Is the cost of soft patterns and prototype materials an apparel manufacturer uses to develop new clothing designs exempt from New York sales and use tax as research and development?

Plain-English summary

The Apparel Group, Ltd., a clothing manufacturer and distributor, asked whether the materials it uses early in product development are exempt from sales and use tax as research and development. Its process: after designers sketch a clothing concept, Petitioner builds a "soft pattern" (generally bought from outside vendors), then uses that soft pattern to construct an "experimental prototype" -- a sample garment made from fabrics, buttons, zippers, Velcro, and similar materials. The prototype is tested for fit, proportions, durability, waterproofing, warmth, and how it holds up to laundering, letting Petitioner correct and refine the soft pattern before it's converted into a "hard pattern" used to cut materials for actual production. Petitioner argued the soft pattern and prototype are essential, integral steps that can't be skipped -- the final garment design literally cannot be finalized without them.

Tax Law § 1115(a)(10) exempts tangible personal property purchased for use "directly and predominantly" in research and development "in the experimental or laboratory sense" -- but the statute and its regulations (20 NYCRR § 528.11) specifically carve OUT ordinary quality-control testing, efficiency surveys, management studies, consumer surveys, and advertising/promotional research from that exemption, even though those activities might loosely be called "research" in everyday language. The regulations further require that the exempt use be "direct" (actual use performing the R&D work itself, not merely collateral to it) and "predominant" (over 50% of the time). The Department agreed the soft patterns and prototypes fall within qualifying R&D to the extent they're used to develop new products or improve existing ones by testing for quality and performance and correcting design deficiencies before mass production -- but drew a real line: if the same soft patterns or prototypes are used more than half the time for things like consumer-acceptance surveys or efficiency studies, they lose the exemption for that portion of use.

What this means for you

Manufacturers developing new products or refining existing ones

Materials used to build test patterns, mockups, or prototypes during genuine product-development work can qualify for New York's R&D sales/use tax exemption -- but only if you can show the materials are used directly (not just collaterally) and predominantly (over half the time) for developing new products, improving existing ones, or advancing your field's technology. Track how prototype materials are actually used; mixed-use items (partly R&D, partly quality-control or marketing testing) need to clear the 50%-of-time threshold to qualify.

Businesses using prototypes mainly for marketing, quality control, or consumer testing

If your prototypes primarily serve efficiency surveys, quality-control inspection, management studies, or consumer/marketing research -- rather than developing or improving the product itself -- this exemption does not apply to that use, even if a prototype is nominally part of your development pipeline.

Common questions

Q: What's the "predominantly" threshold for the R&D exemption?
A: Over 50% of the time the property is used, it must be used directly in the qualifying research-and-development function -- not just somewhere in the broader development process.

Q: Does testing a prototype for durability or quality automatically disqualify it from the exemption?
A: Not if that testing is aimed at developing or improving the product design itself. It's testing done for "quality control" purposes (i.e., inspecting already-designed production output) or consumer/marketing surveys that the exemption specifically excludes.

Q: Can another manufacturer rely on this ruling for its own prototype costs?
A: No. This advisory opinion binds the Department only as to The Apparel Group, Ltd. and the specific facts it described; another business should confirm its own facts meet the "direct and predominant" test.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(10) (research and development exemption)
• 20 NYCRR § 528.11 (research and development regulations)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_63s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (63) S
Sales Tax
October 2, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S960402C

On April 2, 1996, a Petition for Advisory Opinion was received from The Apparel Group,
Ltd., P.O. Box 32100, Louisville, Kentucky 40232-2100.
The issues raised by Petitioner, The Apparel Group, Ltd., are whether:

1. The cost of soft patterns or materials used to create soft patterns is subject to New York
   sales or use tax; and
2. Materials purchased to create an experimental prototype are subject to New York sales or
   use tax?
   Petitioner provides the following facts. Petitioner is a manufacturer and distributor in the
   apparel industry. Petitioner sells clothing under several different brand names to retailers, including
   company owned retail stores. In the early stages of the manufacturing process, after designers create
   concepts for clothing designs, a soft pattern is produced. This soft pattern is used to create an
   experimental prototype. The prototype is a sample garment which is tested and necessary in order
   to finalize the design of the clothing prior to the actual production of the garment. The process is
   termed "product development." The prototype is made with numerous materials, including fabrics
   of various colors and textures, buttons, zippers, Velcro, etc.
   The prototype is utilized to determine if the article of clothing can be made as originally
   designed. For example, a shirt may be constructed with a pocket or collar of a certain size. The
   process insures the proportions are proper and enables Petitioner to revise the design prior to
   production. If the design of the prototype is not functional, then the soft pattern is corrected and
   adjusted. Experimenting with various shapes and size patterns allows Petitioner to develop the best
   "fit," and therefore, a better product. Once the desired soft pattern is obtained, it is used to create a
   hard pattern. The hard pattern is used to cut materials into the specified shapes needed to
   manufacture the garment.
   Petitioner contends that the cost of the soft pattern (generally purchased from outside
   vendors) and the materials used in creating the prototype should be exempt from sales and use tax
   as tangible personal property purchased for use directly and predominantly in research and
   development of new products and/or to improve existing products. The soft pattern together with the
   prototype allows Petitioner the opportunity to improve and correct any problems or deficiencies that
   may surface prior to the mass production of the garment. Consequently, the primary purpose of the
   soft pattern and prototype is either for the development of new products or the improvement of
   existing products.
   According to Petitioner, the soft pattern and prototype are integral parts of the production
   process. The final product could not be produced without the interim stage of product
   development.While the designers are capable of creating a concept, there are aspects of the garment

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TSB-A-96 (63) S
Sales Tax
October 2, 1996
which cannot be determined until a prototype is actually created. The prototype is tested under
various conditions to determine certain qualities such as: durability; fit; whether a garment is
waterproof; warmth under varying temperature conditions; and strength and resilience during
laundering. For example, if the garment was designed to be waterproof, Petitioner will experiment
with different types of fabrics to determine the fabric best suited for this purpose. Therefore, it is
necessary to complete the product development stage prior to mass production. The prototype is used
exclusively during the development stage of the product.
Section ll15(a)(10) of the Tax Law provides an exemption from the sales tax
for:
Tangible personal property purchased for use or consumption directly and
predominantly in research and development in the experimental or laboratory sense.
Such research and development shall not be deemed to include the ordinary testing
or inspection of materials or products for quality control, efficiency surveys,
management studies, consumer surveys, advertising, promotions or research in
connection with literary, historical or similar projects.
Section 528.11 of the Sales Tax Regulations state in part:
(b)...(1) Research and development in the experimental or laboratory sense means
research which has its ultimate goal:
(i) basic research in a scientific or technical field of endeavor;
(ii) advancing the technology in a scientific or technical field of endeavor;
(iii) the development of new products;
(iv) the improvement of existing products;
(v) the development of new uses for existing products.
(2) Research and development in the experimental or laboratory sense does no
include:
(i) testing or inspection of materials or products for quality control (for machinery
and equipment used for quality control in the production of products for sale, see
section 528.13 of this Part);
(ii) efficiency surveys:
(iii) management studies;
(iv) consumer surveys, advertising and promotions; and
(v) research in connection with literary, historical or similar projects.

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Sales Tax
October 2, 1996
(c)...(1) Direct use in research and development means actual use in the research and
development operation. Tangible personal property for direct use would broadly
include materials worked on, and machinery, equipment and supplies used to perform
the actual research and development work . Usage in activities collateral to the actual
research and development process is not deemed to be use directly in research and
development.
(2) Tangible personal property is used predominantly in research and development
if over 50 percent of the time it is used directly in such function.
To the extent that soft patterns and materials used in creating prototypes are used to perform
research to develop new products or improve existing products, they fall within the meaning of
regulation section 528.11(b)(1). However, to qualify for exemption, the soft patterns and materials
used to create the prototype must be used predominantly (over 50% of the time) in research and
development. If the soft patterns and prototypes are used more than 50% of the time in activities
other than research, they will not qualify for exemption. For example, the use of prototypes to
conduct efficiency surveys, consumer surveys etc. which are designed and developed to obtain
information relative to the acceptance of the garments by consumers in the marketplace would not
be deemed to be used predominantly in research and development. Additionally, the soft patterns and
prototypes must be used directly in research and development. Usage in activities collateral to
research and development does not qualify as research and development.
Accordingly, where the soft patterns and materials used to create the soft patterns and
prototypes to test for quality and performance standards or improve and correct any problems or
deficiencies of the garment prior to manufacturing the garment, are used directly and predominantly
(more than 50% of the time) for qualified purposes, they will qualify for the exemption provided by
section ll15(a)(10) of the Tax Law.

DATED: October 2, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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