88-19 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Research and development

Topic

Exemptions

Date Issued

01-04-1988

January 4, 1988

Re: Request for Ruling/Sales and Use Tax

Dear******************

This will reply to your letter of September 22, 1987, in which you wish to determine the applicability of sales and use tax to your corporation. You note in your letter that Your corporation is engaged in the development and production of computer based instrumentation for the measurement of stress.

§58.1-608.19 of the Code of Virginia 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." Virginia Regulation 630-10-92, copy enclosed, includes the following activities within the scope of the research and development exemption:

- (1) the development of new products; (2) the improvement of existing products; or (3) the development of new uses for existing products.

In this instance your corporation is developing a new product; therefore, tangible personal property used directly and exclusively in the development of the product is not subject to the tax. VR 630-10-92 defines the term "direct and exclusive use" and provides examples of taxable and exempt items of tangible personal property used in research activities. Among the items of tangible personal property deemed nontaxable are "computer hardware and ... software when used exclusively to store, retrieve, and process research data." Assuming that your corporation's computer systems are used exclusively in exempt research activities, a refund of the Virginia tax paid on such systems will be available.

In addition, §58.1-608.1 of the Code of Virginia provides an exemption for raw materials, machinery, tools, energy, fuel, and supplies "used directly in ... manufacturing ... products for sale or resale" in the industrial sense. Inasmuch as your corporation is producing equipment for sale or resale, it also qualifies for the industrial manufacturing exemption. I have enclosed a copy of Virginia Regulation 630-10-63, which explains the scope of the exemption and provides examples of taxable and exempt items of tangible personal property used in manufacturing activities.

I trust that this will answer your questions, but please do not hesitate to contact the department if any further questions arise.

Sincerely,

W. H. Forst
Tax Commissioner

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