89-150 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Interstate commerce; Separate entity; Software development

Topic

Taxability of Persons and Transactions

Date Issued

04-28-1989

April 28, 1989

Re: Request for Ruling/Sales and Use Tax

Dear****************

This will reply to your letter dated September 13, 1988 in which you request a ruling on the applicability of the Virginia retail sales and use tax to *********** ("The Taxpayer").

FACTS

The Taxpayer is involved in the research, development and subsequent testing of computer software for its parent company. The Taxpayer develops new software products, improves existing products and expands the capabilities of existing products. The Taxpayer wishes to know whether it will be exempt from the sales and use tax on the equipment it uses exclusively in these research and development efforts.

The Taxpayer also wishes to know the tax consequences of purchases it makes on behalf of an affiliated company located in another state or country. On occasion, the Taxpayer purchases assets for a separately incorporated division of the company. These purchases are usually shipped first to the Taxpayer and then shipped unopened to the affiliate. The Taxpayer wishes to know whether it is liable for Virginia sales tax on these purchases.

RULING

Research and Development

§58.1-608(19) of the Code of Virginia provides an 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." (Emphasis added). This section of the code is delineated in Virginia Regulation 630-10-92, a copy of which is enclosed for your information.

Subsection C of this regulation includes the following activities within the scope of the exemption:

- (1) the development of new products: (2) the improvement of existing products; or (3) the development of new uses for existing products.

The regulation goes on further to define the terms directly and exclusively. The term "used directly" is defined as "those activities which are an integral part of basic research or research and development activities. . . but not including secondary activities such as administration, general maintenance, product marketing and other activities collateral to the actual research process." The term "used exclusively" refers to "items used solely in exempt research activities. Items used both in exempt and nonexempt activities are not used exclusively in research activities and are subject to the tax." (Emphasis added).

Additionally, VR 6309-10-49.2 (copy enclosed) provides that "[t]angible personal property used directly and exclusively in computer software research and development activities is generally exempt from the tax." Both VR 630-10-49.2 and VR 630-10-92 provide examples of tangible personal property and activities which qualify for this exemption.

Based on the facts presented, the Taxpayer does qualify for exemption from the tax when purchasing tangible personal property for direct and exclusive use in the research and development of computer software. In order to claim this exemption, the Taxpayer must provide its suppliers with a copy of the enclosed certificate of exemption (Form ST-11) at the time of making such purchases. Additionally, a refund of the Virginia tax paid may be available on items the Taxpayer possesses which are used exclusively in exempt research activities.

Interstate Commerce

§58.1-608(20) of the Code of Virginia exempts from the sales and use tax the "[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside the Commonwealth." Interpreting this statute, VR 630-10-51 (copy enclosed) provides that "[a] sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia."

Transactions qualifying for the exemption under VR 630-10-51 include those where delivery is made to the purchaser outside of Virginia in the seller's vehicle, by an independent trucker or contract carrier hired by the seller, or by the U.S. Post office or a common carrier. Therefore, a retailer is not required to collect the sales tax from an out-of-state customer when delivery of the product sold is made to the customer outside of Virginia by one of the means listed above.

The Taxpayer may purchase under a resale certificate of exemption those items which will be resold to its affiliate, provided the Taxpayer will not make use of the items prior to reselling them. The ensuing resale will also be exempt from the tax provided that delivery to the affiliate is by one of the means listed in VR 630-10-51.

However. if there is no resale (consideration) between the Taxpayer and its affiliate on items delivered to the Taxpayer in Virginia, the Taxpayer would be deemed the taxable user or consumer of the property and the Virginia sales tax would apply. Moreover, if there is no resale of the items, the sales tax would apply when the Taxpayer purchases from a Virginia supplier and directs the supplier to deliver the property directly to its out-of-state affiliate.

This ruling is predicated on the assumption that the Taxpayer and its affiliate are separate corporate entities. If the Taxpayer and its affiliate comprise one corporate entity. the sale of items to the affiliate would be an intercompany transfer rather than a sale to a separate corporation. As such, the Taxpayer is deemed to make taxable first use of the property in Virginia and the purchases would be subject to the sales tax when delivered to the Taxpayer in Virginia, even though the items will later be shipped to another country for use.

I hope the forgoing information has answered your questions. However. please contact the department if you need additional information.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner