Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Research and development; Feasibility testing
Topic
Taxability of Persons and Transactions
Date Issued
08-08-1994
August 8, 1994
Re: Request for Ruling: Retail Sales and Use Tax
Dear*******
This will reply to your letter of June 28, 1994 in which you request a ruling on the application of the sales and use tax to purchases made pursuant to a contract between the federal government and *************(the "Taxpayer").
FACTS
The Taxpayer has entered into a contract with the federal government to perform research and development tasks for the***********. You request a ruling as to whether purchases made pursuant to the contract qualify for the research and development exemption provided under Va. Code §58.1-609.3(5).
RULING
Va. Code § 58.1-609.3(5) provides an exemption from the sales and use tax for "tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense."
Interpreting the statute, Virginia Regulation (VR) 630-10-92 (copy enclosed) 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 this new knowledge or new understanding into a usable product or process." The regulation further states that the research and development "must have as its ultimate goal: (i) the development of new products; (ii) the improvement of existing products; or (iii) the development of new uses for existing products."
By way of contrast, however, the regulation provides that "research does not include testing or inspection of materials for qualify control [or] environmental analysis, testing of samples for chemical or other content, operations research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research in connection with literary, historical or similar projects." Also see Commonwealth v. Research Analysis Corporation, 214 Va. 161, 198 S.E.2d 622 (1973).
Based on the information provided, the work to be performed by the Taxpayer appears to be primarily feasibility testing. A review of the Statement of Work indicates that the Taxpayer is to "identify system vulnerabilities and to estimate the survivability of the systems against the specified threats." These activities, which focus on the analysis of existing systems and not on advancing technology or the technical understanding of the systems, do not fall within the scope of "basic research" and "research and development" provided in the regulation. Accordingly, purchases made by the Taxpayer under the contract at issue do not qualify for the exemption provided in Va. Code §58.1-609.3(5). The Taxpayer must pay the applicable tax on its purchases.
If you have additional questions regarding this matter, please contact the department.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8184F
Rulings of the Tax Commissioner