Tax Type
Retail Sales and Use Tax
Description
Application for refund; Refunds and dealer discounts
Topic
Taxpayers' Remedies
Date Issued
12-18-1996
December 18, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear**********
This is in response to your letter of October 18, 1996 in which you seek a ruling on behalf of **********(the "Taxpayer").
FACTS
The Taxpayer develops, manufactures, and distributes computer firmware, software, and electronic equipment. In support of this activity, the Taxpayer's Virginia-based division purchases computerized telecommunications equipment along with peripheral equipment and supplies. This equipment is used in a variety of activities, including: (1) evaluation, testing, and research in support of developing computerized telecommunications hardware; (2) the use of simulated environments to develop, test, and enhance transmission links through fiber optic networks; (3) the development of hardware, software, and firmware prototypes; and (4) testing and debugging prototype products to improve product design prior to manufacture.
You indicate that when the Taxpayer purchased the equipment used in these activities, it either accrued the use tax or paid the sales tax directly to vendors. You maintain, however, these items are used in exempt research and development activities. You therefore request permission to request refunds of sales and use taxes paid on prior purchases of these items.
RULING
Exempt Research and Development Activities: Code of Virginia §58.1-609.3(5) provides an exemption from the 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." This exemption is addressed in Virginia Regulations (VR) 630-10-49.2 (innovative high technology industries and research) and 630-10-92 (research). These regulations indicate that the ultimate goal of exempt "research and development in the experimental or laboratory sense" is the development of new products, the improvement of existing products, or the development of new uses for existing products. Further, the specific high technology activities to which the exemption may apply include research and development in computer software technology and information technology.
Based on the information provided in your correspondence, I agree that tangible personal property used in the described activities may be purchased exempt. As mandated in the Code, however, exempt property must be used "directly and exclusively." 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 research and development. The only exception to this is if the taxable use is de minimis as addressed in Part ll, §2.3 of VR 630-10-92. To insure that the direct and exclusive criteria set out in the exemption are satisfied, the department may require on-site inspections of the property at issue.
Another concern is your reference to a simulation room to develop a fiber optic network. Generally, a room or other site in which research activities are conducted does not itself play an active role in those research activities. As such, these sites are not used directly. In this regard, see the enclosed Public Document 96-32 (412196).
Refund Requests: The department will honor requests for refunds of use taxes which the Taxpayer accrued and remitted directly to the department on purchases of tangible personal property qualifying for the research and development exemption. In regard to sales taxes erroneously paid to vendors, the department generally prefers to refund the tax through the dealer because of the 1 percent local sales tax and the dealer's discount.
Code of Virginia §58.1-1822 limits the amount of the refund to those monies actually paid to the department. In those cases where the department makes a direct refund to the customer, it is still necessary for the customer to obtain from the dealer that portion of the sales tax representing the dealer's discount.
VR 630-1-1820(C)(3) indicates that when the customer is applying directly for a refund of taxes paid to a dealer, the customer must explain why the refund could not or would not be made by the dealer. While most dealers are willing to make refunds to their customers, the department will issue direct refunds to the customer in those instances where the procedure causes an administrative or financial burden on the dealer
Regardless of whether the dealer or the customer applies for a refund, the person applying for the refund has the burden of proving that the tax was paid erroneously. In seeking refunds from vendors, the Taxpayer must provide them a fully completed Certificate of Exemption, Form ST-11, with box number 5 checked. Requests for refunds from the department should be accompanied by a copy of this letter. Also, any application for refund is subject to the three-year statute of limitations prescribed in Code of Virginia §58.1-1823.
Please contact *************in my Office of Tax Policy at******** if you have further questions regarding this issue.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/118171
Rulings of the Tax Commissioner