Tax Type
Corporation Income Tax
Description
Determination of Exempt Status
Topic
Exemptions
Date Issued
03-31-2000
March 31, 2000
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****.
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer') for the period January 1993 through September 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a government contractor. I understand that the contested purchases were made in connection with two specific subcontracts between the Taxpayer and its customer, *****. Further, the contested purchases are in connection with the Taxpayer's operation and maintenance of the *****, a facility located in Virginia. You maintain that the contracts with your customer are research and development contracts and are therefore not taxable.
DETERMINATION
Government Contracts - Generally
The department has traditionally held that in considering the tax treatment of federal government contracts, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. The "true object' test described in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 is used to determine whether the contract is for the sale of tangible personal property or for the provision of some service.
If a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its contractual services, even though title to some or all of the property may pass to the government. Conversely, if a contract is for the sale of tangible personal property, the contractor may purchase such property exempt from the tax for resale. The subsequent sale of the property to the government is exempt under Code of Virginia Sec. 58.1-609.1(4).
Research and Development
Notwithstanding the true object of a government contract, Code of Virginia Sec. 58.1-609.3(5) provides a sales and use tax exemption for "[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.' (Emphasis added.) The department interprets this statute in 23 VAC 10-210-3070 through 3074. These regulations define "research and development' as "a systematic study or search directed toward a new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of this new knowledge or new understanding into a usable product or process.' The term "basic research' is defined as "a systematic study or search in a scientific or technical field or endeavor with the ultimate goal of advancing knowledge or technology in that field.'
By way of contrast, the regulations provide that exempt research does not include testing or inspection of materials or products for quality control, environmental analysis, testing of samples, operations research or management studies. Further, in order to qualify for the exemption, tangible personal property must be used directly and exclusively in an actual research process and must be purchased by the organization that actually performs the exempt research activities. Also see the enclosed Public Document 96-90 (5/16/96), which addresses the research and development exemption as it applies to government contractors.
Applying the government contractor and research and development guidelines to the contract in the instant case leads to the following conclusions:
Based on the information before me, the assessment is correct. Because of the delay in responding to your appeal, interest on the assessment has been accrued only through the date of your protest letter. No additional interest will accrue provided the assessment is paid within 30 days from the date of this letter.
If you have any questions regarding this letter, you may call ***** in the department's Office of Tax Policy at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21169I
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****.
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer') for the period January 1993 through September 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a government contractor. I understand that the contested purchases were made in connection with two specific subcontracts between the Taxpayer and its customer, *****. Further, the contested purchases are in connection with the Taxpayer's operation and maintenance of the *****, a facility located in Virginia. You maintain that the contracts with your customer are research and development contracts and are therefore not taxable.
DETERMINATION
Government Contracts - Generally
The department has traditionally held that in considering the tax treatment of federal government contracts, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. The "true object' test described in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 is used to determine whether the contract is for the sale of tangible personal property or for the provision of some service.
If a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its contractual services, even though title to some or all of the property may pass to the government. Conversely, if a contract is for the sale of tangible personal property, the contractor may purchase such property exempt from the tax for resale. The subsequent sale of the property to the government is exempt under Code of Virginia Sec. 58.1-609.1(4).
Research and Development
Notwithstanding the true object of a government contract, Code of Virginia Sec. 58.1-609.3(5) provides a sales and use tax exemption for "[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.' (Emphasis added.) The department interprets this statute in 23 VAC 10-210-3070 through 3074. These regulations define "research and development' as "a systematic study or search directed toward a new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of this new knowledge or new understanding into a usable product or process.' The term "basic research' is defined as "a systematic study or search in a scientific or technical field or endeavor with the ultimate goal of advancing knowledge or technology in that field.'
By way of contrast, the regulations provide that exempt research does not include testing or inspection of materials or products for quality control, environmental analysis, testing of samples, operations research or management studies. Further, in order to qualify for the exemption, tangible personal property must be used directly and exclusively in an actual research process and must be purchased by the organization that actually performs the exempt research activities. Also see the enclosed Public Document 96-90 (5/16/96), which addresses the research and development exemption as it applies to government contractors.
Applying the government contractor and research and development guidelines to the contract in the instant case leads to the following conclusions:
- First, it appears that the true object of the contracts is for the provision of services. I note that the Taxpayer is responsible for some tangible deliverables. However, the overriding task set out in the Statement of Work requires that the Taxpayer use its technical expertise to provide the facility with operation and maintenance services.
Based on the information before me, the assessment is correct. Because of the delay in responding to your appeal, interest on the assessment has been accrued only through the date of your protest letter. No additional interest will accrue provided the assessment is paid within 30 days from the date of this letter.
If you have any questions regarding this letter, you may call ***** in the department's Office of Tax Policy at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21169I
Rulings of the Tax Commissioner