Tax Type
Retail Sales and Use Tax
Description
Computer network used for both research and administration
Topic
Taxability of Persons and Transactions
Date Issued
01-04-1988
January 4, 1988
Re: 58.1-1821 Application/Sales and Use Tax
Dear****************
This is in reply to your letter dated October 28, 1987 in which you seek the correction of sales and use tax assessed to as a result of a recent audit.
FACTS
*****************personal computer products. A recent audit of the taxpayer produced an assessment for failure to pay tax on a computer network that is used for research and development activities as well as administrative activities.
The taxpayer asserts that of the tax applies to tangible personal property (a computer network) used directly in software development. Therefore, since the company qualifies for an exemption under Virginia Code §58.1-608(19) which provides a sales and use tax exemption for tangible personal property used "directly and exclusively" in research activities, the taxpayer contends that only that portion of the network used for administrative purposes should be taxed. Accordingly, the taxpayer seeks the reduction of the tax assessed on the computer network by 50% (the amount allocated for use by production personnel).
DETERMINATION
§58.1-608(19) of the Code of Virginia does provide an 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.
This section of the code is delineated in §630-10-92 of the Virginia Retail Sales and Use Tax Regulations (a copy of which is enclosed for your information). Computer hardware and software when used directly and exclusively for research are exempt from the tax as stipulated by the regulation. The regulation goes on further to define the terms "used directly" and "used exclusively". The term "used directly" is defined as "[t]hose activities which are an integral part of basic research or research and development activities...but not including secondary activities such as administration, general maintenance", etc. The term "used exclusively" refers to those "[i]tems used solely in exempt research activities. Items used both in exempt and nonexempt activities are not used exclusively in research activities and are subject to the tax. "
The regulation further states "[a] prorated research exemption based upon percentages of exempt and nonexempt usage or an exemption based upon the preponderance of an item's use in exempt activities is not permitted under this section." Emphasis added.
Inasmuch as the law and departmental regulations are specific in that tangible personal property must be used directly and exclusively in research activities in order to qualify for the exemption, I must conclude that the assessment issued to the taxpayer is correct and payable.
Sincerely,
W.H. Forst
Tax Commissioner
Rulings of the Tax Commissioner