Tax Type
Retail Sales and Use Tax
Description
Software tactical systems research
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
04-06-1988
April 6, 1988
Re: Ruling Request/ Sales and Use Tax
Dear****************
This will reply to your letter of August 7, 1987 on behalf of *********** (taxpayer), seeking a research and development exemption from the sales and use tax. We apologize for the delay in providing you with this response.
FACTS
The taxpayer is engaged in tactical systems software development, primarily for the United States Navy. Examples of areas in which the taxpayer performs research and development include: naval combat systems and tactical data acquisition units and their derivatives; system, component and software design effort, including design of microcomputer software, design of prototype hardware, preparation of functional and detailed engineering drawings, and preparation of functional descriptions; and investigations of techniques and procedures which would facilitate the design and manufacture of combat systems.
In addition you state that the taxpayer has placed major emphasis on technology transfer of research concepts into the development of high-technology systems and prototypes for problem solving and providing input to requirements for more advanced systems.
Accordingly, you request a ruling that the taxpayer qualifies for the research and development exemption from the sales and use tax under §58.1-608(19) of the Virginia Code.
RULING
Virginia Regulation (VR) 630-10-92(A) (copy enclosed) provides that "[t]he tax does not apply to tangible personal property purchased or leased and used directly and exclusively in ... research and development in the experimental or laboratory sense." (Emphasis added). Subsection (C) of this regulation then defines "research and development" to mean:
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- ...a systematic study or search directed toward new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of such new knowledge or new understanding into a usable product or process.
- ...a systematic study or search directed toward new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of such new knowledge or new understanding into a usable product or process.
In addition, VR 630 (copy enclosed), clarifies that the research and development exemption in VR 630-10-92 applies to "research and development activities in the experimental or laboratory sense which have as their ultimate goal the advancement of technology, the development of new products or processes, or the improvement of existing products or processes." Therefore, "most research into innovative technologies or fields will qualify for the research exemption. However, the production of management studies and similar projects does not constitute exempt research under VR 630-10-92 [since] such projects do not involve experimental or laboratory research."
Based on the facts presented, and the above referenced regulations, the taxpayer in this case qualifies for exemption from the tax when purchasing items for direct and exclusive use in the research and development of new tactical systems software and prototype hardware products. Examples of items which would qualify for this exemption if used directly and exclusively in such research processes are paper and supplies used to record research findings, computers used to store, retrieve and process research data, and technical books and journals for use in performing background research. In order to claim this exemption, the taxpayer must provide its suppliers with copies of the enclosed certificate of exemption (Form ST-11) at the time of making such purchases.
The exemption granted in this letter is strictly limited to the facts presented, and has no application to any other activities engaged in by the taxpayer. For example, the exemption does not apply to items purchased for use by the taxpayer in activities which occur either before or after the actual research process. An activity which occurs before the research process would include investigations of techniques and procedures to facilitate the design of combat systems. Activities which occur after the research process would include the preparation of engineering drawings, functional descriptions, or instructional manuals.
The exemption granted herein is also inapplicable to administrative- equipment and supplies used by taxpayer's research or clerical personnel such as desks, chairs, copy machines, file cabinets, etc. The taxpayer should refer to the examples of taxable and exempt items listed in subsection G of VR 630-10-92 in determining whether a particular purchase qualifies for exemption.
I hope that the foregoing has responded to your question, but let the department know if you have any further questions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner