Tax Type
Retail Sales and Use Tax
Description
Research and development; High definition television
Topic
Taxability of Persons and Transactions
Date Issued
08-01-1990
August 1, 1990
Re: Request for Ruling/Sales and Use Tax
Dear******************
This will reply to your letter of January 4, 1990, and ********** letter of September 20, 1989, requesting a ruling on the sales and use tax application to research activities conducted by********** (the Taxpayer).
FACTS
The Taxpayer is a Delaware corporation exempt from federal income tax under §501(c)(6) of the Internal Revenue Code. The Taxpayer's principal office is in Alexandria, Virginia and it is authorized to do business in Virginia.
The Taxpayer's principal function is to explore the issues arising from the introduction of advanced television technology (high definition television). The Taxpayer will design and conduct tests on advanced television transmission systems which have the potential for use by broadcasters and cablecasters. The tests will be conducted in a scientific and objective manner, and will be reported to the public, industry groups and governmental agencies for the purpose of assisting in the development of (1) appropriate advanced television transmission standards for the United States and (2) suitable governmental policies to implement them.
RULING
Virginia Code §58.1-608(3)(e) provides an exemption for "tangible personal property for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense."
Interpreting the statute, Virginia Regulation 630-10-92 (copy enclosed) defines "basic research" as "a systematic study or search in a scientific or technical field of endeavor with the ultimate goal of advancing knowledge or technology in that field." "Research and development" is defined as "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." The regulation further states that research and development "should have as its ultimate goal: (1) the development of new products, (2) the improvement of existing products, and (3) the development of new uses for existing products."
By way of contrast, however, the regulation provides that "basic research and research and development do not include testing or inspection of materials for quality control (or) environmental analysis, testing of samples for chemical or other content, operations research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research in connection with literary, historical or similar projects." Also see the enclosed copy of Commonwealth v. Research Analysis Corporation, 214 Va. 161, 198 S.E. 2d 622 (1973).
According to your letter, the Taxpayer primarily designs and conducts tests on advanced television transmission systems for possible future use by broadcasters and cablecasters. Once the tests are completed, the Taxpayer reports its findings to the public, industry groups and governmental agencies.
As noted above, the exemption generally is unavailable for activities that merely entail the testing or analysis of products as these activities do not actually seek to advance scientific knowledge or technology. The same is true in this case as the Taxpayer is conducting its tests merely to determine the relative merits and quality of proposed products. Therefore, the exemption is unavailable for equipment used in your testing operation.
However, the Taxpayer's efforts to identify and determine the suitability of terrestrial spectrum bands for advanced television broadcasting do qualify for the exemption as these research efforts are directed toward new understanding of a scientific or technical field and will help to advance technology on the advanced television field.
The exemption is limited, however, to tangible personal property used directly and exclusively in qualifying research activities. As noted in Virginia Regulation 630-10-92, property that is used both in taxable and exempt activities is deemed to be fully taxable due to the exclusive use requirement.
If you should have any further questions, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner