Tax Type
Retail Sales and Use Tax
Description
Manufacturer, Research and development
Topic
Exemptions
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
12-23-1987
December 23, 1987
Re: §58.1-1821 Application/ Sales and Use Tax
Dear ***************
This will reply to your letter of October 1, 1987, on behalf of *********** (taxpayer), seeking adjustment of an assessment issued in the above referenced case for the period October 1983 through August 1986.
FACTS
The taxpayer is a **********. In this connection the taxpayer was audited and held liable for the tax on its purchases of the following items: camera equipment for use in its research area, forklift battery chargers, a Q.A. fume hood, dock seals, a biohazard safety hood and a gamma detector.
The taxpayer contests the application of the tax to its camera equipment, contending that it is used directly and exclusively in research in the experimental or laboratory sense, under Virginia Regulation (VR) 630-10-92. The assessment on its purchase of forklift battery chargers is contested on the grounds that such chargers represent "fuel, power, [or] energy used directly in manufacturing or processing," under VR 630-10-63(A)(3). In addition, the taxpayer contends that its purchase of a Q.A. fume hood qualifies for exemption from the tax as "equipment used for production line testing or quality control," under VR 630-10-63(C)(2). Furthermore, the taxpayer denies any liability for the tax in purchasing dock seals, under a real estate contract, which it contends lost their identity as tangible personal property upon installation, pursuant to VR 630-10-27. Lastly, the taxpayer contends that its purchase of a biohazard safety hood for donation to a university qualifies for exemption from the tax under Virginia Code §58.1-608(59), and that a gamma detector purchased for use in the university's lab qualifies for the basic research exemption cited above.
The taxpayer also seeks the waiver of all penalties assessed in this case.
DETERMINATION
Camera equipment
VR 630-10-92(A) provides in pertinent part that "[t]he tax does not apply to tangible personal property purchased or leased and used directly and exclusively in basic research in the experimental or laboratory sense or research and development in the experimental or laboratory sense." Subsection F of this regulation provides further that "[i]tems of tangible personal property used directly and exclusively in basic research or research and development include materials worked on, equipment, machinery, tools, supplies, energy, fuel, and power used in such processes." This same subsection also provides examples of exempt items used in research activities such as, "[p]aper and supplies used to record research findings during the actual research process. "
The camera equipment purchased in this case was used either to record stop action photographs of experiments in process or, in conjunction with a microscope, to record pictures of chemical compounds for further detailed study and comparison to other compounds.
Based on the facts presented, and the regulation cited above, I find basis for adjustment of the assessment to remove the taxpayer's purchases of camera equipment for exclusive use in recording its research findings.
Forklift battery chargers
Since, pursuant to VR 630-10-63(B)(2), the forklift battery chargers are used to power machinery which is used directly in the taxpayer's manufacturing process, I find basis for removing the chargers from the assessment.
Q.A. fume hood
VR 630-10-63(C)(2) provides in pertinent part that "[e]quipment used for production line testing or quality control is classified as exempt production equipment. Testing for the purpose of improving administrative efficiency or any other testing not relating to quality control is taxable." This subsection of the regulation provides further that "[t]angible personal property used for ..ventilation,...or to dispose of plant wastes and pollutants, other than equipment designated as certified pollution control equipment under the provisions of Va. Code §58.1-3660," is taxable. In addition, tangible personal property "used for such programs as safety, accident prevention, and first aid" is taxable under the regulation. While the fume hood may have been essential to the health and safety of the taxpayer's employees in conducting product line testing involving hazardous chemicals, the fume hood itself was not an immediate part of such product testing. Nor is there any indication that the hood has been designated as certified pollution control equipment under §58.1-3660 of the Code. Accordingly, I find no basis for correction of the assessment for the fume hood.
Dock seals
According to your letter, the dock seals are used to cover exterior head and side pads on a shipping door which were replaced under a real estate contract. In addition, you state that the pads are bolted to the outside of the building and all labor involved and materials used was supplied by a contractor. Based on the facts presented, I find basis for agreeing that the dock seals lost their identity as tangible personal property upon installation, and therefore, they will be removed from the assessment.
Biohazard safety hood and gamma detector
Since July 1, 1986, §58.1-608(59) of the Virginia Code has provided an exemption from the tax for "[t]angible personal property withdrawn from [an untaxed] inventory and donated to (i) an organization exempt from taxation under §501(c)(3) of the Internal Revenue Code, or (ii) the Commonwealth, any political subdivision of the Commonwealth, or any school, agency or instrumentality thereof." This exemption was not given retroactive effect.
It is my understanding that the taxpayer in this case donated the safety hood to the university in 1983, three years prior to the effective date of this exemption. Accordingly, the taxpayer may not rely upon this exemption to exempt its purchase of the biohazard safety hood.
In addition, the taxpayer's purchase of the gamma detector has not been shown to meet the criteria for exemption as being used exclusively in basic research or research and development in the experimental or laboratory sense. The research and development exemption cited above, provides in pertinent part that in order to qualify for the exemption, the items purchased must not only be used directly and exclusively in basic research or research and development in an experimental or laboratory sense, but they must also be purchased, "by the person, firm, corporation, or other entity that actually will perform [the] research activities." (See. subsection D of VR 630-10-92).
While the taxpayer in this case directs the research activities being conducted under contract with a university, the taxpayer itself does not actually perform all of such research. Accordingly, the taxpayer was correctly held liable for the tax in purchasing the gamma detector mentioned above.
Penalties
Section 58.1-105 of the Virginia Code authorizes the department in all cases in which a penalty is imposed upon the taxpayer for failure to comply with the requirements of the tax laws to accept offers made in compromise or in lieu of such penalties.
Based on all of the facts and circumstances of this case and the authority cited above, I find basis for the waiver of the penalties assessed in this case. Therefore, the audit will be adjusted in accordance with the foregoing, and a revised assessment will be issued to the taxpayer as soon as practicable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner