Tax Type
Retail Sales and Use Tax
Description
Research and Development; Nonprofits
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
12-28-1992
December 28, 1992
Re: §58.1-1821 Application: Use Tax
Dear**************
This will reply to your letter in which you seek correction of a use tax assessment for the ******************** (the "Taxpayer").
FACTS
The Taxpayer is a nonprofit research and educational organization that identifies and develops ways to reduce the human and economic losses that result from highway accidents. The Taxpayer has recently engaged in activities with the ultimate goal of determining the relationship between speed traveled and other varying factors.
In an audit of the Taxpayer the department determined that the Taxpayer owed use tax on its purchase of certain equipment used in conducting its activities. The equipment included radar detectors, radar detector detectors, and passive alcohol sensors (collectively referred to herein as the "Equipment"). The Taxpayer claims that the Equipment is used in research and development activities and should, therefore, be exempted from the imposition of the use tax.
DETERMINATION
Va. Code §58.1-608(A)(3)(e) provides an exemption for the use or consumption of tangible personal property in conducting basic research or research and development activities. Virginia Regulation (VR) 630-10-92 defines basic research 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." Research and development is defined as "a systematic study or search directed toward new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of such new knowledge or new understanding into a usable product or process."
The ultimate goal of research and development activities should include (i) the development of new products; (ii) the improvement of existing products; and (iii) the development of new uses for existing products. Basic research and research and development do not include testing or inspection of material for quality control or environmental analysis, testing of samples, operations research, feasibility studies, and other information gathering activities.
The leading case in the research and development area is Commonwealth of Virginia v. Research Analysis Corp., 214 Va. 161 (1973). In Research Analysis, the Supreme Court held that a taxpayer's use of tangible personal property that provided the United States Army with a decision making methodology was not research and development in the pure sense of the word.
The opinion termed the phrase "operations research" which it defined as a way of providing management with a systems approach or methodology for future management decision using the most efficient use of the organization's resources. The Court held that operations research was not research and development in the pure sense of the word and found the exemption inapplicable.
For simplicity reasons I shall address each type of equipment separately.
Radar Speed Measuring Devices
Radar speed measuring devices are used by the Taxpayer to aid in determining the relationship between posted speed limits and the speed at which drivers travel. The information produced by the Taxpayer was behavioral in nature, rather than scientific or technical.
Furthermore, the developed through the tests was furnished to policy makers and others as a means of educating them on the issue. As such, this is directly analogous to the "operations research" activities found in Research Analysis. Therefore, the Taxpayer's use of the radar speed measuring devices is not exempt from taxation.
Radar Detector Detectors
The Taxpayer used radar detector detectors to determine the relationship the use of radar detectors and speeds traveled. The initial phase of the project, the controlled field testing of the devices to determine their usefulness in urban conditions, might qualify for the exemption to the extent that the procedures were aimed at finding a new use for an existing product or enhancing the technology of the current products.
However, even assuming that this phase of the Taxpayer's activities was exempt research, the radar detector detectors, again were used, in the second phase of the project, to compile information on driver behavior. The information is operations research which is not exempt.
To qualify for the exemption, the use or consumption of tangible personal property in basic research or research and development activities must be exclusive. VR 630-10-92. The use or consumption of such property in activities in addition to basic research and research and development thus negates the exemption. Since the Taxpayer's use of the radar detector detectors was not exclusive to basic research and research and development activities, the Taxpayer's use of the equipment does not qualify for the exemption.
Passive Alcohol Sensors
The Taxpayer conducted various experiments that tested the effectiveness of different brands of passive alcohol sensing devices. The testing of the devices merely identified which are better then others. The information produced will assist users of the sensors to choose which product to purchase.
The nature of the Taxpayer's experiments focused on the analysis of existing products and not on advancing technology or the technical understanding of the sensors. This type of activity is not research and development as defined in the Code and regulations. Therefore, the Taxpayer's use of such property is not exempt.
Based upon the above analysis, the assessment of use tax on the cost of the equipment is correct. The department shall, therefore, recommence its collection activities.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5090O
Rulings of the Tax Commissioner