When were circuit-board testing charges taxable, and how was a customer-specific drilled fixture plate treated?

Plain-English summary

A printed-circuit-board manufacturer offered optional testing of its own bare boards. Most customers bought boards for resale. The testing used a $200,000 bare-board tester and fixtures assembled from reusable interconnect pins, base plates, spacers, screws, and other standard tools. A customer-specific plexiglass piece was drilled to match the holes in that customer's board and was reusable.

The customer price reflected test-operator labor and machine time plus fixture-assembly labor. Operators assembled and verified a fixture, tested the board, disassembled the fixture, and reused the standard parts. The plexiglass cost only a few percent of the testing charge. Quality-assurance testing was generally nontaxable when the tested boards were sold for resale and taxable when the boards were sold at retail, whether or not the charge was separately stated.

Tool ownership complicated the answer. The manufacturer said it retained title and possession of the tools and that the plexiglass was worthless. The auditor said the drilled plate became customer property, was held by the manufacturer as bailee, and would be delivered on request. If the customer owned it, the portion of the fixture charge attributable to the fabricated plate was taxable regardless of the board's resale status. The manufacturer could take a tax-paid-purchases-resold deduction for the plate's material cost.

If the customer did not own the plate, the manufacturer consumed all tooling, tax applied to the tooling sale to the manufacturer, and the testing charge followed only the board sale's resale or retail status. Testing customer-furnished parts without transferring title to any property was a nontaxable service.

Source and live-annotation limits

The PDF describes vendor invoices with tax added but does not reproduce them. It also does not include the May 1 request, customer contracts, board sales, resale documents, testing specifications, tools, plates, cost records, price calculations, title terms, bailment records, delivery requests, audit record, transaction samples, tax measure, assessment, payment, or later outcome. Because the source preserves opposing ownership accounts, it does not establish which fixture branch applied to a completed transaction.

The live annotation preserves the fixture composition, customer-specific plate, ownership alternatives, resale-versus-retail testing rule, taxable transferred-tooling rule, provider-consumption alternative, and service-only result. It omits the May 1 request, optional nature of testing, customer mix, tester price, detailed standard tools, vendor tax, pricing components, assembly and reuse steps, low plate-cost ratio, competing manufacturer/auditor accounts, bailment and requested delivery, tax-paid deduction, missing records, and lack of cited legal authority.

What this means for you

Manufacturers, testing providers, and tax professionals

Document whether the board is sold for resale or at retail, whether testing is separate from a board sale, each fixture component, who owns and may demand the customer-specific plate, title and bailment terms, tooling charges, material cost, and tax paid to vendors.

Common questions

Was testing a board sold for resale taxable?

Generally no. Testing a board sold at retail was generally taxable.

Was the customer-specific plate taxable?

If ownership passed to the customer, yes—the fabricated plate's portion of the fixture charge was taxable regardless of the board sale.

What if the manufacturer retained the plate?

The manufacturer consumed all tooling, and the testing charge depended only on the board sale's resale or retail status.

What if the manufacturer only tested customer-furnished parts?

The charge was nontaxable if no property title transferred to the customer.

Citations and references

• May 1, 1990 request — referenced but not included
• Vendor invoices for standard fixture tools and plexiglass with sales tax added — described but not included
• Auditor's account that the drilled plate became customer property held by the manufacturer as bailee — described without the audit record
• No numbered statute, regulation, ruling, case, or other legal authority is cited in the opinion

Verbatim support

From the official July 10, 1991 letter:

Generally, testing charges are nontaxable, even if separately stated, when the item tested is sold for resale. Generally, testing charges are taxable, whether separately stated or not, if the item tested is sold at retail.

Accordingly, tax applies to some portion of the fixture charge; that is, the portion of the charge attributable to the fabricated plexiglass plate.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/345-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/345-0082.pdf

Original ruling text

345.0082

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-3723

July 10, 1991
Ms. K--- M. I--Controller
H--- T--- Corporation
XXXX --- Road
--- ---, CA XXXXX
H--- T--- A--- Co.
SR -- XX-XXXXXX
Dear Ms. I---:
This is in response to your letter of May 1, 1990.
We understand that H--- T--- is a printed circuit board manufacturer. You offer testing service for your customers. You test the bare boards which you manufacture for assure quality and performance. This testing service is one of the numerous options available to your customers. You have sought clarification as to whether certain testing charges are subject to sales tax. The majority of your customers purchase your products for resale. You state that it is your understanding that the actual testing labor charge, per part, is not subject to tax if your customer is purchasing the part for resale. In your view, the testing becomes part of the production, and you are not selling a tested part. In order to test the printed circuit board, you must assemble a “fixture” which adapts the board to be tested to the bare board tester. The particular tester used for the testing of these parts is a $200,000 piece of capital equipment. To use this tester to test the board, you have standard tools which you use over and over to test different boards. The tools consist of interconnect pins, fixture base plates and ancillary spacers, screws, etc., required to construct the fixture. All of these tools were invoiced to H--- with the applicable sales tax added. The only part of the fixture that is special for a particular customer’s board is a piece of plastic which is drilled to match the holes in the customer’s board. This plexiglass material is also purchased as a taxable item to H--- T---. The cost of this plastic is usually only a few percent of the cost of the testing charge. We understand from our auditor that this specially drilled fixture plate is reusable and becomes the property of the customer, but is retained by you as a bailee and would be delivered to the customer upon the customer’s request.

Ms. K--- M. I---

-2-

July 10, 1991
345.0082

The price you charge a customer is determined by two factors. One is the test operator’s labor and machine time. The other is the labor charge to assemble a fixture. Your test operators assemble fixtures, verify the proper operation of the fixtures, and then test the board for which the fixture was assembled. After a board is tested, the fixture is disassembled, and the parts are used to assemble a fixture for another board. You state that title and possession of the tools remain at Hunter, and that the plexiglass is worthless. Our auditor advises us that the plexiglass becomes the property of the customer and is held by you as bailee. Generally, charges for qualify assurance testing are taxable or nontaxable, depending upon whether the item tested is sold for resale or is sold at retail. Generally, testing charges are nontaxable, even if separately stated, when the item tested is sold for resale. Generally, testing charges are taxable, whether separately stated or not, if the item tested is sold at retail. The problem is complicated when tooling or fixtures are sold to the customer. The charge made to the customer for the tooling, which becomes the property of the customer, is always taxable whether the items tested are sold for resale or are sold at retail. Property becoming a component part of the tooling fixtures sold to the customer may be purchased for resale. In your case, it is evident that the only piece of the fixture which is possibly sold to the customer is the drilled plexiglass plate. It is clear that title to other tooling items are retained by you. Accordingly, tax applies to some portion of the fixture charge; that is, the portion of the charge attributable to the fabricated plexiglass plate. A tax-paid resold deduction may be taken with respect to the materials cost of the plate. If the facts are that the customer does not become the owner of the plate, matters are simplified greatly. You are then the consumer of all tooling items, including the plexiglass materials, and tax applies on the sale of these items to you. Then, the taxability of the itemized testing charge to the client is dependent only upon the nature of the sale of the parts as a resale or a sale at retail, as previously discussed. If you provide testing services only, the charge is not subject to tax. The assumption here is that you are testing customer-furnished parts and you do not transfer title to any property to the customer. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel
GJJ:sr
cc:

Mr. John D. Wishart
Supervising Tax Auditor
San Jose District