Does a manufacturer owe New York use tax on its own products that its sales reps use as demonstration units before those units are eventually sold?

Plain-English summary

Datascope Corp. manufactures electronic medical monitoring equipment and disposable supplies. It gives sales reps an inventory of products to carry into the field, demonstrate to customers, and take orders on; the reps hold a given demo unit for about two years, after which most units are recycled to inventory and sold (with sales tax charged at sale). The demo units are capitalized on Datascope's books as machinery and equipment and depreciated. Datascope argued that no use tax should apply because the units are always intended for eventual sale (and are taxed then), and that reps merely hold the equipment. It asked whether compensating use tax is due.

The Department held the demonstration use is taxable.

• The use-tax rule. Tax Law § 1110 imposes a compensating use tax on the use in New York of tangible personal property a person manufactures, processes, or assembles when the maker also offers the same kind of property for sale — measured by the price at which the maker offers such items for sale. But § 1110 also says that "the mere storage, keeping, retention or withdrawal from storage" by the maker is not a taxable use.
• Demonstration is more than storage. The Department found the reps' use of the equipment for demonstration goes beyond mere storage or retention. When Datascope withdraws the equipment from inventory, capitalizes it as machinery and equipment, and depreciates it, and its reps use it to demonstrate products, that is a taxable use.
• Future sale doesn't save it. The intention to sell the units later does not make them any less subject to use tax at the time of the demonstration use. (That the units are also taxed when finally sold does not change the result.)
• Result and valuation. The demonstration equipment is subject to compensating use tax, computed under 20 NYCRR 531.3(b)(3) on the price at which Datascope offers the same items for sale (per its price list, catalog, or sales records).

What this means for you

Pulling your own product out of inventory to use as a demo unit can trigger use tax. New York's manufacturer use tax exempts only "mere storage, keeping, retention or withdrawal from storage." Actually using the goods — here, demonstrating them in the field — is a taxable use.

Capitalizing and depreciating the units is a strong signal of taxable use. When you move goods from inventory onto your books as depreciable machinery and equipment, you've treated them as assets in use, not held for sale — and that use is taxed.

"We'll sell it eventually" is not a defense. The plan to return demo units to inventory and sell them later (and collect sales tax then) does not excuse use tax at the time you use them for demonstration.

The tax base is your selling price. For self-manufactured goods, the use tax is computed on the price at which you offer the same items for sale, using your price list, catalog, or average of prices charged.

Common questions

Q: I make a product and use some units as demos before selling them. Do I owe use tax?
A: Yes, if you use them (e.g., demonstrating in the field). Only mere storage or withdrawal from storage is exempt; actual demonstration use is taxable.

Q: The demo units are always sold later and taxed then. Isn't that enough?
A: No. The intention to sell later doesn't remove the use tax owed at the time you use the units for demonstration.

Q: How is the use tax calculated on my own product?
A: On the price at which you offer the same kind of item for sale — from your price list, catalog price, or the average of prices charged customers (20 NYCRR 531.3(b)(3)).

Citations and references

Statute and regulation:

• Tax Law § 1110 — compensating use tax on self-manufactured property the maker uses while offering the same kind for sale; excludes mere storage, keeping, retention, or withdrawal from storage
• 20 NYCRR 531.3(b) — applies the use tax to property manufactured/processed/assembled by the user and values it at the price the user offers such items for sale (paragraph (3))

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a87_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87(44)S
Sales Tax
November 12, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S861216B

On December 16, 1986, a Petition for Advisory Opinion was received from Datascope Corp.,
3 Fir Court, Oakland, New Jersey 07436.
The issue raised is whether the compensating use tax is due on equipment capitalized and
principally used for demonstration purposes by Petitioner's representatives in the field. Such
equipment is subsequently sold in the normal course of business.
Petitioner manufactures and sells electronic medical monitoring equipment and disposable
medical supplies. An inventory of Petitioner's products is provided to its sales and service
representatives who transport this inventory to various customers in their sales and service territory.
The sales representatives, upon visiting prospective or existing customers, demonstrate their products
and take orders for them from their customers. These orders are then forwarded to Petitioner's home
office in Paramus, New Jersey for acceptance and processing. The sales representatives generally
carry a specific product in their inventory for an average period of two years. This equipment is
capitalized on Petitioner's books as machinery and equipment and is subject to periodic depreciation.
After a sales representative has held the equipment for the two-year period, 80% of the
equipment is recycled to inventory and sold to various customers. The remaining 20% is transferred
to Petitioner's service representatives, who travel to customers who have requested service on their
products. Ordinarily, a service representative will service a product at the customer's location. If
the product cannot be repaired at the customer's location, then a similar item (from the service
representatives stock) is loaned to the customer until the defective unit is repaired. Approximately
75% of the equipment is repaired at the time of the service call. The service representative holds the
equipment in his stock for an average 3-year period, at which time approximately 90% of the
equipment is placed in used equipment inventory and sold. The remaining 10% is written-off as
outdated or excess inventory.
At the time any of Petitioner's equipment is sold, whether new or used, any applicable sales
taxes is charged to Petitioner's customers.
It is Petitioner's contention that compensating use tax should not apply to the sales and
service representatives equipment inventory, due to the following:
1.

It is the intention of Petitioner that, when an item is manufactured, it will be subject
to eventual sale. In reality, approximately 98% of all electronic equipment is
eventually sold, with the remaining amount written off as obsolete inventory.
Petitioner contends that a taxable transaction will occur at the time of eventual sale
and not during the time the products are used for display purposes.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-87(44)S
Sales Tax
November 12, 1987

2.

The equipment held by Petitioner's service representatives should also not be subject
to compensating use tax. A large percentage of the service equipment inventory may
remain in the service representatives possession for as long as six months without
being used, and since this equipment is only being held or retained by the service
representative, no taxable use occurs. Furthermore when these service items are
eventually sold, they would be subject to the applicable sales tax.
Based on the above facts and circumstances, Petitioner respectfully requests an
advisory opinion relating to the applicability of the compensating use tax to sales and
service equipment inventories.

Section 1110 of the Tax Law imposes a compensating use tax on the use within this state of
"any tangible personal property manufactured, processed or assembled by the user, if items of the
same kind of tangible personal property are offered for sale by him in the regular course of
business...." Section 1110 provides that the tax is computed based upon "the price at which items
of the same kind of tangible personal property are offered for sale by the user." Section 1110 also
provides that "the mere storage, keeping, retention or withdrawal from storage of tangible personal
property by the person who manufactured, processed or assembled such property shall not be deemed
a taxable use by him."
Paragraphs (1) and (3) of section 531.3(b) of the sales tax regulations contain additional
information relative to Petitioner.
(b) Tangible personal property manufactured, processed or assembled by the user.
(1) A compensating use tax is imposed on the use of any tangible personal property
which was manufactured, processed or assembled by the user, if items of the same kind of
tangible personal property are offered for sale by him in the regular course of business.
•

•

•

•

(3) Where the user sells items of the same kind to other persons in the regular course
of business, the basis of tax on the use of tangible personal property which is manufactured,
processed or assembled by the user is the price at which such items are sold as evidenced
by a price list, catalog price or record of sales. In the absence of a catalog price or price list,
the average of the prices charged various customers will be deemed the price which the user
would sell such item to the persons during the regular course of business.

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TSB-A-87(44)S
Sales Tax
November 12, 1987

The use by Petitioner's salesmen of equipment for demonstration purposes is a taxable use
since such use goes beyond "mere storage, keeping, retention or withdrawal from storage" when
Petitioner withdraws the equipment from inventory, capitalizes it on its books as machinery and
equipment and depreciates it. Petitioner's intention to sell such equipment at some time in the future
does not render the equipment any the less subject to the compensating use tax at the time of use by
Petitioner's salesmen. Accordingly, equipment manufactured by Petitioner and used for
demonstration purposes as described above is subject to the compensating use tax which is to be
computed in accordance with section 531.3(b)(3) of the sales tax regulations.

DATED: November 12, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.