Was a manufacturer's research-department consumption of metal sheets bought as resale raw material subject to use tax?

Plain-English summary

A manufacturer bought metal sheets outside California as raw material for products it made and sold. Its research department consumed some sheets in three ways: checking supplier specifications, testing enamel quality, and comparing which sheets worked best for particular purposes.

California treated supplier-specification testing as part of the inevitable material loss of manufacturing, not taxable use. But sheets consumed to test enamel or improve or develop products were used in experimental work and were taxable.

Common questions

Why was supplier-specification testing nontaxable?

The source treated that consumption as inevitable loss connected with manufacturing.

What made the other tests taxable?

They used the sheets as tools or subjects of experimental work to evaluate enamel quality or develop better or new products.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/570-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/570-0140.pdf

Original ruling text

570.0140

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

June 1, 1955

--- & --Attorneys at Law
XXX --- Street
--- --- X, California

Your letter of January 21

Gentlemen:
A client of yours is a manufacturer who purchases metal sheets outside the State. The sheets are for use as a raw material and become a component part of a product which it manufactures and sells. Some of the metal sheets are turned over to the research department for various purposes, and you ask if the use tax applies to such sheets. Some of the sheets are tested to make sure that the supplier is following specifications. Some of the sheets are used to test the quality of various enamels which are applied to the sheets. Still others are tested to see which are best for certain purposes. In all three instances the metal sheets are consumed by the research department and cannot be used in your client’s business. It is our opinion that the testing of the sheets to make certain that the supplier is following specifications is merely part of the inevitable loss of material connected with any manufacturing process and is not a taxable use. The other two uses of the metal sheets appear to be in the nature of experimental work for improving the product or for developing new products, and it is our opinion that this type of use is taxable. Very truly yours,

Bill Holden
Associate Tax Counsel

BH:ph
cc:

--- --- – Tax Administrator