Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Sales and Use Tax Annotations
515.0000 SERVICE ENTERPRISES GENERALLY—Regulation 1501
(b) COPYING AND TRANSCRIBING
515.0225 Reverse Engineering. Pursuant to a reverse engineering agreement, a firm is provided with an instrument by a client, for the purpose of disassembling and evaluating it. The firm then prepares and delivers drawings on velum, which are needed by the client to design and assemble printed circuit boards. The taxpayer also prepares and delivers a listing of parts and materials, plus assembly instructions for the instrument. The firm designates the charge to the client as "reverse engineering".
The client examines the reverse engineering package and decides whether to begin mass production of the instrument. If it decides to proceed, the client either has the firm or another manufacturer begin production, under a separate agreement.
The drawings are transferred for the purpose of conveying information and not for use in manufacturing the instruments. The assembly instructions appear to be based on engineering expertise and are important aspects of the reverse engineering agreement. Based on these conclusions, the firm's reverse engineering is a nontaxable service. If the firm also mass produces the instruments, the reverse engineering would still be regarded as nontaxable service provided that there was no production contract in place, between the parties, to produce the instruments before completion of the reverse engineering package. 4/25/88.