Tax Type
Retail Sales and Use Tax
Description
Analyzing or testing; Limits of research and development exemption
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
04-11-1984
April 11, 1984
Re: §58-1118 Application/Sales and Use Tax
Dear *********************
This will reply to your letter of February 20, 1984 in which you submit an application for relief of sales and use tax assessed to ***** as the result of an audit.
FACTS
***** (hereinafter *****) is engaged in the analysis of minerals and other items for various customers. ***** primarily analyzes samples provided by concerns engaged in mining and performs extraction technique research to determine the cost effectiveness of extracting minerals.
***** contends that it is engaged in research and development and is therefore entitled to an exemption from the sales and use tax under the provisions of § 58-441.6(q) of the Code of Virginia.
DETERMINATION
§ 58-441.6(q) of the Code of Virginia exempts "tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense"
Based upon the statute above, tangible personal property must satisfy two tests in order to qualify for the research exemption. First, the property must be used directly and exclusively in basic research or research and development, and second, such research activities must be conducted in the experimental or laboratory sense.
In interpreting the provisions of Virginia Code § 58-441.6(q), one must look for guidance to the ruling of the Virginia Supreme Court in Commonwealth v. Research Analysis Corporation, 214 Va. 161, 198 S.E. 2d 622 (1973). At the time of the Court's opinion, the statute was applicable only to tangible personal property used in "research and development in the experimental or laboratory sense," although "basic research" was included within the exemption by departmental regulation. Subsequent to the Court's opinion, the department changed its research and development regulation to remove "basic research" from the scope of the exemption effective January 1, 1979; however, the statute was amended by the General Assembly in 1981 to clarify that "basic research" was indeed within the scope of the research and development exemption retroactive to January 1, 1979. Therefore, we find the Court's opinion in Research Analysis to be relevant here to your situation.
The Court noted in Research Analysis that research "entails a systematic study or search directed toward new scientific knowledge or new under-standing of a particular subject," 214 Va. at 164. In addition, the Court stated that "the definitions of experimental or laboratory accent basic scientific research," 214 Va. at 161, and lastly, the Court concluded that "the legislature intended Code § 58-441.6(q) to be a restrictive provision exempting only that tangible personal property purchased or leased and used in scientific or traditional physical science research and development which generates new tangible products or processes, or the improvement of existing products or processes, not mere management studies, reports or surveys" (emphasis added), 214 Va. at 165.
In this case, we find that ***** is merely analyzing or testing mineral and other samples for content and providing reports and/or feasibility studies to the clients who submit such samples. While such efforts are conducted in an experimental or laboratory environment, we feel that such efforts are not directed toward obtaining new knowledge or understanding. Rather, ***** is merely identifying the existing elements, substances, etc., which make up various samples submitted to it and providing the results of such surveys to its customers for their use in making management decisions (i.e. whether to continue work or suspend mining or other operations).
Based upon the foregoing, I must conclude that the operations conducted by ***** do not fall within the research exemption as interpreted by the Virginia Supreme Court in Research Analysis. Therefore, the assessment outstanding against ***** shall remain due and payable.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner