May 6, 2016
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling on behalf of your client, ***** (the "Taxpayer"), regarding the application of the Virginia retail sales and use tax to the Taxpayer's research and development facility located in Virginia. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is a supplier and manufacturer of specialized polypropylene films used primarily for food packaging, product labeling, and non-food applications. In addition to their normal manufacturing facilities, the Taxpayer operates a separate research and development site at a Virginia location. The Virginia facility is not a manufacturing site but is dedicated solely to research and development. The Virginia facility produces an unusable film size, which is considered a research and development "pilot" line. The Taxpayer produces this film size for the sole purpose of improving their existing film packaging product. While the Taxpayer does not produce any products for sale or resale purposes at their Virginia facility, the facility produces a certain amount of waste product in their research and development process.
The Taxpayer has been approached by an out-of-state scrap recycler for the purpose of purchasing the Taxpayer's unusable waste produced at their Virginia research and development facility. All waste material would be delivered to the out-of-state scrap recycler via common carrier. The Taxpayer requests clarification as to whether the sale of its unusable waste materials would disqualify it from the research and development sales tax exemption based on the exclusive nature of the Virginia exemption.
RULING
Virginia Code § 58.1-609.3 5 provides a retail sales and use tax exemption for "tangible personal property purchased for use and consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." The Department's policy regarding this exemption is set out in Title 23 Virginia Administrative Code (VAC) 10-210-3070 through 10-210-3074. Title 23 VAC 10-210-3070 A defines research and development as follows:
"Research and development" means a systematic study or search directed toward 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. Research and development must have as its ultimate goal: (i) the development of new products; (ii) the improvement of existing products; or (iii) the development of new uses for existing products. Research and development does not include the modification of a product merely to meet customer specification 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.
Title 23 VAC 10-210-3071 sets forth the scope of the research and development exemption. Subsection A of this regulation addresses direct and exclusive use as follows:
The exemption is limited in scope to tangible personal property used directly and exclusively in an actual research process, starting with the handling and storage of raw materials and supplies at the research facility and ending after the last step of the research process when the products of the research process are stored at the research facility. Items of tangible personal property used directly and exclusively in research include chemicals, drugs and other materials, equipment, machinery, tools, supplies, energy, fuels, and power used in these processes. An item is not considered used directly and exclusively merely because it is essential to research activities or because its use is required by law.
Based on a reading of the exemption statute and the regulations, it is apparent that the Taxpayer's Virginia operation qualifies as a research and development facility. The fact that the Taxpayer's research and development activities result in scrap or waste matter is immaterial to the application of the exemption. Furthermore, the fact that the Taxpayer has a market for its scrap materials does not negate the application of the research and development exemption. It is not the intended purpose of the Taxpayer's research and development facility to produce a product for sale. It is merely a by-product of their research and development activities. For this reason, I find that the sale of scrap material at the Virginia facility does not disqualify the facility from enjoying the retail sales and use tax exemption afforded to the Taxpayer's research and development activities.
This ruling is based on the facts presented in your letter as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia and regulation sections cited in this letter are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you should have any question concerning this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6137393856.R