Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Basic research
Topic
Taxability of Persons and Transactions
Date Issued
05-16-1996
May 16, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear********************
This will reply to your letter of February 12, 1996 regarding the application of the sales and use tax to certain government contract purchases by*******(the "Taxpayer").
FACTS
The Taxpayer has entered into a contract with an agency of the federal government. Under authority of the contract, certain tasks and their related purchases are made pursuant to several delivery orders.
Background information suggests that the overall purpose of the controlling contract is the development and delivery of integrated planning applications and simulation systems. Delivery Order 023 calls for the integration of simulation technology with other planning systems. Delivery Order 030 proposes to develop software tools and capabilities to enhance wargame training, planning, and simulation. Delivery Order 033 is itself a compilation of separate task orders specifying a wide range of contractor requirements.
The Taxpayer maintains that tangible personal property purchased under these documents was used directly and exclusively in the research and development project. The Taxpayer further maintains that its activities under the delivery orders are exempt research and development as addressed in Virginia Regulation (VR) 630-10-92 and requests a ruling to this effect.
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 VR 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."
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- This regulation further provides that:
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- "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.
I agree that the scope of the work addressed in the contract and delivery orders, which advances knowledge especially in the field of simulation technology, is "basic research" as defined above. Tangible personal property which is used "directly and exclusively" in this research activity 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.
The second question is whether the tasks for which the Taxpayer is responsible under the delivery orders are exempt direct use activities or taxable collateral activities. In this regard, the Contract Work Breakdown Structure specified in Delivery Orders 023 and 030 describe activities which appear to be an integral part of the basic research. These activities include, for example, requirements analysis, hardware and software engineering, and systems integration.
At the same time, I notice that the Taxpayer is also responsible for some administrative activities, e.g., project management and schedule control. Also the objectives of tasks 1 through 4 of Delivery Order 033 call for the provision of technical support for demonstrations. These tasks are collateral to basic research and, like the administrative activities, are taxable activities.
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 II, § 2.3 of the regulation.
I trust that this information is helpful. If you need additional assistance, please contact *****in my Office of Tax Policy at ***** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10919I
Rulings of the Tax Commissioner