The Colorado Department of Revenue ruled that testing a product before final sale was not a taxable use.
The taxpayer was developing and selling new technologies for oil, gas, geothermal, and mining operations. The taxpayer developed unique products and processes for each client. These products were sold once and were never mass-produced. Before final sale, the taxpayer tested the product. The test used less than one percent of the product's useful life span. The taxpayer asked whether materials purchased to create the products were taxable because they were used during testing.
Colorado taxes the privilege of storing, using, or consuming tangible personal property. When determining if an item is "used" in Colorado, the state looks several factors, including what the item's intended, or "primary," use is. Colorado does not tax materials that will be manufactured into a new product for resale.
The materials purchased by the taxpayer for testing and resale were exempt. The materials were purchased primarily for resale as part of developed products, not for use in testing. The testing was also an integral part of the manufacturing process. The materials were therefore not "used," and the taxpayer did not owe tax on them.