Were separately listed design, engineering, manufacturing, and performance-testing charges taxable when a manufacturer sold custom equipment?

Plain-English summary

A manufacturer agreed to design and engineer custom equipment, manufacture it from materials the manufacturer supplied, and test it before shipment. The customer would review and approve the design drawings and calculations before manufacturing began, and the manufacturer would not install the equipment.

The Comptroller said all separately listed charges were related to producing and selling the equipment and were taxable as part of its sales price. That included “drawings and calculations engineering approval,” manufacturing the equipment, and performance testing.

The letter quoted Texas Tax Code § 151.007, which defined sales price as the total amount for which a taxable item is sold without deductions for the item, materials, labor or services, other expenses, or the listed transportation costs.

What this means for you

Separately stating pre-production design, engineering, or testing did not remove those amounts from the taxable price when they were part of delivering the custom-made equipment.

Common questions

Were the design and engineering charges taxable? Yes.

Was performance testing taxable? Yes.

Did separate invoicing change the result? No. The Comptroller treated every listed charge as part of the equipment's selling price.

Did the manufacturer install the equipment? No. The ruling states that the manufacturer would not install it.

Citations and references

• Tex. Tax Code § 151.007 (sales price)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9101L1069C11

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller January 23, 1991

Dear *****:

The request for a tax ruling that you sent to Lucy Glover was
given to me for a response.

You stated that a manufacturer was asked to design and engineer,
custom manufacture and then test a piece of equipment prior to
shipment. The manufacturer will furnish all materials but will
not install the equipment. The manufacturer must allow the cus-
tomer to review and approve of the design drawings and calcula-
tions prior to the start of the custom manufacturing process.

All of these charges that must be listed separately to the cus-
tomer, including the design and testing, are related to the pro-
duction and sale of the equipment. The charges are taxable as
part of the selling price. This includes the fee for "drawings
and calculations engineering approval," "manufacture of equip-
ment," and "performance testing."

Section 151.007 of the sales tax law defines sales price as fol-
lows:

the total amount for which a taxable item is sold, leased, or
rented, valued in money, without a deduction for the cost of:
(1) the taxable item sold, leased, or rented;
(2) the material used, labor or service employed,
interest, losses or other expense;
(3) the transportation of tangible personal property; or
(4) transportation incident to the performance of a
taxable service

This opinion is based upon the facts you presented. If there are
additional or different facts, this opinion may change.

Please feel free to contact me if you have any additional ques-
tions. You may write me, call toll free 1- 800- 252 -5555 (ext.
3-4685) from anywhere in the United States or phone 512/463-4685.

Sincerely,
Julie Pesl
Tax Administration Division

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller January 23, 1991

Dear *****:

I received the request for a tax ruling that you forwarded from one
of your members. Jo Ann Dieck is the acting supervisor of the sales
tax group, and she will assign this request to a member of her group
for a response.

In the meantime, if you have any questions, please feel free to call
either me at 463-4677 or Ms. Dieck at 463-4666.

Sincerely,
Lucy Glover
Manager, Tax Administration