils and stains for testing bleaches
and other laundry additives) are subject to the sales tax imposed on receipts from
sales of tangible personal property under section 1105(a) of the Tax Law; and
3.
Whether Petitioner's purchases of tangible personal property for use in
providing research and development services for clients qualify for the exemption
from sales tax imposed on retail sales of tangible personal property provided
under section 1115(a)(10) of the Tax Law.
Petitioner makes the following submission of facts.
Petitioner provides consulting and testing services to the detergent,
household product and chemical specialty industries. Petitioner provides services
with respect to products including detergents, laundry additives, polishes,
cleaners, household specialties, cosmetics, personal care products and over the
counter drugs.
With respect to detergent items, Petitioner's laboratory tests both finished
and experimental formulations for performance using ASTM and CSMA protocols.
Terg-0-Tometer and washing machine tests are frequently run. Petitioner tests
automatic dishwasher detergents and hard surface cleaners. Petitioner formulates
products.
Petitioner makes dust-sebum and ground-in-clay soiled fabric swatches for use
by clients in performing detergency research in the client's own laboratories.
Petitioner also makes special soils and stains for testing bleaches and other
laundry additives. Petitioner provides similar services for customers interested
in cosmetic, household products and chemical specialties.
The confidential reports issued by Petitioner are based upon data compiled
by Petitioner's laboratory technicians during various tests performed on products
submitted by clients.

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TSB-A-97(51)S
Sales Tax

Most of Petitioner's clients are outside New York State.
Petitioner purchases items of tangible personal property for use in
providing services to clients. Typical purchases made by Petitioner for use in
providing the services are as follows:
Rental of deionizer for treating waste for laundering research
Reagents
Laboratory tools and equipment
Stationery and computer supplies for written reports
Materials for soiling and staining
Cloth and clothing for soiling and cleaning projects
Section 525.2(a)(3) of the Sales and Use Tax Regulations states that "[t]he
sales tax is a 'destination tax', that is, the point of delivery or point at which
possession is transferred by the vendor to the purchaser or designee controls both
the tax incident and the tax rate . . . "
Section 1105 of the Tax Law states, in part:
Imposition of sales tax.-...there is hereby imposed and there shall
be paid a tax . . . upon:
(a)
The receipts from every retail sale of tangible
property, except as otherwise provided in this article.

personal

Section 1115 of the Tax Law states, in part:
Exemptions from sales and use taxes.--(a) Receipts from the following
shall be exempt from the tax on retail sales imposed under
subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
*

*

*

(10) Tangible personal property purchased for use or consumption
directly and predominantly in research and development in the
experimental or laboratory sense.
Such research and development
shall not be deemed to include the ordinary testing or inspection of
materials or products for quality control, efficiency surveys,
management studies, consumer surveys, advertising, promotions or
research in connection with literary, historical or similar projects.
Section 528.11 of the New York State Sales and Use Tax Regulations states,
in part:

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TSB-A-97(51)S
Sales Tax

Research and development. [Tax Law, Section 1115 (a) (10) and Section
1115 (b) (ii)]
(a) Exemption. (1) The sale of tangible personal
property purchased for use or consumption directly and predominantly
in research and development in the experimental or laboratory sense
is exempt from the sales and use tax.
*

*

*

(4)
An Exempt Use Certificate (Form ST-121) is used to make
purchases eligible for this exemption, without payment of sales tax.
. . .
(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;

(iii) the development of new products;
(iv)

the improvement of existing products; and

(v)

the development of new uses for existing products.

(2) Research and development in the experimental or laboratory
sense does not include:
(i) testing or inspection of materials or products for quality control .
. . ;
(ii) efficiency surveys;
(iii) management studies;
(iv) consumer surveys, advertising and promotions; and
(v) research in connection with literary, historical or similar
projects.
(c)
Directly, predominantly, exclusively. (1) Direct use in
research and development means actual use in the research and
development operation.
Tangible personal property for direct use
would broadly include materials worked on, and machinery, equipment
and supplies used to perform the actual research and development
work.
Usage in activities collateral to the actual research and
development process is not deemed to be used directly in research and
development.

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Sales Tax

(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.
(3) Tangible personal property is exempt only if it meets the
tests of direct and predominant use.
Example 1: Test tubes, flasks, reagents, microscopes and slides
purchased by a chemical manufacturer for its research laboratory for
developing new pesticides are exempt from sales tax.
Example 2: Laboratory tables for use in a research laboratory are
exempt, but desks and chairs used by clerical personnel are not used
directly in research.
*

*

*

Example 6: Paper on which research and development test results are
recorded is exempt, but paper for in-house printing of a summary of
research and development findings so that decisions may be made as to
the marketability of the new products is taxable as the decision
making activity is administrative.

Section 1105(c) of the Tax Law imposes tax on the receipts from the sale of
certain enumerated services.
A service which is not one of the enumerated
services in Section 1105(c) is not subject to sales or compensating use tax. The
product testing service and related sale of the reports of the analysis do not
constitute an enumerated taxable service under Section 1105(c) of the Tax Law.
Receipts from the product testing service and sale of these reports, therefore,
are not subject to sales or compensating use tax.
See Taxability of Certain
Laboratory Reports, TSB-M-95(8)S.

Petitioner’s receipts from sales of tangible personal property (i.e., dust
sebum and ground-in-clay soiled fabric swatches and special soils and stains) to
clients for use by clients in their laboratories will be subject to the sales tax
imposed on sales of tangible personal property under section 1105(a) of the Tax
Law when the transfer of the tangible personal property takes place within New
York State (see Section 525.2(a)(3) of the Sales and Use Tax Regulations).
However, if in accordance with Section 1115 (a) (10) of the Tax Law the tangible
personal property is for use or consumption directly and predominantly in research
and development in the experimental or laboratory sense, Petitioner will not be
required to collect the sales tax imposed on receipts from the sale of tangible
personal property under section 1105(a) of the Tax Law, provided the client gives
Petitioner a properly completed exempt use certificate within 90 days of the
transaction (see Section 1132(b) of the Tax Law and Section 532.4 of the Sales and
Use Tax Regulations). Furthermore, Petitioner will not be required to collect the
sales tax imposed on receipts from the sale of tangible personal property under
section 1105(a) when delivery of the tangible personal property occurs outside New
York State.

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TSB-A-97(51)S
Sales Tax

Petitioners' purchases of reagents, laboratory tools and equipment,
materials for soiling and staining, cloth and clothing for soiling and cleaning
projects, stationery and computer supplies as well as the rental of a deionizer
are purchases of tangible personal property.
Purchases of tangible personal
property generally are subject to the sales tax imposed on sales of tangible
personal property under section 1105(a) of the Tax Law.
However, in the instant matter, Petitioner's purchases of the reagents,
laboratory tools and equipment, materials for soiling and staining, cloth and
clothing for soiling and cleaning projects, and the rental of a deionizer are all
purchases which may qualify for the exemption from the sales tax imposed on
receipts from sales of tangible personal property under section 1115(a)(10) of the
Tax Law. To qualify for the exemption from sales tax under section 1115(a)(10)
of the Tax Law, each item purchased by Petitioner must be used or consumed
directly and predominantly (more than 50% of use) in research and development in
the experimental or laboratory sense as discussed under section 528.11(b)(1) of
the Sales and Use Tax Regulations.
If the service performed by Petitioner results in the development of a new
product, the improvement of an existing product, or the development of a new use
for an existing product, Petitioner will be performing research and development
within the parameters of section 528.11(b)(1) of the Regulations. Accordingly,
Petitioner's purchases of the items of tangible personal property enumerated above
for use in performing research and development in the experimental or laboratory
sense will qualify for the exemption from sales tax under section 1115(a)(10) of
the Tax Law. However, when Petitioner's service is merely product testing that
does not seek to achieve the goals enumerated under section 528.11(b)(1) of the
Regulations, Petitioner's purchases of the items of tangible personal property
enumerated above will not qualify for the exemption afforded under section 1115(a)
(10) of the Tax Law but will be subject to the sales tax imposed on sales of
tangible personal property under section 1105(a) of the Tax Law. Petitioner may
make purchases of tangible personal property for use in research and development
tax exempt by giving the supplier(s) a properly completed form ST-121, Exempt Use
Certificate within 90 days of the purchase date.
Petitioner's purchases of stationery and computer supplies for use in
preparing written reports for clients will be subject to the sales tax imposed on
tangible personal property under section 1105(a) of the Tax Law since Petitioner
is providing a service which is not subject to tax under section 1105(c) of the
Tax Law.

DATED: August 25, 1997

NOTE:

/s/
JOHN W. BARTLETT
Deputy Director
Taxpayer Services Division

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