Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Basic research and development
Topic
Taxability of Persons and Transactions
Date Issued
11-18-1996
November 18, 1996
Re: Ruling Request: Retail Sales and Use Tax
Dear***************
This is in response to your letter of October 15, 1996 in which you seek a ruling on the application of the tax to purchases made by********** (the "Taxpayer") pursuant to a specific contract with the federal government.
FACTS
The Taxpayer has been awarded a subcontract to perform activities related to aerospace research and technology for an agency of the federal government. Under agency regulations, the Taxpayer is requesting a ruling from the department on any tax exemptions that may be applicable to purchases made under this subcontract.
RULING
Code of Virginia § 58.1-609.3(5) provides an exemption 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."
The department's policy regarding this exemption is set out in Virginia Regulation 630-10-92 which 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."
This regulation further provides that:
-
- "Direct use" means those activities which are an integral part of basic research or research and development activities, including all steps of these activities, but not including secondary activities such as administration, general maintenance, product marketing, and other activities collateral to the actual research process.
The statement of work submitted with your correspondence indicates that the Taxpayer is responsible for a wide range of tasks associated with aerospace activities. These activities include, for example, testing and analysis in connection with gas dynamics, aerodynamic technology, fluid mechanics, and materials research. I agree that the scope of this work constitutes "basic research" as defined above. Tangible personal property which is used "directly and exclusively" in these research activities may be purchased exempt of the tax. As a precaution, the department cannot determine direct and exclusive use based on your correspondence, and an on-site inspection of the property may be required.
I also note that the Taxpayer's research programs and activities will be more specifically defined through task orders issued by the contracting officer. It is not possible at this time to determine whether these tasks orders are exempt direct use activities or taxable collateral activities. It may be, for example, that a particular task order will require the Taxpayer to provide administrative activities. If so, purchases of tangible personal property made in connection with the administrative or other collateral activities are taxable, regardless that title to that property passes directly to the government.
As discussed above, property purchased to perform secondary or collateral activities is taxable. Further, if a single item is used both in taxable and exempt activities, such property is taxable since it is not used exclusively in basic research. The only exception to this is if the taxable use is de minimis as addressed in Part ll, §2.3 of the regulation.
I trust that this letter addresses your concerns. Please contact******* in my Office of Tax Policy at************* if you need additional assistance
Sincerely,
Danny M. Payne
Tax Commissioner
Danny M. Payne
Tax Commissioner
OTP/117711
Rulings of the Tax Commissioner