Were automotive-wheel validation tests taxable as services tied to the sale of taxable production molds?

Plain-English summary

An automotive supplier sold taxable molds and support tooling to vehicle manufacturers, while separately selling the resulting aluminum wheels for resale. It charged $409,170 for validation testing. The audit treated those charges as taxable services tied to the molds; the manufacturer said the testing evaluated the resale wheels.

The appeals recommendation agreed with the manufacturer. The engineering specification described a wheel-testing program spanning pre-production, in-process, and continuing production phases, all directed toward conformance with the wheel's design intent. Failed tests might lead to mold, material, or process changes, so the tooling and process were incidentally evaluated, but the primary purpose was validating the wheels.

The conclusion was reinforced by evidence that another vehicle manufacturer using the same tooling did not require the validation tests. The recommendation canceled the $409,170 taxable measure attributable to the testing.

Why the testing was assigned to the wheels

• The submitted engineering specification focused on wheel design intent.
• Production wheels were sampled and tested through multiple phases.
• Tooling, material, and process changes were possible responses, but not the ultimate testing objective.
• The same tooling could be used for a customer that did not require the tests.

Citations and references

• California Sales and Use Tax Regulation 1525(a) (as cited)
• Redacted vehicle manufacturer's engineering specification for cast-aluminum-wheel validation, including minimum tests, sample sizes, frequencies, three test phases, random production sampling, and design-intent standard — quoted and described; complete specification not reproduced in the official PDF
• Tooling purchase orders and invoices on which validation charges always appeared, wheel purchase and resale records, title transfer before production, California tooling use, and different testing requirements for two manufacturers using the same tooling — facts stated; underlying orders, invoices, title documents, records, and comparison evidence not reproduced in the official PDF
• September 23, 1992 Van Nuys Appeals conference on a redacted petition covering July 1, 1985–March 31, 1989 and $409,170 of claimed-exempt validation charges — petition, audit, conference notice, transcript, exhibits, briefs, and other evidence not reproduced in the official PDF
• December 3, 1990 revised audit and August 5, 1993 recommendation to cancel the $409,170 validation-testing measure and otherwise redetermine — revised audit, computation, final Board action, redetermination, collection, refund, appeal, and later outcome not supplied
• Official Annotation 295.0728's molds, wheel production, pre- and in-production testing, engineering specification, design-intent goal, possible tooling, material and process changes, incidental mold testing, customer comparison, resale classification, and Aug. 5, 1993 date — annotation omits the petition and audit period and measure, conference, purchase-order and invoice placement, title and California-use facts, three test phases and random sampling, revised audit, recommendation status, missing records, and final outcome and supplies no additional proceeding record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0728.pdf

Original ruling text

STATE OF CALIFORNIA

295.0728

BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION
In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
S--- I--I---, INC.
Petitioner

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DECISION AND RECOMMENDATION

No.

SR -- XX-XXXXXX-010

The Appeals conference in the above-referenced matter was held by Staff Counsel Michele F. Hicks on September 23, 1992 in Van Nuys, California. Appearing for Petitioner:

Mr. R. J--- O--Vice President
Finance & Treasurer
Mr. D--- L--Tax Manager
Mr. M--- J. O--Director
O---Programs

Appearing for the
Sales and Use Tax Department:

Mr. William J. Faiola
Supervising Tax Auditor
Mr. Luis Torres
Tax Auditor
Protested Item

The protested tax liability for the period July 1, 1985 through March 31, 1989 is measured by: Item

E. Claimed exempt validation
testing charges.

State, Local
and County

$409,170

S--- I--I---, Inc.
SR -- XX-XXXXXX-010

-2-

August 5, 1993
295.0728

Petitioner’s Contention
Validation testing is exempt because the validation work is performed on the wheels which are resold rather than on the tooling/mold. Summary Petitioner is a manufacturer of automotive products. A large part of petitioner’s business involves the manufacture and sale of cast aluminum road wheels to [car manufacturers]. The sales of wheels to [car manufacturers] are not subject to sales tax because [car manufacturers] purchase these wheels for resale. In order for the Company to produce wheels for [car manufacturers], certain molds and support tooling are required. Therefore, prior to the initiation of wheel production, petitioner receives a purchase order from [car manufacturers] to produce all necessary tooling to support the volume of wheels which the Company is expected to produce. Although the tooling remains at all times at the Company’s manufacturing facility, title to the tooling is transferred to [car manufacturers] prior to initiation of production. Because these tooling sales are not made for resale and the tooling is used exclusively in California, such sales are subject to sales tax. Petitioner recognizes this tax liability. The issue in this appeal concerns the amounts petitioner charges [car manufacturers] for validation testing. Petitioner contends that the testing is done to prove the design intent of each individual wheel style and thus the testing is done on the wheels. Since the wheels are sold for resale, no tax is due on these charges. The audit staff contends that the testing is done to validate the molds. The validation charges are always on tooling invoices and purchase orders. The staff presumes that [car manufacturers] will not take title to the molds until [car manufacturers] is satisfied that the molds produce unblemished wheels. Therefore, the staff contends that the validation testing is a service that is part of the sale of the molds and is taxable. Petitioner has submitted a copy of [car manufacturers]’s engineering specification for the validation testing. The specification is for the cast aluminum wheel. The specification provides that “[t]he engineering tests, sample sizes, and test frequencies contained within the engineering specification reflect the minimum requirements established to provide a regular evaluation of conformance to design intent.”

S--- I--I---, Inc.
SR -- XX-XXXXXX-010

-3-

August 5, 1993
295.0728

There are three test phases: (1) Production Validation; (2) In-Process Tests Phase 1; (3) In-Process Tests Phase 2. The first phase calls for tests to be completed with parts from production tooling. The second phase calls for tests to demonstrate manufacturing process capability and must be completed using production tooling and manufacturing processes. The third phase consists of tests completed with production parts (wheels) on a continuing basis. Sample wheels for these tests are selected on a random basis to represent the entire production population. Analysis and Conclusions Sales and Use Tax Regulation 1525(a) provides: “(a) Tax applies to the sale of tangible personal property to persons who purchase it for the purpose of use in manufacturing, producing or processing tangible personal property and not for the purpose of physically incorporating it into the manufactured article to be sold. Examples of such property are machinery, tools, furniture, office equipment, and chemicals used as catalysts or otherwise to produce a chemical or physical reaction such as the production of heat or the removal of impurities.” The factual question here is what is being tested? The wheels produced by the molds or the molds that produce the wheels. This question is rather like asking whether the chicken or the egg came first. While the testing does serve to validate the molds, we believe that the primary purpose is to test the wheels. The engineering specifications which have been submitted outline a comprehensive wheel testing program from pre-production through production. The goal is repeatedly described as providing an evaluation of “design intent” of the wheel. If any requirements of the tests are not met, the result could be changes in tool design, or changes in material composition, or changes in manufacturing process. Thus the mold is incidentally being tested, along with the manufacturing process and the material composition, but the ultimate goal of the testing is to validate the wheel. This conclusion is supported by the fact that the wheel validation tests which petitioner performs for [car manufacturers 1] are not required by [car manufacturers 2] even though the tooling for each is the same. This fact indicates that the validation tests are not required for the tooling itself.

S--- I--I---, Inc.
SR -- XX-XXXXXX-010

-4-

August 5, 1993
295.0728

Recommendation
Cancel the $409,170 measure of tax attributable to wheel validation testing. Otherwise, redetermine in accordance with the revised audit dated December 3, 1990.

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MICHELE F. HICKS, STAFF COUNSEL

8/5/93
________
DATE