If a company designs tools, dies, jigs, and fixtures on a computer for manufacturers, is the sale of those designs subject to Texas sales tax?

Plain-English summary

A company that designs industrial tools, dies, jigs, and fixtures on a computer for manufacturers — and also designs modifications to manufacturers' existing production-line machines — asked the Texas Comptroller's Tax Policy Division how sales tax applied to its work. The company explained that when a manufacturer wants the designed part actually built, the company contracts with a local tool-and-die shop to build it, bills the manufacturer the complete charge, and then pays the tool-and-die shop out of that amount.

The Comptroller (signed by Bettie Peterson, Tax Administration Division) answered with three distinct rules:

• Selling a design alone is taxable as the sale of a pattern for use in manufacturing.
• Selling a design modification for an existing production-line machine is taxable as the repair or remodeling of tangible personal property, or of nonresidential realty, depending on which one the particular machine counts as.
• Creating a design and having the tool built (the combined design-plus-build arrangement described in the facts) makes the entire charge to the customer taxable as a sale of tangible personal property.

The letter adds that patterns, repairs, and tangible personal property sold this way may still qualify for the manufacturing exemption described in the Comptroller's enclosed publication #94-124. As with all STAR letters, the Comptroller notes the opinion is based on the facts presented and different facts, even if similar, may produce a different answer.

What this means for you

Design firms and engineering shops serving manufacturers

If you sell a computer-generated design for a tool, die, jig, or fixture on its own, treat that sale as the sale of a taxable pattern. If you instead design a modification to a customer's existing production machine, treat that as a repair or remodeling charge (of either tangible personal property or nonresidential realty, depending on the machine) rather than as a pattern sale.

Firms that both design and arrange fabrication

If you create the design and then have a tool-and-die shop build the part — collecting one combined payment from the manufacturer and paying the fabricator out of it — the Comptroller treats your entire charge to the customer as a taxable sale of tangible personal property, not as a separate nontaxable design service plus a taxable build.

Manufacturers and accountants evaluating the manufacturing exemption

Even though these design, repair, and fabrication charges are taxable in the first instance, they may qualify for the manufacturing exemption described in Comptroller publication #94-124. Check whether your purchase of a pattern, repair, or finished tool fits that exemption before assuming tax is unavoidable.

Common questions

Q: Is selling a computer-generated design for a tool, die, jig, or fixture taxable in Texas?
A: Yes. The Comptroller ruled that the sale of such designs is taxable as the sale of a pattern for use in manufacturing.

Q: What about designing a modification to a manufacturer's existing machine?
A: That is taxable as the repair or remodeling of tangible personal property or nonresidential realty, whichever applies to the particular machine.

Q: If a design firm both creates the design and has the tool physically built, how is the whole transaction taxed?
A: The total charge billed to the customer is taxable as the sale of tangible personal property — even though part of that charge is passed through to a separate tool-and-die shop that does the actual building.

Q: Can any of this qualify for a tax exemption?
A: The sale of patterns, repairs, and tangible personal property described in this letter may qualify for the manufacturing exemption under Comptroller publication #94-124.

Citations and references

No statutes, rules, or cases were cited by name in this letter; it references Comptroller publication #94-124 regarding the manufacturing exemption.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9506L1354E01

Original ruling text

June 15, 1995

Dear ***:

Thank you for your letter dated June 5, 1995, concerning the taxability of
computer designs.

FACTS: Your company designs on a computer, industrial tools, dies, jigs, and
fixtures for manufacturers. You also design modifications for their existing
production line machines. If a manufacturer wants you to build the designed
part, you then contract a local tool and die shop to build the part, the
complete bill is paid to your company, then you pay the tool and die shop.

RESPONSE: The sale of the designs is taxable as the sale of a pattern for
use in manufacturing.

The sale of design modifications is taxable as the repair or remodeling of
tangible personal property or nonresidential realty (which ever applies to
the particular machine).

When you create a design and have the tool made the total charge is taxable
as the sale of tangible personal property.

The sale of patterns, repairs, and tangible personal property may qualify
for the manufacturing exemption as provided in the enclosed publication

94-124.

This opinion is based on the facts presented. Different facts although
similar may result in different answers.

You may call or write me for additional information or if you have any
questions. The toll free number is 1-800-531-5441, and my extension is
50330. The direct line is 512/475-0330. You may also write to Tax
Administration, Comptroller of Public Accounts.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9606593L