Do fabric swatches, computer equipment, and color printers/supplies used by a clothing manufacturer's design department to sketch new clothing lines qualify for New York's research and development sales tax exemption?

Plain-English summary

Capital Mercury Apparel manufactures shirts, sweaters, suits, and leisure wear, and maintains a research and development facility in New York. Its designers buy fabric swatches, scan them into a computer, and use the computer to sketch new clothing designs, experimenting with color and texture variations. The design lab also buys color printers, cartridges, and paper to print out the computer-generated designs. If a sample product built from a design gets picked for marketing, actual production happens at a separate facility. Capital Mercury asked whether the swatches and the printing equipment/supplies qualify for New York's sales tax exemption for research and development purchases.

New York's R&D exemption is deliberately narrow: it covers property used directly and predominantly in research and development "in the experimental or laboratory sense" -- meaning basic scientific/technical research, advancing technology, or developing/improving actual products -- and specifically excludes things like quality-control testing, efficiency surveys, management studies, and consumer surveys/advertising. The regulations further require that the property be used more than 50% of the time in the actual research and development operation itself, not in activities that are merely collateral to it.

The Department found that sketching new clothing designs -- even with the aid of scanned swatches and computer tools -- is a preliminary conceptual design activity, not experimental or laboratory research. Citing several of its own prior rulings on the same distinction, the Department concluded the swatches, color printers, cartridges, and paper are all used in that early conceptual stage rather than in the kind of scientific/technical research and development the exemption is meant to protect. As a result, none of these purchases qualify for the exemption, and Capital Mercury owes sales tax on all of them.

What this means for you

Apparel, product design, and manufacturing companies

Calling a group "the design department" or "R&D facility" doesn't automatically bring its purchases within the research and development exemption. The dividing line is whether the work is genuinely experimental/technical research (developing new manufacturing processes, testing new materials scientifically) versus creative/conceptual product design (sketching, color and style variations) -- the latter doesn't qualify even when done with sophisticated digital tools.

Companies buying computers, printers, or design software for creative teams

Equipment used to visualize, sketch, or mock up new products is generally treated the same as any other office/creative equipment for tax purposes -- it needs to be tied to genuine experimental/technical research activity, not conceptual design, to get R&D treatment.

Accountants and tax professionals

This ruling is a clean, concrete illustration applying the "preliminary conceptual stage of design" line the Department has drawn in a series of prior rulings (cited below) -- useful for any client claiming the R&D exemption for a design, styling, or creative department's supplies.

Common questions

Q: Does having an official "R&D facility" designation help qualify design work for the exemption?
A: No -- the exemption turns on the actual nature of the work performed (genuine experimental/technical research vs. conceptual design), not on how a facility or department is labeled.

Q: Would the underlying manufacturing/production process itself potentially qualify for the R&D exemption?
A: This ruling addresses only the design department's swatches and printing supplies; it doesn't analyze the separate production facility, which would need its own fact-specific review.

Q: What kinds of activities are automatically excluded from the R&D exemption regardless of context?
A: Quality-control testing/inspection, efficiency surveys, management studies, consumer surveys, advertising/promotions, and research connected to literary/historical projects are all expressly excluded by regulation.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(10) (research and development exemption)
• 20 NYCRR § 528.11(b) (definition of research and development)
• 20 NYCRR § 528.11(c) (directly, predominantly, exclusively)

Prior rulings referenced:

• Lenon Sokolowski Models, TSB-D-92(70)S (May 16, 1991)
• Sybron Corporation, TSB-A-85(17)S (May 14, 1985)
• Protocom Devices Inc., TSB-A-88(4)S (December 3, 1987)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(44)S
Sales Tax
November 4, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990330A

On March 30, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Capital Mercury Apparel, 1372 Broadway, New York, New York 10018.
The issue raised by Petitioner, Capital Mercury Apparel, is whether certain materials used
in its design department are exempt from sales and compensating use tax under Section 1115(a)(10)
of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner manufactures a wide variety of clothing items including shirts, sweaters, suits and
leisure wear. Petitioner has a research and development facility in New York State. Petitioner’s
designers purchase fabric swatches that are used to design and create new products and lines of
clothing. These fabric swatches are scanned into a computer. The computers are then used by
designers to sketch new designs for product lines, varying such factors as color and texture. In
addition, Petitioner’s lab purchases color printers, as well as printer cartridges and paper, to produce
print-outs of the computer generated designs. If a sample product created from a design is selected
for marketing, production will occur at a separate facility.
Applicable Law and Regulations
Section 1115(a)(10) of the Tax Law provides exemption from the sales and compensating
use tax for:
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 Sales Tax Regulations provides, in part:
(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;

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TSB-A-99(44)S
Sales Tax
November 4, 1999

(ii) advancing the technology in a scientific or technical field of endeavor;
(iii) the development of new products;
(iv) the improvement of existing products;
(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 (for
machinery or equipment used for quality control in the production of products for
sale, see section 528.13 of this part);
(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.
(2) Tangible personal property is used predominantly in research and
development if over fifty percent of the time it is used directly in such function.
Opinion
Petitioner’s designers purchase fabric swatches used to create designs for new lines of
clothing that may subsequently be manufactured. Petitioner also purchases color printers, printer
cartridges and paper, which are used to produce hard copies of the designs. Tangible personal
property used in this manner, in the preliminary conceptual stage of design, is not considered to be
used directly in research and development (see Lenon Sokolowski Models, Dec Tax App Trib,

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Sales Tax
November 4, 1999

May 16, 1991, TSB-D-92(70)S; Sybron Corporation, Adv Op St Tx Comm, May 14, 1985,
TSB-A-85(17)S; Protocom Devices Inc., Adv Op Comm T&F, December 3, 1987, TSB-A-88(4)S).
Accordingly, the swatches, color printers and related supplies purchased by Petitioner do not qualify
for exemption under Section 1115(a)(10) of the Tax Law.

DATED: November 4, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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