Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Research and development
Topic
Taxability of Persons and Transactions
Date Issued
04-02-1996
April 2, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********************
This is in response to your letter of September 15, 1995 in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer"). I note that the assessment has been fully paid.
FACTS
The Taxpayer is engaged in research and development and the manufacturing of specialized component parts for cellular phones. An audit for the period April 1992 through December 1994 resulted in an assessment for certain untaxed purchases of tangible personal property. The Taxpayer protests the assessment made on the purchase of an enclosure screen room and on the purchase of a CAD workstation, both of which are used in the Taxpayer's research and development activities. The Taxpayer also indicates that other items in the assessment are pending pollution control certification.
DETERMINATION
Enclosure screen room: The screen room is described as a cell type enclosure used in the radio frequency test lab while making noise figure measurements on high gain amplifiers. Outside interference from other tests or from signals in the environment may produce unreliable test data, and the screen room acts as a shield against this outside interference.
Code of Virginia § 58.1-609.3(5) provides an exemption from the tax for:
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- Tangible 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)
The Virginia Supreme Court addressed the issue of direct use and found that by using the word "directly," the legislature intended to narrow the scope of an exemption to tangible personal property used immediately in an exempt activity. See Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973). Further, the department relies on this interpretation as it applies to industrial manufacturing activities which, like the research and development exemption, is restricted to property used directly in an exempt activity. To this end, Virginia Regulation 630-10-63 indicates that the exemption applies to items "which are indispensable to the actual production of products for sale and which are used as an immediate Part of such production process."
In this instance, the screen room is used in exempt research and development activities. However, the screen room itself is not used in an exempt manner in that it does not play an active role in the actual testing process. Rather, it facilitates the process by shielding the tests from outside interference. As such, the screen room is not used directly and was properly included in the assessment.
CAD workstation: You indicate that this item was purchased and is currently being used by an engineer who is a prime designer for a military research and development group and is being used exclusively in that capacity. You further indicate that the Project Appropriation Request (PAR) provides that this equipment is also capable of being used for commercial design purposes, an activity not associated with research and development.
I understand that the auditor examined several CAD workstations that were under PAR's signifying them to be purchased for both commercial use and research and development. However, the auditor did not include these other CAD workstations based on the date of purchase and the date that the commercial work was implemented. Using these same criteria, the auditor and the Taxpayer determined that the contested equipment was probably used about 5-10 percent in a taxable activity. Accordingly, and because the exemption is based on exclusive use, the department has no alternative but to uphold the assessment for this particular workstation.
Pollution control certification: You indicate that certain items in the assessment are pending certification as exempt pollution control equipment and supplies. Upon certification, the Taxpayer may apply to the department for a refund of the taxes paid on these assessed items. The application for refund on these assessed items may be made within three years of the date of the assessment.
Please contact *** in my Office of Tax Policy at***. if you have further questions regarding these issues.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10344I
Rulings of the Tax Commissioner