Document Number
03-91
Tax Type
Retail Sales and Use Tax
Description
Use directly & exclusively in R&D of pharmaceutical products
Topic
Accounting Periods and Methods
Computation of Tax
Taxpayers' Remedies
Date Issued
11-14-2003

November 14, 2003




Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ****************:

This is in reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period January 1996 through July 2001. I apologize for the delay in the Department's response.
FACTS

The Taxpayer states that it is engaged in basic laboratory research and it purchases supplies that it uses or consumes directly in the development of new products or in the improvement of existing products. The Taxpayer's customers are primarily pharmaceutical manufacturers. The Taxpayer contends that its testing and analysis determines if the pharmaceutical product developed by its customers satisfies federal Food and Drug Administration (FDA) or Environmental Protection Agency (EPA) requirements. If the federal requirements are not satisfied, the Taxpayer develops changes to improve the customer's product in order to obtain such approval. The Taxpayer also states that it conducts research to determine new ways to arrest certain human diseases such as Hepatitis B. Accordingly, the Taxpayer maintains that its purchases qualify for the research and development exemption provided by Va. Code § 58.1-609.3(5).
DETERMINATION

Virginia Code § 58.1-609.3(5) provides an exemption for the purchase of tangible personal property used or consumed directly and exclusively in basic research or research and development in the experimental or laboratory sense. Title 23 of the Virginia Administrative Code (VAC) 10-210-3070 provides that:
    • "Research and development" means a systematic study or search directed toward 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. 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. Research and development does not include the modification of a product merely to meet customer specifications unless the modification is carried out under experimental or laboratory conditions in order to improve the product generally or develop a new use for the product.

The Taxpayer states that the pharmaceutical testing and analysis efforts are focused in developing new ways to arrest certain diseases. The results of the testing are provided to the manufacturer and the federal government. The Taxpayer maintains that its work substantially involves "helping" its customers develop new pharmaceutical products or improve existing products.

Based on the information before me, I agree that the Taxpayer's testing and analysis are a part of the research and development of its customers' products. There is, however, insufficient documentation to show what specific tangible personal property assessed in the audit has been purchased for use directly and exclusively in its research and development of pharmaceutical products. As a result, I will have the Department's auditor contact the Taxpayer to arrange a meeting to review such documentation. If the review results in a revision, the audit assessment will include accrued interest only to the date of the Taxpayer's original protest letter. If the review results in no further revision, the assessment will be updated to the date of the auditor's current review, including accrued interest. The total outstanding balance will be immediately due and payable.

If you have any questions regarding this matter, please contact ***** of the Department's Office of Policy and Administration, Appeals and Rulings, at *****@tax.state.va.us or at *****.
                • Sincerely,

                • Kenneth W. Thorson
                  Tax Commissioner


AR/37985Q

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46