Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Research and development
Topic
Taxability of Persons and Transactions
Date Issued
04-24-1996
April 24, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter of September 26, 1995 in which you seek correction of the recent sales and use tax audit of **********(the "Taxpayer") for the period of May 1991 through April 1994.
The Taxpayer is a manufacturer of automotive and watercraft performance instrumentation. Prior to the production process, the Taxpayer designs, builds, and tests prototypes which have been built in strict accordance with customer provided specifications. In addition, the Taxpayer performs post-production testing on manufactured products. The Taxpayer protests the taxing of tangible personal property used in its test lab, maintaining the items are used directly in research and development of new products.
The Taxpayer also objects to the taxing of "torque testers" used to test the torque level of electric screwdrivers used directly in the manufacturing process. The Taxpayer contends that the torque testers are used directly in production and are therefore exempt.
Finally, the Taxpayer maintains an injection molding tool shop. This shop serves three main purposes: i) maintenance of the production molds, ii) repair of the production molds, and iii) reengineering of the molds when necessary. In conjunction with the injection molding tool shop, the Taxpayer employs the use of a bridge crane to remove the molds from the injection machines and also to transport the molds to and from the tool shop. The Taxpayer takes the position that the crane itself is an integral part of production and therefore exempt.
DETERMINATION
Research and Development Issue
Code of Virginia § 58.1-609.3.5 provides a sales and use tax exemption for "tangible personal property for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." (Emphasis added).
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 the 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 such new knowledge or new understanding into a usable product or process."
By way of contrast, however, the regulation provides that "basic research and research and development do not include testing or inspection of materials for quality control...". In addition, the regulation specifically provides that research and development does not include the modification of a product merely to meet a customer's specification.
Based on the information provided to this office, the items in dispute (e.g. vibration system, environmental chamber, and photometer) are all used to test prototypes built to customer provided specifications. While changes to the prototype may be made as a result of test results, the regulation cited above clearly provides that testing and product modification do not qualify as exempt research and development. In addition, the post-production function of the equipment would deny the exemption based on the equipment's non-exclusive use in research and development.
Manufacturing Issues
Code of Virginia § 58.1-609.3.2 provides an exemption from the sales and use tax for, "machinery or tools or repair parts thereof or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing,... products for sale or resale...". (Emphasis added). The term "used directly" is then defined under Code of Virginia § 58.1-602 as follows:
In the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the court held that the use of the word "directly" in the statute was intended to narrow the scope of the exemption. Therefore, as the exemption applies only when an item is indispensable to actual production and is used primarily or consumed immediately in the actual production of tangible personal property.
Based on the above, the department finds that the torque testers and the bridge crane do not qualify for the exemption. While the torque tester and bridge crane may be essential in order to maintain exempt tangible personal property, neither are directly used in the actual production of the tangible personal property.
Accordingly, there is no basis to adjust the audit assessment. If you should have any further question, please contact *******Office of Tax Policy, at*************.
Danny M. Payne
Tax Commissioner
OTP/10338K
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter of September 26, 1995 in which you seek correction of the recent sales and use tax audit of **********(the "Taxpayer") for the period of May 1991 through April 1994.
FACTS
The Taxpayer is a manufacturer of automotive and watercraft performance instrumentation. Prior to the production process, the Taxpayer designs, builds, and tests prototypes which have been built in strict accordance with customer provided specifications. In addition, the Taxpayer performs post-production testing on manufactured products. The Taxpayer protests the taxing of tangible personal property used in its test lab, maintaining the items are used directly in research and development of new products.
The Taxpayer also objects to the taxing of "torque testers" used to test the torque level of electric screwdrivers used directly in the manufacturing process. The Taxpayer contends that the torque testers are used directly in production and are therefore exempt.
Finally, the Taxpayer maintains an injection molding tool shop. This shop serves three main purposes: i) maintenance of the production molds, ii) repair of the production molds, and iii) reengineering of the molds when necessary. In conjunction with the injection molding tool shop, the Taxpayer employs the use of a bridge crane to remove the molds from the injection machines and also to transport the molds to and from the tool shop. The Taxpayer takes the position that the crane itself is an integral part of production and therefore exempt.
DETERMINATION
Research and Development Issue
Code of Virginia § 58.1-609.3.5 provides a sales and use tax exemption for "tangible personal property for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." (Emphasis added).
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 the 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 such new knowledge or new understanding into a usable product or process."
By way of contrast, however, the regulation provides that "basic research and research and development do not include testing or inspection of materials for quality control...". In addition, the regulation specifically provides that research and development does not include the modification of a product merely to meet a customer's specification.
Based on the information provided to this office, the items in dispute (e.g. vibration system, environmental chamber, and photometer) are all used to test prototypes built to customer provided specifications. While changes to the prototype may be made as a result of test results, the regulation cited above clearly provides that testing and product modification do not qualify as exempt research and development. In addition, the post-production function of the equipment would deny the exemption based on the equipment's non-exclusive use in research and development.
Manufacturing Issues
Code of Virginia § 58.1-609.3.2 provides an exemption from the sales and use tax for, "machinery or tools or repair parts thereof or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing,... products for sale or resale...". (Emphasis added). The term "used directly" is then defined under Code of Virginia § 58.1-602 as follows:
-
"Used directly," when used in relation to manufacturing, processing,... refers to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration."
In the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the court held that the use of the word "directly" in the statute was intended to narrow the scope of the exemption. Therefore, as the exemption applies only when an item is indispensable to actual production and is used primarily or consumed immediately in the actual production of tangible personal property.
Based on the above, the department finds that the torque testers and the bridge crane do not qualify for the exemption. While the torque tester and bridge crane may be essential in order to maintain exempt tangible personal property, neither are directly used in the actual production of the tangible personal property.
Accordingly, there is no basis to adjust the audit assessment. If you should have any further question, please contact *******Office of Tax Policy, at*************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10338K
Rulings of the Tax Commissioner