Department of Revenue finds that design software was used in “pre-production” and not exempt from Indiana sales tax

In Letter of Findings 04-20110391 (posted April 25, 2012), the Indiana Department of Revenue found that software and related items used to design plastic injection molds, tools and dies were used in “pre-production” and therefore not exempt from sales tax.  Indiana exempts from sales tax the acquisition of manufacturing machinery, tools and equipment for “direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property.”  Ind. Code § 6-2.5-5-3 (Section 3).  Indiana also exempts transactions involving materials acquired for “direct use in the direct production of” the machinery, tools, or equipment described in Section 3.  Ind. Code § 6-2.5-5-4.  These exemptions apply a “double direct” test, i.e. the property must be directly used in direct production of other property.  By rule, the Department has stated that machinery, tools and equipment are directly used in production if they have an “immediate effect” on the property being produced. 45 IAC 2.2-5-8.  Property has an “immediate effect” on production “if it is an essential and integral part of an integrated process which produces tangible personal property.” Id.  The Department’s rules include the following example of property that does not have an “immediate effect” on production and is therefore taxable:  “Computers which produce designs which are not sold as products are not exempt.  Thus, computer-aided design is a nonexempt function.” 45 IAC 2.2-5-8(g)(7) (emphasis added).

Taxpayer was a tool and die manufacturer.  According to the taxpayer, its designs of molds, tools and dies were sold to customers, along with the manufactured molds.  Thus, taxpayer asserted that the Department’s example supported application of the manufacturing exemption to taxpayer’s purchases of design software and related items.  As proof, taxpayer submitted design/building specification documents containing language that required taxpayer to present any “prints or tracings” of the mold designs to customers at the conclusion of the production process. The Department, however, was not persuaded and concluded that the design software and related items were used in “pre-production” and thus taxable.  The Department reasoned: “Taxpayer’s design services are akin to those services provided by an architect for example. Taxpayer’s actual design, like the architect’s blueprint, is associated with a service Taxpayer provides its customers in preparation for the actual production of the mold, tool, or die.” (emphasis added).

The Department also noted that Taxpayer did not present evidence showing that it actually sold the designs themselves.  That customers requested the Taxpayer’s designs at the end of the production process was, according to the Department, not evidence that Taxpayer actually sold the designs to the customers.

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