Tax Type
Retail Sales and Use Tax
Description
Manufacturing Exemptions; Research and development
Topic
Taxability of Persons and Transactions
Date Issued
06-10-1999
June 10, 1999
Re: Request for Ruling: Retail Sales and Use Tax
Dear**************
This is in response to your letter regarding the application of the retail sales and use tax to equipment, reagents, and supplies purchased by * * * * * (the "Taxpayer'). I apologize for the delay in responding to your correspondence.
FACTS
The Taxpayer operates as a research and development facility for clients primarily involved in the life sciences. These clients are researchers working in university, government, and private sector laboratories. The work which the Taxpayer performs for these clients includes: (1) research to the client's specifications under contract to that client; (2) performing experiments to a client's specifications on a one-time basis; and (3) analysis on clients' compounds as part of the basic research process. These analyses are usually to verify the chemical nature of a particular compound.
In addition to these client-related activities, the Taxpayer conducts its own research and development programs in-house which support its claims for intellectual property. Accordingly, you summarize the Taxpayer's work as either supporting the research and development programs of your clients or supporting the research and development programs of the Taxpayer. These activities include DNA sequence analysis; protein sequence analysis; chemical synthesis of DNA, RNA, or PNA; purification of proteins; preparation of antibodies; cloning; and spectroscopic techniques (such as mass spectroscopy and fluorescence spectroscopy). The Taxpayer has also been accredited by government agencies to perform paternity testing by DNA analysis.
The Taxpayer seeks exempt status on its purchases of equipment, reagents, and supplies under the exemption for research and development.
RULING
Code of Virginia § 58.1-609.3(5) provides a sales and use tax exemption 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.' (Emphasis added.) The department interprets this statute in Title 23 of the Virginia Administrative Code (VAC) 10-210-3070 through 3074. These regulations define "research and development' as "a systematic study or search directed toward a new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of this new knowledge or new understanding into a usable product or process.' The term "basic research' is defined 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 way of contrast, the regulations provide that exempt research does not include testing or inspection of materials or products for quality control, environmental analysis, testing of samples, operations research or management studies. Further, in order to qualify for the exemption, tangible personal property must be used in an actual research process, but excluding activities which are collateral to the actual research.
It appears that some of the Taxpayer's activities may represent exempt research and development. The Taxpayer's own research efforts in cloning, for example, may be an example of exempt basic research. Similarly, research into the chemical synthesis of DNA compounds may also qualify as an exempt activity.
I am concerned, however, that some of the Taxpayer's other activities are not exempt research and development as set out in the statute and regulations. For example, the analysis of clients' compounds to verify chemical content is a testing activity which is specifically excluded from the definition of exempt research. Even assuming that the client may be engaged in exempt basic research, the Taxpayer's analysis of the client's compounds is more in the nature of a taxable collateral activity. In effect, the chemical analysis supports the basic research or research and development programs of its clients. Also, I do not believe that paternity testing by DNA analysis is an example of "basic research' as defined above. While this activity is conducted in a laboratory setting, paternity testing is not conducted with the ultimate goal of advancing technology in a scientific or technical field.
With this determination in mind, the application of the tax to the Taxpayer's purchases of equipment, reagents, and supplies is as follows:
Equipment: The exemption would not extend to equipment used by the Taxpayer if that equipment is used in any taxable testing activity or support activity. Further, no exemption would apply even if the same equipment is also used in the Taxpayer's exempt basic research. This is because the dual use of such equipment would violate the exclusivity test mandated in the statute.
Reagents and supplies: I understand that reagents and supplies are purchased in bulk and may be used in both taxable and exempt activities. Reagents and supplies used in exempt basic research are exempt of the tax provided that they are used directly and exclusively. Conversely, the tax does apply to reagents and supplies used in any taxable activity. Accordingly, the Taxpayer may purchase these items exempt of the tax and accrue the tax on the taxable portion by remitting the tax directly to the department on a Consumer Use Tax Return, Form ST-7.
I understand that the Taxpayer has been discussing these issues with the department's audit staff. I am confident that you will be able to determine a mutually agreeable percentage of taxable and exempt use of reagents and supplies. However, I will certainly address any other questions which the Taxpayer may have.
If you have any questions regarding this letter, please contact * * * * * in the department's Office of Tax Policy at * * * * *.
Sincerely,
Danny Payne
Tax Commissioner
Rulings of the Tax Commissioner