Tax Type
Retail Sales and Use Tax
Description
Research and development
Topic
Exemptions
Date Issued
06-26-1985
June 26, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of November 14, 1984 in which you submit an application In for correction of sales and use tax assessed to ***** as the result of a recent audit.
FACTS
A recent audit of ***** produced an assessment for the failure to remit the sales and use tax on tangible personal property used in two projects. ***** asserts that the two projects in question constituted research and development activities and that tangible personal property used in those projects should therefore be exempt from the tax.
The first project in question involved the study of characteristic signals generated by sensors in monitoring a landfill liner. This project entailed a study of signals generated by sensors with the ultimate goal of determining what procedures and combination of sensors could provide a detection system for landfill liner leaks.
The second project in question involved the development of a prototype security system to be demonstrated to a state prison agency in connection with a competitive bid submitted to the prison agency.
DETERMINATION
During the audit period in question, Section 58-441.6(q) of the Code of Virginia (recodified as Virginia Code Section 58.1-608.19 effective January 1, 1985) provided an exemption from the sales and use tax 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."
"Basic research" is defined in Section 630-10-92.B of the Virginia Retail Sales and Use Tax Regulations as "a systematic study or search in a scientific or technical field of endeavor with the ultimate goal of advancing knowledge or technology in that field." The regulation also states "research and development...should have as its ultimate goal: (1) the development of new products; (2) the improvement of existing products; or (3) the development of new uses of existing products."
The first project in question here was the study of characteristic signals generated by sensors in monitoring a landfill liner and the development of signal analysis procedures and a combination of sensors that could provide a detection system for landfill liner leaks. Although this project was seemingly in the nature of a feasibility study, a non exempt research activity under Virginia Retail Sales and Use Tax Regulation 630-10-92, a reading of the contract between ***** and ***** reveals that the project was broad enough in nature to qualify for exemption under the regulation. Specifically, ***** in this project was to test various existing sensing methods to determine whether any such methods or a combination could be adapted to the detection of landfill liner leaks. Consequently, the project qualifies as an exempt research activity as it had as at least part of its objective the development of a new use for existing products and/or processes.
The second project in question involved the provision of consulting services by an employee of ***** in the development of a prototype personal security alarm system for ultimate placement on the commercial market. As this project involved the development of a new product, activities are eligible for the research and development exemption.
Based upon the foregoing, all tangible personal consumed by ***** in the above two projects that was used directly and exclusively in the projects will be removed from the department's audit. To assist your firm in the future I have enclosed a copy of Virginia Retail Sales and Use Tax Regulation 630-10-92.
Sincerely,
W. H. Forst
Tax Commissioner
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of November 14, 1984 in which you submit an application In for correction of sales and use tax assessed to ***** as the result of a recent audit.
FACTS
A recent audit of ***** produced an assessment for the failure to remit the sales and use tax on tangible personal property used in two projects. ***** asserts that the two projects in question constituted research and development activities and that tangible personal property used in those projects should therefore be exempt from the tax.
The first project in question involved the study of characteristic signals generated by sensors in monitoring a landfill liner. This project entailed a study of signals generated by sensors with the ultimate goal of determining what procedures and combination of sensors could provide a detection system for landfill liner leaks.
The second project in question involved the development of a prototype security system to be demonstrated to a state prison agency in connection with a competitive bid submitted to the prison agency.
DETERMINATION
During the audit period in question, Section 58-441.6(q) of the Code of Virginia (recodified as Virginia Code Section 58.1-608.19 effective January 1, 1985) provided an exemption from the sales and use tax 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."
"Basic research" is defined in Section 630-10-92.B of the Virginia Retail Sales and Use Tax Regulations as "a systematic study or search in a scientific or technical field of endeavor with the ultimate goal of advancing knowledge or technology in that field." The regulation also states "research and development...should have as its ultimate goal: (1) the development of new products; (2) the improvement of existing products; or (3) the development of new uses of existing products."
The first project in question here was the study of characteristic signals generated by sensors in monitoring a landfill liner and the development of signal analysis procedures and a combination of sensors that could provide a detection system for landfill liner leaks. Although this project was seemingly in the nature of a feasibility study, a non exempt research activity under Virginia Retail Sales and Use Tax Regulation 630-10-92, a reading of the contract between ***** and ***** reveals that the project was broad enough in nature to qualify for exemption under the regulation. Specifically, ***** in this project was to test various existing sensing methods to determine whether any such methods or a combination could be adapted to the detection of landfill liner leaks. Consequently, the project qualifies as an exempt research activity as it had as at least part of its objective the development of a new use for existing products and/or processes.
The second project in question involved the provision of consulting services by an employee of ***** in the development of a prototype personal security alarm system for ultimate placement on the commercial market. As this project involved the development of a new product, activities are eligible for the research and development exemption.
Based upon the foregoing, all tangible personal consumed by ***** in the above two projects that was used directly and exclusively in the projects will be removed from the department's audit. To assist your firm in the future I have enclosed a copy of Virginia Retail Sales and Use Tax Regulation 630-10-92.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner