Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Research and development
Topic
Taxability of Persons and Transactions
Date Issued
04-10-1996
April 10, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your correspondence in which you seek a ruling on the application of the exemption for research and development activities to****** (the "Taxpayer"), as the result of an audit for the period March 1988 through January 1994. The Taxpayer has paid the assessment and requests a refund of a portion of the assessment.
FACTS
The Taxpayer coordinates the exchange and sharing of kidney, liver, and pancreas organs among a network of organ procurement organizations nationally and provides the appropriate donor and recipient medical information. In developing and recording medical information, the Taxpayer maintains a data management department which conducts scientific studies relating to prolonging survival rates of recipients of solid organ transplantation.
The Taxpayer was assessed tax on computer hardware and software used in its data management department in the performance of its scientific studies. The Taxpayer protests the tax asserting that the disputed property is used exclusively in basic research as defined in Virginia Regulation (VR) 630-10-92.
DETERMINATION
Code of Virginia § 58.1-609.3(5) 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." VR 630-10-92 interprets the statute and specifically states the tax or exempt status of certain property when used in research and development activities.
VR 630-10-92 further 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. Basic research in the experimental or laboratory sense is such research that is carried on in a laboratory environment or by experimental methods." Emphasis added.
Conversely, the Virginia Supreme Court decided in Commonwealth v. Research Analysis Corporation, 214 Va.161, 198 S.E.2d 622 (1973), that research activities that are not of an experimental or laboratory nature are taxable. Such activities include management studies, environmental analyses, feasibility studies, consumer product testing, and social science or historical research.
The Taxpayer collects and analyzes data and provides the information to its network of organ procurement organizations to enable such organizations to seek more effective ways to preserve, transport, and extend patient survival once the transplant has been performed, according to the Taxpayer's mission statement. The Taxpayer's scientific studies involve the distribution of drugs to random transplant patients off-site and the data is collected and analyzed to determine an end result.
Based on the department's understanding of the network and the participating organ procurement organizations, the results of the Taxpayer's studies are submitted to such organizations, where the actual research and development of new drugs and methods to minimize tissue rejection and prolong patient survival is performed. As such, the Taxpayer is engaged primarily in drug testing and data collection which does not qualify as basic research. Even if we accept the Taxpayer's premise that it is engaged in basic research based on its use of experimental methodology, its use of the disputed property in taxable data collection, storage, and retrieval activities negates its qualification for the exemption because the disputed property is not used exclusively in basic research.
I commend the Taxpayer for its work in the field of organ transplantation, however, based on the statute, the regulation, and the department's established policy, the Taxpayer is not engaged in basic research that is carried on in a laboratory environment or by experimental methods as defined in the regulation. In addition, the activities outlined in your letter of October 3, 1995 are not considered basic research within the context of the regulation for the same reasons as stated above. Therefore, the Taxpayer is not entitled to a refund of the tax attributable to property used in conducting its scientific studies.
Exemption Legislation
Code of Virginia § 58.1-609 does not provide a general exemption from the sales and use tax for nonprofit organizations. If you are interested in pursuing exemption legislation during the 1997 General Assembly Session, I have enclosed a questionnaire for legislative consideration of a sales and use tax exemption request and Tax Bulletin 94-13, which explains the procedure and information required. The questionnaire should be completed and forwarded to a legislator who will sponsor the bill for exemption. The legislator must sign the questionnaire and submit it to the department by November 1, 1996.
If you have any questions regarding this matter, you may contact *** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8440J
Rulings of the Tax Commissioner