Tax Type
Retail Sales and Use Tax
Description
Government contractor; Research vs. services
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
02-06-2001
February 6, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***
This is in response to your letter requesting correction of the consumer use tax assessment issued to **** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
FACTS
The Taxpayer provides engineering services and products to the federal government. An audit for the period January 1993 through October 1995 resulted in the assessment of use tax on untaxed purchases of tangible personal property used in its operations and to provide its services in Virginia. The Taxpayer has paid the assessment at issue.
The Taxpayer takes exception to the use tax assessed on materials for Job #241 and maintains that the required tasks constitute a research and development contract. The Taxpayer claims that it is required to provide engineering support to NASA, such as support for the development (i.e., breadboarding, prototyping, evaluation, etc.) of communication packages for certain NASA systems. Accordingly, the Taxpayer maintains that the materials used in the performance of Job #241 qualify for exemption under Code of Virginia § 58.1-609.3(5).
DETERMINATION
Code of Virginia § 58.1-609.3(5) provides an exemption from the retail sales and use tax for:
Tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.
The terms "basic research" and "research and development" are defined by Title 23 of the Virginia Administrative Code (VAC) 10-210-3070(A). The ultimate goal of basic research is to advance knowledge or technology in a particular scientific or technical field. Whereas, the ultimate goal of research and development is to transform newly found knowledge into a usable new product or process, an improved product, or a new use for an existing product. The regulation, however, states that modification of a product merely to meet customer specifications does not qualify as research and development, unless the modification is carried out under experimental or laboratory conditions in order to improve the product generally or develop a new use for the product.
Section B of this regulation is also informative as it explains what does not constitute research:
Research does not include testing or inspection of materials or products for quality control .... Additionally, research does not include environmental analysis, testing of samples for chemical or other content, operations research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research in connection with literary, historical, or similar projects.
After carefully reviewing the statement of work ("SOW") and task orders presented for Job #241, it is apparent that the Taxpayer provides systems engineering support involving a variety of duties. The SOW defines the "management, planning, efforts, services and documentation required to support systems engineering tasks" for a particular NASA system. The scope of the SOW states that the Taxpayer is to provide systems engineering support in the areas of "return services, forward services, tracking services, video/voice services, and control systems." The scope of the SOW also includes "requirements assessment, impact to existing systems, system enhancement concepts, architectural trade studies, conceptual designs, specification development and maintenance, along with supporting reports, studies, and analyses." As part of the technology studies required, the Taxpayer is to "conduct hardware and software prototyping and bench demonstrations to confirm the validity of concepts and to obtain analytical data."
Although the SOW sets out general objectives, a review of the task orders presented shows specific objectives which include, but are not limited to, conducting systems analysis; studies to examine an existing system for the development of a conceptual design; trade-off studies; performance, cost, benefit, risk, trade studies and analysis; comparison and compatibility studies; project management and feasibility reports; technical analysis; coordinating interface requirements; planning, assessing, and monitoring technology activities; prototyping for demonstration or benchmark testing; performance analysis using analytical models or simulation models; modeling for accuracy and traceability; modeling or simulation to validate the architecture in terms of performance, operations, and completeness; trend analysis; concept development; requirements analysis; analysis of software modifications; etc.
These and other activities presented in the contract documents appear to be pursuits that are limited to satisfying specific customer requirements using standard engineering practices, rather than searching for and advancing new knowledge in a particular scientific or technological field. Moreover, these documents contain no contract language to convince me that the scope of the contract involves basic research or research and development in the sense contemplated by 23 VAC 10-210-3070.
Therefore, I must conclude that Job #241 is properly characterized as an engineering services contract, and that the materials used or consumed in Job #241 are not entitled to the research/research and development exemption. Rather, the Taxpayer is deemed the final user or consumer of all of the materials purchased in connection with such contract. As such, the assessment in this case is proper as issued.
If you have any questions about this response, please contact *** of the department's Office of Tax Policy at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/22709R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***
This is in response to your letter requesting correction of the consumer use tax assessment issued to **** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
FACTS
The Taxpayer provides engineering services and products to the federal government. An audit for the period January 1993 through October 1995 resulted in the assessment of use tax on untaxed purchases of tangible personal property used in its operations and to provide its services in Virginia. The Taxpayer has paid the assessment at issue.
The Taxpayer takes exception to the use tax assessed on materials for Job #241 and maintains that the required tasks constitute a research and development contract. The Taxpayer claims that it is required to provide engineering support to NASA, such as support for the development (i.e., breadboarding, prototyping, evaluation, etc.) of communication packages for certain NASA systems. Accordingly, the Taxpayer maintains that the materials used in the performance of Job #241 qualify for exemption under Code of Virginia § 58.1-609.3(5).
DETERMINATION
Code of Virginia § 58.1-609.3(5) provides an exemption from the retail sales and use tax for:
Tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.
The terms "basic research" and "research and development" are defined by Title 23 of the Virginia Administrative Code (VAC) 10-210-3070(A). The ultimate goal of basic research is to advance knowledge or technology in a particular scientific or technical field. Whereas, the ultimate goal of research and development is to transform newly found knowledge into a usable new product or process, an improved product, or a new use for an existing product. The regulation, however, states that modification of a product merely to meet customer specifications does not qualify as research and development, unless the modification is carried out under experimental or laboratory conditions in order to improve the product generally or develop a new use for the product.
Section B of this regulation is also informative as it explains what does not constitute research:
Research does not include testing or inspection of materials or products for quality control .... Additionally, research does not include environmental analysis, testing of samples for chemical or other content, operations research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research in connection with literary, historical, or similar projects.
After carefully reviewing the statement of work ("SOW") and task orders presented for Job #241, it is apparent that the Taxpayer provides systems engineering support involving a variety of duties. The SOW defines the "management, planning, efforts, services and documentation required to support systems engineering tasks" for a particular NASA system. The scope of the SOW states that the Taxpayer is to provide systems engineering support in the areas of "return services, forward services, tracking services, video/voice services, and control systems." The scope of the SOW also includes "requirements assessment, impact to existing systems, system enhancement concepts, architectural trade studies, conceptual designs, specification development and maintenance, along with supporting reports, studies, and analyses." As part of the technology studies required, the Taxpayer is to "conduct hardware and software prototyping and bench demonstrations to confirm the validity of concepts and to obtain analytical data."
Although the SOW sets out general objectives, a review of the task orders presented shows specific objectives which include, but are not limited to, conducting systems analysis; studies to examine an existing system for the development of a conceptual design; trade-off studies; performance, cost, benefit, risk, trade studies and analysis; comparison and compatibility studies; project management and feasibility reports; technical analysis; coordinating interface requirements; planning, assessing, and monitoring technology activities; prototyping for demonstration or benchmark testing; performance analysis using analytical models or simulation models; modeling for accuracy and traceability; modeling or simulation to validate the architecture in terms of performance, operations, and completeness; trend analysis; concept development; requirements analysis; analysis of software modifications; etc.
These and other activities presented in the contract documents appear to be pursuits that are limited to satisfying specific customer requirements using standard engineering practices, rather than searching for and advancing new knowledge in a particular scientific or technological field. Moreover, these documents contain no contract language to convince me that the scope of the contract involves basic research or research and development in the sense contemplated by 23 VAC 10-210-3070.
Therefore, I must conclude that Job #241 is properly characterized as an engineering services contract, and that the materials used or consumed in Job #241 are not entitled to the research/research and development exemption. Rather, the Taxpayer is deemed the final user or consumer of all of the materials purchased in connection with such contract. As such, the assessment in this case is proper as issued.
If you have any questions about this response, please contact *** of the department's Office of Tax Policy at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/22709R
Rulings of the Tax Commissioner