Tax Type
Retail Sales and Use Tax
Description
Research and development materials
Topic
Taxability of Persons and Transactions
Date Issued
02-27-1987
February 27, 1987
Re: Request for Ruling/Sales and Use Tax
Dear ************************
This will reply to your letter of October 1, 1986, in which you request a ruling on the application of the sales and use tax to the research activities conducted by your corporation.
§58.1-608.19 of the Code of Virginia provides 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." This exemption is discussed in detail in Virginia Regulation 630-10-92, a copy of which is enclosed.
As noted in VR 630-10-92, the exemption will generally apply to the following research activities: (1) basic research with the ultimate goal of advancing knowledge or technology in a scientific or technical field of endeavor, (2) the development of new products, (3) the improvement of existing products, and (4) the development of new uses for existing products. While I am not familiar with all of your corporation's research activities, those falling within one or more of the above categories will generally be eligible for the exemption.
VR 630-10-92 also goes into detail as to what types of items qualify for the exemption. Those that are used directly in exempt research activities qualify for the exemption, including computer hardware and software used to store, retrieve, and process research data, test tubes, flasks, microscopes, etc. While not noted in the regulation, electronic instrumentation and components, laboratory equipment, tools, and similar items would also qualify for the exemption. However, work benches and storage cabinets and other similar items are deemed to be used indirectly in exempt research activities; therefore, such items will be taxable.
While an item must be used directly in an exempt research activity in order to qualify for the exemption, it must be used exclusively in the activity to actually gain the exemption. While the term "exclusively" is not defined by law, regulation, or legal precedent within Virginia, it is reasonable to assume that the term is intended to limit the exemption only to property used solely in exempt research activities. Accordingly, a computer terminal that is used occasionally by a secretary for report preparation would not qualify for the exemption.
As to items that are purchased for use in exempt research activities, but are subsequently used in a nonexempt manner, the tax will apply as of the time the property is first used in a nonexempt manner. The basis of the tax would be the cost price paid for the property; however, if the taxable use occurs six months or more after the property was purchased, the tax would be based on the fair market value of the property.
I trust that this, when read in conjunction with VR 630-10-92 and Emergency VR 630-10-49.2, will answer all of your questions. If further questions arise, however, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner