Tax Type
Retail Sales and Use Tax
Description
Manufacturing, Research and development; Government contracts
Topic
Taxability of Persons and Transactions
Date Issued
09-24-1997
September 24, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to **********(the "Taxpayer") for the period March 1993 through December 1995. I note that the assessment associated with the uncontested purchases has been paid.
FACTS
The Taxpayer operates as a government contractor. At issue in this case is the application of the tax to two contracts between the Taxpayer and agencies of the federal government. You maintain that tangible personal property purchased under authority of these contracts is exempt in that the contracts represent research and development activities.
I understand that you cannot disclose the contracts' statements of work.
Alternatively, you have provided summaries of the work performed on the two contracts.
DETERMINATION
Code of Virginia § 58.1-609.3(5) provides an exemption from the sales and use 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 statute is interpreted in the regulations set out in Title 23 of the Virginia Administrative Code (VAC). 23 VAC 10-210-3070 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." By that same regulation, "research and development" must have as its ultimate goal: (i) the development of new products; (ii) the improvement of existing products; or (iii) the development of new uses for existing products.
By way of contrast, however, the regulation provides that exempt research does not include testing or inspection of materials or products for quality control or environmental analysis, testing of samples for chemical or other content, operations research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research in connection with literary, historical, or similar projects.
In the instant case, you have provided me your own summaries of the two contested contracts. Your summary of Project 9319 indicates that the Taxpayer's work calls for measuring the value of certain air combat intelligence factors. This activity appears to be in the nature of a management study. I agree that such a study depends on research techniques, but this research is not necessarily "in the experimental or laboratory sense" as mandated in the statute. Your summary for Project 9316 suggests that the Taxpayer contracted to design and prototype a certain analysis package. This activity may have research and development aspects. Without the contract's statement of work, however, it is difficult to determine if this activity meets the requirements set out in the regulation.
I am very concerned with the issues raised in this case because the statements of work have not been provided to the department. Prior rulings issued by the Tax Commissioner indicate that absent an opportunity to review a contract's statement of work, the department has no alternative but to uphold the assessment associated with those contracts. See, for example, the enclosed Public Document 96-102 (5/28/96). Further, both the auditor and the audit supervisor in this case have been granted top secret clearance by the federal government.
The courts have consistently held that a tax assessment is prima facie correct and that the burden is on the taxpayer to prove otherwise. I appreciate your attempt to resolve the contested issues in this case by providing contract summaries. Nevertheless, the summaries do not constitute proof that the assessment is erroneous.
Accordingly, l find in the instant cast that the contested purchases have been correctly assessed. I will, however, continue to suspend collection activity on the outstanding balance of the assessment for an additional 60 days. It is hoped that in this time the Taxpayer can provide the statements of work to the auditor so that the contested issues can be more precisely reviewed. Lacking the statements of work, a revised bill, with interest accrued to date, will be sent to the Taxpayer at the end of the 60 day period.
If you have any questions regarding this letter, please contact ******** in my Office of Tax Policy at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12290I
Rulings of the Tax Commissioner