Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, Medical devices provided to research clinics
Topic
Taxability of Persons and Transactions
Date Issued
07-21-1995
July 21, 1995
Re: 58.1-1821 Appeal: Retail Sales and Use Tax
Dear****************
This will reply to your letter of March 17, 1995 in which you seek correction of a use tax assessment to your company, ***********the"Taxpayer", for the period November 1991 through September 1994.
FACTS
The Taxpayer which manufacturers and sells cardiac related medical devices contests a recent sales and use tax assessment on certain cardiac devices (the "Devices") supplied to clinical centers for research. The Devices, which like pacemakers, save or lengthen the lives of persons with various cardiac diseases, are provided free of charge to clinical centers for research as part of a cooperative agreement with a university ("Coordinating Center") and a national health association. Under the agreement, the Coordinating Center is responsible for contracting with clinical centers and collecting, analyzing and compiling data, etc. The Taxpayer will monitor the entire program and pay the personnel and other costs and expenses incurred by the Coordinating Center attributable to the activities performed. The results of the research will be used by the Taxpayer as the basis for Food and Drug Administration (FDA) approval for the use of the Devices with certain high-risk patients.
You suggest that the Devices qualify for exemption from the tax under the research exemption provided for in Code of Virginia §58.1-609.3(5) and thus the tax was incorrectly assessed. The auditor, on the other hand, held the Devices taxable as withdrawals from a resale inventory for donation to the clinical centers for use in research.
DETERMINATION
Code of Virginia §58.1-609.3(5) 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." Virginia Regulation (VR) 630-10-92 which interprets this Code section provides in pertinent part:
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- Tangible personal property must be purchased or leased by the person, firm, corporation, or other entity that actually will perform research activities in order to qualify for the tax exemption for items used directly and exclusively in research. If the research equipment is purchased or leased by a person and is subsequently donated or loaned to another person to perform research for either party, the equipment is taxable to the person making the purchase, even if the other party is a nonprofit organization, governmental entity, or is otherwise exempt from the sales and use tax.
- Tangible personal property must be purchased or leased by the person, firm, corporation, or other entity that actually will perform research activities in order to qualify for the tax exemption for items used directly and exclusively in research. If the research equipment is purchased or leased by a person and is subsequently donated or loaned to another person to perform research for either party, the equipment is taxable to the person making the purchase, even if the other party is a nonprofit organization, governmental entity, or is otherwise exempt from the sales and use tax.
Code of Virginia §58.1-609.8(5) provides an exemption from the tax for "[t]angible personal property withdrawn from inventory and donated to (i) an organization exempt from taxation under §501(c)(3) of the Internal Revenue Code (I.R.C.) or (ii) the Commonwealth, any political subdivisions of the Commonwealth, or any school, agency or instrumentality thereof." However, an examination of the transactions involved reveals that this exemption is not applicable, notwithstanding the fact that the centers must be either exempt from taxation under I.R.C §501 (c)(3) or an institution of higher learning.
In this case, the Taxpayer is contractually required to provide the Devices free of charge to the clinical centers. This type of transaction is not envisioned by the above exemption which was enacted to exempt gift transactions by businesses to nonprofit organizations and the Commonwealth. The transactions are not "donations" or "gifts" in the traditional sense. "Donation" is defined in The American Heritage Dictionary, Second College Edition, as "the act of giving to a fund or cause; contribute." "Gift" is defined as "something that is bestowed voluntarily and without compensation."
In this case, the Taxpayer will be compensated with results from the research. Accordingly, the donated property exemption is not applicable to the donations of the Devices to the clinical centers.
The Virginia courts have consistently held that exemptions from the tax must be strictly construed and where there is any doubt, that doubt must be resolved against the person claiming the exemption.
Based upon the facts presented and the mandate of strict construction, the department has no alternative but to find that the Devices were appropriately held taxable under Code of Virginia §58.1-623(C) as withdrawals from inventory, and the assessment as issued is correct. However, I will agree to waive the penalty assessed with respect to this issue.
The assessment will be revised as set forth herein and a revised Notice of Assessment with accrued interest will be sent to you shortly.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9493H
Rulings of the Tax Commissioner