Is rigorous two-month testing of printers a nontaxable demonstration when the tester later sells usable units and destroys unsalable ones?

Plain-English summary

A printer vendor bought printers and rigorously tested each one for about two months to determine whether it met the vendor's standards. After testing, the vendor sold usable printers as used equipment and destroyed units that could not be sold.

The Board concluded that this standards testing was a use beyond solely demonstrating or displaying the printers while holding them for sale. The later sale of successful units did not make the earlier testing nontaxable.

The memorandum also corrected a broader annotation about compatibility testing. Testing an item to learn whether that item works with an equipment system can be demonstration of the tested item. But the separate equipment used to conduct that test is not thereby in nontaxable demonstration use.

What this means for you

Printer and technology vendors

Buying units for sustained qualification testing is different from merely demonstrating them to prospective customers. Later selling tested units as used property does not erase the testing use.

Product-testing teams

Separate the item whose performance or compatibility is being demonstrated from equipment serving as the testing tool. The memorandum treated those roles differently.

Accountants and tax professionals

Document the purpose, duration, disposition, and role of each item in a testing program. A resale plan alone did not control this result.

Common questions

Q: Did the Board treat the two-month printer tests as demonstration?
A: No. It viewed the rigorous standards testing as a use other than solely demonstration or display.

Q: Did selling successful printers after testing prevent tax?
A: No. The opinion still treated the testing as an intervening taxable use.

Q: What happened to printers that could not be sold?
A: The described purchaser destroyed them.

Q: Is compatibility testing always taxable?
A: No. Testing the item itself for compatibility can be demonstration of that item. The memorandum says the separate equipment used to test it is taxable test equipment.

Citations and references

• Sales and Use Tax Annotation 210.0560
• Current Legal Digest 480 — described as revising Annotation 210.0560; digest not reproduced in the official PDF
• Board auditing staff's February 3, 1993 memorandum — questioning the revised annotation; memorandum not reproduced in the official PDF
• November 9, 1990 opinion — system-compatibility testing conclusion quoted and copy described as attached; attachment not reproduced in the official PDF
• Requested correction of Annotation 210.0560 — requested by copy of the memorandum; final correction record not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0510
• Original supporting opinion: 210.0510 PDF

Original ruling text

State of California

Board of Equalization
Legal Division

Memorandum
To

: Mr. Verne Ferreira

210.0510
Date :

June 30, 1993

Oakland – Auditing (CH)

From

: Ronald L. Dick
Senior Tax Counsel

Subject : Current Legal Digest 480

Annotation 210.0560
This is in reply to your February 3, 1993 memorandum regarding Current Legal Digest 480 which revised Business Taxes Law Guide Annotation 210.0560. Specifically, you questioned the third example in the annotation which states: “3. Equipment used to test an item to determine whether that item will function with other equipment as part of an equipment system.” The annotation was based on a November 9, 1990 opinion (copy attached) which concluded that, “demonstration and display includes testing of an item with other equipment to determine whether that item will function with other equipment as part of an equipment system.” The annotation, as written, does not accurately state the conclusion reached in the opinion. The testing of the item does not result in a taxable use of the item. However, the annotation incorrectly states that the use of the test equipment is nontaxable. By a copy of this memorandum, we are requesting that the annotation be corrected to state: “3. An item tested to determine whether that item will function with other equipment as part of an equipment system.” You also asked whether tax applies to the sale of printers to a person who will purchase the printers to rigorously test them to determine whether they meet standards of the purchaser. The purchaser tests the printers for approximately two months. At the end of the testing, the purchaser either sells the used printer or destroys it, if it is unsalable. The purchaser will market other printers of the vendors whose printers were successful in the test. We believe that under the facts you described, the testing is a use of the printers other than solely for demonstration or display while holding those printers for sale in the regular course of business. We hope this answers your questions; however, if you need further information, feel free to write again.

Harry L. Say

RLD:sr

-2-

December 20, 1963
585.0480