Tax Type
Retail Sales and Use Tax
Description
Supplier of electronic interconnect solutions and electromechanical equipment.
Topic
Exemptions
Date Issued
10-05-2004
October 5, 2004
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling regarding a retail sales and use tax exemption for transactions involving ********* (the "Taxpayer"). I apologize for the Department's delay in responding to your letter.
FACTS
The Taxpayer is a supplier of electronic interconnect solutions and electromechanical equipment. The Taxpayer entered into a joint venture with a Virginia company ("Company A") to develop and market a high-speed explosive detection system for use at airport baggage check-in areas. The Taxpayer states that a prototype of the security scanner is being assembled for pre-production testing and qualification. The Taxpayer anticipates that one or two more prototypes will be built in the future. Upon completion of the testing phase, the Taxpayer will manufacture the security scanners at its facility located outside Virginia.
In the situation you present, the Taxpayer purchases processing systems from a supplier located in Florida. The supplier ships the processing systems directly to Company A in Virginia for the first stage assembly of the security scanner prototype. The security system is then shipped to the Taxpayer's facility located outside Virginia for final assembly. The Taxpayer's supplier has demanded that the Taxpayer furnish a Virginia certificate of exemption in order to purchase the processing systems exempt of the tax. The Taxpayer requests a ruling on the correct application of the sales and use tax to the above transaction.
RULING
First Use
Virginia Code § 58.1-604 provides that a use tax is imposed on the use or consumption of tangible personal property in Virginia. Virginia Code § 58.1-602 defines the term "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business."
Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-6030(A), the use tax applies "to the use, consumption, or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased." In this case, the Taxpayer is making a taxable first use of the processing systems in Virginia. This is true even if the systems are subsequently shipped to the Taxpayer's out-of-state location for final assembly.
Research and Development
Virginia Code § 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."
The Department interprets this statute in Title 23 of the Virginia Administrative Code (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 ultimate goal of exempt research and development must be the development of new products, the improvement of existing products, or the development of new uses for existing products. Further, Title 23 VAC 10-210-765 illustrates certain specific innovative high technology industries and indicates that the exemption generally applies to activities with the ultimate goal of advancing information technology "or developing new products, technology or processes or improving or finding new uses for existing products, technology or processes . . . . "
Based on the information provided, it appears that the development of the Taxpayer's product qualifies for the research and development exemption. The exemption will also apply to the testing of the prototypes as described above. Such testing, performed to determine the technological capabilities of the Taxpayer's proposed product, is an exempt research and development activity.
When making purchases of tangible personal property that qualify for the research and development exemption, the Taxpayer must present a properly completed Sales and Use Tax Exemption Certificate, Form ST-11, to its suppliers. The certificate may be used only for the purchase of tangible personal property used or consumed directly and exclusively in the development of the security scanner prototypes. (See item #5 on Form ST-11).
This response is based on the facts presented to the Department as summarized above. Any change in these facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and regulations cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. Form ST-11 is also available on the web-site. If you have any questions regarding this letter, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/50291T
Rulings of the Tax Commissioner