Virginia Administrative Code › Title 23 - TAXATION › Agency 10 - DEPARTMENT OF TAXATION › Chapter 210 - RETAIL SALES AND USE TAX › Section 23VAC10-210-3071 - Research; extent of the exemption

Current through Register Vol. 40, No. 24, July 15, 2024
A. Direct and exclusive use. The exemption is
				limited in scope to tangible personal property used directly and exclusively in
				an actual research process, starting with the handling and storage of raw
				materials and supplies at the research facility and ending after the last step
				of the research process when the products of the research process are stored at
				the research facility. Items of tangible personal property used directly and
				exclusively in research include chemicals, drugs and other materials,
				equipment, machinery, tools, supplies, energy, fuel, and power used in these
				processes. An item is not considered used directly and exclusively merely
				because it is essential to research activities or because its use is required
				by law.
B. Items used in both
				taxable and exempt research activities. When a single item is used both in
				exempt and nonexempt activities, it is not used exclusively in research
				activities and is taxable. Therefore, a prorated research exemption of the
				single item based upon percentages of exempt and nonexempt usage or an
				exemption based upon the preponderance of an item's use in exempt activities is
				not permitted.
Example: A company purchases a computer system which is used
				  90% of the time for research purposes. The remaining 10% of the time, the
				  computer is used to maintain accounting records and generate monthly financial
				  statements. The computer system is taxable on the full purchase price.
C. De minimis usage. When research
				property is used in a taxable manner, it will continue to be exempt from the
				tax if the taxable use is de minimis in nature. Taxable use of the property is
				considered de minimis if the taxable usage of the property (i) does not involve
				a continuous or ongoing operation; (ii) does not follow a consistent pattern,
				i.e., weekly, monthly, quarterly, etc.; (iii) is occasional in nature occurring
				no more than three times; and (iv) in total, accounts for no more than three
				days.
Example 1. A company purchases a computer system which it
				  uses directly for research. However, a management report is generated which
				  addresses the progress of a research project. It takes two days to generate the
				  report. No other taxable usage was made of the computer. Although the
				  generation of management reports is typically a taxable usage of research
				  equipment, this use of the computer to generate a management report is
				  considered de minimis as it is not a continuous operation, it occurred one
				  time, and took less than three days to complete. Therefore, although de minimis
				  taxable usage of the computer system is made, it will continue to be exempt
				  from the tax.
Example 2. Facts are the same as Example 1, except that
				  instead of generating a management report, the computer is used to generate
				  weekly payroll and employment tax return reports, which consumes 2.0% of the
				  computer's time. The generation of payroll and employment reports is not a de
				  minimis taxable usage of the computer as the reports are generated on an
				  ongoing basis. Therefore, the computer is not considered used exclusively for
				  research and is taxable.
D.
				Item changed from exempt to taxable use. When tangible personal property is
				purchased exempt of the tax for direct and exclusive use in research and is
				subsequently used in a manner other than that which would retain the exemption,
				the tax must be remitted directly to the department using Consumer Use Tax
				Return, Form ST-7, based on the purchase price of the property. However, if the
				taxable use of the property occurs more than six months after the date it was
				purchased, the tax may be computed on the lower of purchase price or fair
				market value at the time the taxable use was made. The burden of proof is on
				the person to substantiate the fair market value of the property.
E. Equipment purchased or leased for use by
				other companies. Tangible personal property must be purchased or leased by the
				person, firm, corporation, or other entity that actually will perform research
				activities in order to qualify for the tax exemption for items used directly
				and exclusively in research. If the research equipment is purchased or leased
				by a person and is subsequently donated or loaned to another person to perform
				research for either party, the equipment is taxable to the person making the
				purchase, even if the other party is a nonprofit organization, governmental
				entity, or is otherwise exempt from the sales and use tax.
Example: A company hires an institution to conduct research
				  on its behalf. The company purchases research equipment which it donates to the
				  institution to conduct the research. The company is taxable on the purchase
				  price of the equipment because it is not actually conducting the research
				  activities.
Statutory Authority
§§ 58.1-203 and 58.1-609.3(5) of the Code of
					 Virginia.