Does benchmark testing create taxable use when computers are withdrawn from resale inventory solely to demonstrate performance and then returned for sale?

Plain-English summary

A computer-industry representative asked about computers and components removed from resale inventory solely to establish performance benchmarks. Manufacturers ran industry-standard, customized industry-standard, and customer-specific performance demonstrations, published the results through performance councils, and returned the equipment to inventory for sale.

The Board treated that benchmark testing as demonstration rather than taxable use. The conclusion rested on the described facts: the equipment was used exclusively to establish performance levels, the testing laboratory did no research and development, customers did not fund the tests, and the components were neither capitalized nor expensed before being returned to resale inventory.

Sections 6094 and 6244 generally make a purchaser's use of resale property taxable when it goes beyond retention, demonstration, or display. The letter concluded that these benchmark activities stayed within the demonstration exception.

What this means for you

Computer manufacturers and technology sellers

Performance testing can qualify as demonstration when its purpose is to give customers comparable sales data about the property itself and the tested items remain resale inventory.

Product-testing teams

Document the testing purpose and what happens to each component afterward. The letter specifically relied on exclusive benchmark use, no research and development in the laboratory, and return to inventory for ordinary sale.

Accountants and tax professionals

Do not extend the result automatically to engineering, research, production, or other internal uses. The opinion addressed benchmark demonstrations under a narrow stated fact pattern.

Common questions

Q: Did removing the computers from inventory itself trigger use tax?
A: No. On these facts, the temporary withdrawal was solely for demonstration through benchmark testing.

Q: Could the testing be tailored to a specific prospective customer?
A: Yes. The facts included systems configured to a customer's requirements and tested with customer software and data, at no cost to the prospective customer.

Q: What happened after testing?
A: The components were returned to inventory and held for sale in the regular course of business.

Q: Did the letter approve research-and-development use?
A: No. It expressly stated that no research and development occurred in the testing laboratory.

Citations and references

• California Revenue and Taxation Code §§ 6094 and 6244
• Requester's February 7, 1994 letter — benchmark methods and accounting treatment quoted at length; separate letter not reproduced in the official PDF
• Standard Performance Evaluation Corporation and Transaction Processing Performance Council benchmark materials — organizations and review/publication process described; materials not reproduced in the official PDF
• Copy to a redacted District Administrator — copy recipient listed; no separate transmittal record supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0041
• Original supporting opinion: 210.0041 PDF

Original ruling text

210.0041

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

April 6, 1994

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. E--- T--E--- T--- & Associates
XXXX ---, Suite XXX
---, CA XXXXX
Dear Mr. T---:
This is in reply to your February 7, 1994 letter regarding the application of use tax to the cost of computers and computer components withdrawn from inventory solely for the purpose of demonstrating their performance level. You explained that, once the performance levels, or benchmarks, are established, the computers are returned to inventory and held for sale in the regular course of business. You provided the following additional information: "1.

Industry standard performance measurements are used by all of the major computer systems manufacturers to demonstrate that their products perform at competitive levels. The only purpose of a benchmark is to provide a common yardstick with which to compare performances. Benchmarks provide a mechanism for customers to compare products on a consistent basis and reduces the need for the manufacturer to perform demonstrations at customer sites. The ability of a manufacturer to furnish performance numbers is critical to the success of their field sales force. Comparative performance ratings furnish empirical data that can provide the sales force a competitive advantage.

"2.

Benchmarks are developed by councils such as the Standard Performance Evaluation Corporation (SPEC) and the Transaction Processing Performance Council (TPC). There are multiple ways a computer manufacturer can demonstrate performance. The most commonly used methods are the Industry Standard Performance Demonstration,

Mr. E--- T---

-2-

April 6, 1994
210.0041

Customized Industry Standard Performance Demonstration, and Custom Customer Performance Demonstration. 2.1

Industry Standard Performance Demonstration. Typically, a very large system is configured in a testing laboratory. The laboratory is used exclusively for testing. No research and development is performed in the laboratory. Demonstrations are run to demonstrate performance levels Only. Several measures of performance are required. Demonstrations can take to up six months to complete. The configuration in the lab will change on a regular basis as new options become available. All components of the system configuration must be available on a manufacturer's price list within 12 months of the manufacturer's filing of demonstration data with a performance council.

2.2

Customized Industry Standard Performance Demonstration. A system is configured in the lab that is similar to a specific customer's system requirements. Industry standard performance demonstrations are conducted on the system at no cost to a potential customer.

2.3

Custom Customer Performance Demonstration. A system is configured in the lab that is identical to a customer's requirements. The customer's application software and data are used to run performance specific tests that demonstrate the machine's performance level. This type of demonstration is done for large prospective customers and is not funded by the customer.

"3.

Demonstrations are conducted by manufacturers and the results are submitted to the councils for review. The results are published and made available to the public.

"4.

Components used in the demonstrations are withdrawn from inventory, used exclusively to establish performance standards, then returned to inventory for sale. The components are neither capitalized or expensed for either financial statement or federal income tax purposes."

If a purchaser who gives a resale certificate or purchases property for the purpose of reselling it makes any storage or use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business, the storage or use is taxable as of the time the property is first so stored or used. (Rev. & Tax Code Sections 6094, 6244.)

Mr. E--- T---

-3-

April 6, 1994
210.0041

We believe that benchmark testing performed under the facts you described is a demonstration of the property by the purchaser while holding it for sale in the regular course of business. Accordingly, we believe that the benchmark testing is not a taxable use of the property. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:plh
---

cc:

--- District Administrator - --