89-140 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Research and development; Feed for test animals

Topic

Exemptions

Taxability of Persons and Transactions

Date Issued

04-28-1989

April 28, 1989

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

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

This will reply to your letter of June 10, 1988, in which you request a refund of sales and use tax paid as the result of a recent audit.

FACTS

********** (Taxpayer) conducts product safety analyses under laboratory conditions for various manufacturers. A recent audit of the taxpayer produced an assessment for various articles of tangible personal property purchased for use in these activities, including feed used to administer compounds to test. animals, bedding for test animals, and equipment and supplies used to sanitize test animal housing units.

The taxpayer contests the assessment of tax on certain articles, contending that they are exempt from the tax due to direct usage in industrial manufacturing and/or basic research in the experimental or laboratory sense.

DETERMINATION

Application of Industrial Manufacturing Exemption

§58.1-602.9 of the Code of Virginia provides:

- "Manufacturing, processing, refining, or conversion" includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site, and also includes equipment and supplies for production line testing and quality control...

Interpreting this provision, Virginia Regulation 630-10-63 specifically limits the exemption to machinery, tools, supplies, etc., used on the production line at a single plant site. In this instance, the taxpayer's activities on behalf of manufacturers do not take place on the manufacturers' production lines, but in the taxpayer's own facilities. As such, the exemption does not apply.

The Virginia Supreme Court's opinion in Commonwealth v. Wellmore Coal, 228 Va. 149, 320 S.E.2d 509 (1984), is inapplicable to this case. In Wellmore, the court held that certain truck parts and road building materials used in the transportation of coal from a mine to a coal processing plant were "used directly in the process of mining" despite the fact that mining and processing did not occur on the same site. This case differs from Wellmore in that Virginia Code §58.1-602 and VR 630-10-63 do not refer to mining activities, but only to manufacturing, processing, refining, and conversion.

Even if the exemption was available here, it is my understanding that much of the taxpayer's activities are in connection with products that have not yet reached production (see enclosed November 29, 1979 letter from the taxpayer).

Application of the Research and Development Exemption

§58.1-608.19 of the Code of Virginia exempts from the sales and use tax "[t]angible personal property purchased for use or consumption directly and exclusively in basic research...in the experimental or laboratory sense."

Virginia Regulation 630- 10-92 defines the terms "used directly" to mean "those activities which are an integral part of basic research...but not including secondary activities" and "used exclusively" to mean "items used solely in exempt research activities." Further, the regulation notes that various articles, including "heating and cooling equipment...used exclusively to maintain the integrity of research materials" are exempt.

The animal feed in question is used exclusively in connection with exempt research animals in order administer test compounds. The bedding and cleaning materials are also used exclusively in connection with exempt research animals and play a direct role in maintaining the integrity of the research involving the animals. As such, these items are used directly and exclusively in exempt research and development activities.

Based upon the foregoing, the items in question will be removed from the department's audit. In addition, all penalty assessed to the taxpayer will be abated. A revised notice of assessment will be issued to the taxpayer as soon as practicable .

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner