Tax Type
Retail Sales and Use Tax
Description
Manufacturing; Research and development; Charitable organization
Topic
Taxability of Persons and Transactions
Date Issued
08-28-1997
August 28, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This is in reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period July 1993 through June 1996. I note that the assessment has been paid in full. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a nonstock, charitable, scientific and educational organization exempt from federal income taxation under § 501 (c)(3) of the Internal Revenue Code. It operates in close proximity to or in conjunction with research facilities of two out-of-state universities. The Taxpayer conducts research in physical, biological, medical, mathematical, agricultural, economic, and engineering sciences and publishes information and data arising from its investigations and research.
An audit by the department resulted in the assessment of use tax on general expense items and fixed assets purchased by the Taxpayer. You maintain that (1) the Taxpayer is an exempt organization based on the nature of its activities, and (2) the items assessed are used directly and exclusively in research and development activities and qualify for the sales and use tax exemption provided in Code of Virginia § 58.1-609.3(5).
DETERMINATION
Generally: 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. This exemption is addressed in Title 23 of the Virginia Administrative Code (VAC) 10-210-3070 through 10-210-3074. These regulations indicate that activities qualifying for this exemption include any activity which has as its goal the advancement of existing knowledge or technology; the development of new uses for existing products, technology or processes; or the improvement of existing products, technology or processes.
The fact that an organization's activities are devoted to research and development does not render that organization exempt from the Virginia retail sales and use tax for all its purchases. The exemption for research and development activities is limited to items that are used directly and exclusively in exempt activities. Items used in both exempt and nonexempt activities (e.g., administration, general maintenance, product marketing, etc.) are not used exclusively in research activities and, therefore, are subject to the tax. In other words, the exemption is limited in its application and does not apply to all tangible personal property purchased by a nonprofit research and development organization.
With this background in mind, l will address the contested issues arising from the department's audit.
General expense purchases: A review of the audit report and workpapers reveals that tax was assessed on general office equipment and supplies and on items the auditor determined to be used in activities outside the regulatory definition of "basic research" and "research and development." Such activities included impact studies on implementation of new commercial aviation safety standards and the publishing of the findings for a federal government agency.
As explained in VAC 10-210-3070, feasibility studies do not fall within the scope of research. Similarly, impact studies do not constitute exempt research. Therefore, items used in conducting the studies and in publishing the findings do not qualify for the exemption, even if the property is also used in exempt research and development activities. The auditor correctly included these items in the audit.
Fixed assets: A detail audit was conducted of fixed asset purchases. According to the audit report, the assessment included office computers which were not used exclusively in exempt research activities.
The fact that certain items were purchased solely because the Taxpayer was awarded a research and development contract by the federal government does not render each purchase exempt. The item must be used in exempt research and development activities to qualify for exemption. Based on my review of the audit report and the information you have provided, the office computers and other fixed assets were not used directly and exclusively in the Taxpayer's research and development activities. I would note that the auditor did not assess tax on certain fixed assets acquired under federal government research and development contracts. The auditor correctly assessed the tax on fixed asset purchases.
Accordingly, there is no basis to revise the assessment and issue a refund. If you have any questions regarding this matter, you may contact **** of the department's Office of Tax Policy at********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11798F
Rulings of the Tax Commissioner