Does a clinical laboratory's testing of pharmaceutical drug-trial samples qualify as exempt research and development, exempting its equipment and utility purchases?

Plain-English summary

The Petitioner is a clinical laboratory that tests blood and other samples for pharmaceutical companies running drug trials -- determining the safety and efficacy of new drugs (and improvements/new uses for approved drugs); the data goes to the client for FDA submission. Its labs handle intake, safety testing, efficacy testing, additional testing, infectious-disease testing, and assay development, plus a separate project-management service. It buys lab supplies, equipment, electricity, and natural gas to run the testing.

The Office of Counsel concluded:

• The testing is exempt R&D. Tax Law 1115(a)(10) (and 1115(b)(ii) for utilities) exempts property used in "research and development in the experimental or laboratory sense" -- which includes developing new products, improving existing products, or developing new uses (20 NYCRR 528.11(b)). The lab's testing to develop/improve drugs qualifies. It excludes "ordinary testing or inspection... for quality control."
• Testing equipment used directly + predominantly = exempt. TPP used directly (actual use in the R&D operation) and predominantly (over 50% of the time) in the testing -- test tubes, reagents, microscopes, centrifuges, testing machinery, lab refrigerators, etc. -- is exempt. Claim it by giving suppliers Form ST-121 within 90 days.
• Non-R&D and indirect items = taxable. Supplies for the project-management service (e.g., report stationery), items used for ordinary QC testing/inspection, and items only indirectly related (goggles, lab coats) are not exempt -- taxable under section 1105(a). The lab must show how each item is used.
• Utilities: direct AND exclusive (100%). The gas/electricity exemption (1115(b)(ii)) is narrower -- it requires directly and exclusively (100%) R&D use. So power for payroll/HR computers, client data storage, and heating/cooling non-R&D areas is taxable; electricity/gas for assay development is exempt only if that development itself qualifies as R&D. The lab must allocate using an engineering survey and keep records (it bears the burden).

What this means for you

Labs / R&D operations

Testing aimed at developing or improving a product (here, drugs) is exempt R&D in the experimental/laboratory sense. Equipment and supplies used directly and more than 50% in that work are exempt -- use Form ST-121 (within 90 days).

The exemption doesn't cover everything

Ordinary quality-control testing, project-management/admin supplies, and indirectly-used items (safety gear like goggles and lab coats) are taxable. Be ready to document how each item is used to support an exemption.

Utilities are held to a stricter standard

For electricity and gas, you need direct and exclusive (100%) R&D use. Power for payroll, HR, data storage, and HVAC of non-R&D space is taxable. Allocate exempt vs. taxable utility use with an engineering survey and keep records -- the burden is on you.

Common questions

Q: Is my drug-trial / product-testing lab doing exempt R&D?
A: Yes, if the testing develops a new product, improves an existing one, or finds new uses. That's R&D in the experimental/laboratory sense -- but ordinary quality-control testing doesn't qualify.

Q: What equipment is exempt?
A: TPP used directly and predominantly (over 50%) in the R&D testing -- claimed with Form ST-121 within 90 days. Project-management supplies and indirect items like goggles and lab coats are taxable.

Q: Is my electricity and gas exempt?
A: Only the portion used directly and exclusively (100%) in R&D. Power for payroll, data storage, and HVAC of non-R&D areas is taxable; allocate with an engineering survey.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1115(a)(10) (exemption for property used in research and development)
• Tax Law section 1115(b)(ii) (exemption for gas/electricity used directly and exclusively in R&D)
• 20 NYCRR section 528.11 (research and development; direct/predominant/exclusive use)
• Tax Law section 1105(a) (sales tax on tangible personal property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a15_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(14)S
Sales Tax
March 20, 2015

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S121226A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTED “Petitioner”. Petitioner asks whether its activities constitute "research
and development in the experimental or laboratory sense" for purposes of Tax Law §§
1115(a)(10) and 1115(b)(ii), such that certain purchases it makes are exempt from the sales and
use tax.
We conclude that Petitioner’s testing services result in the development of a new product,
the improvement of an existing product, or the development of a new use for an existing product.
Therefore, Petitioner is engaging in exempt research and development activities in the
experimental or laboratory sense within the meaning of Tax Law §§ 1115(a)(10) and 1115(b)(ii)
and it may make certain purchases exempt from sales tax.
Facts
Petitioner is a laboratory services corporation that provides clinical testing services at its
facilities located around the world, including one facility located in New York State. Petitioner
states that its New York laboratory is dedicated to providing testing services for various
pharmaceutical clients looking to develop new drugs, as well as clients looking to improve drugs
already approved by the United States Food and Drug Administration (FDA). In particular, the
laboratory assists in testing both the safety and effectiveness of experimental pharmaceutical
drugs offered to human patients during clinical trials. All data produced during the testing is
released to the client for eventual submission by the client to the FDA as the client pursues
various stages of the development of new drugs. The laboratory is dedicated exclusively to
testing related to its clients’ clinical trials, and Petitioner’s staff is led by a team of medical
doctors and PhD level scientists.
Petitioner offers standardized testing platforms with consistent test methodologies and
result reporting. The lab is accredited by the College of American Pathologists. Petitioner
provides timely laboratory test results and related demographic data in support of its clinical
testing. The goal is to provide custom laboratory and related study management services while
ensuring full regulatory compliance.
Petitioner describes human clinical trials as having four general phases.
• Phase I -- Involves screening for safety and an initial administration of the drug to a small
group of individuals to evaluate safety, determine dosage range, and identify side effects.

-2-

TSB-A-15(14)S
Sales Tax
March 20, 2015

• Phase II -- Involves establishing the protocol for the clinical trial as well as administering the
drug to a larger group to determine the effectiveness and safety of the drug. Petitioner’s client
establishes the protocol, but the client may request Petitioner’s input on the testing steps
established by the protocol.
• Phase III -- The drug is given to large groups to confirm effectiveness, monitor side effects,
compare the drug to commonly used treatments, and collect information necessary for improving
the dosage and safety of the drug. A unique identifier is provided for each test subject, and the
studies are blinded in such a way that Petitioner does not know if a sample belongs to a patient
receiving a new drug or a placebo.
• Phase IV – Studies are conducted after a drug has been approved for release to ascertain the
drug's long-term risks, benefits and optimal uses.
Petitioner exclusively provides laboratory services to its clients for the purpose of
developing new pharmaceutical drugs, improving pharmaceutical drugs that have already
received FDA approval, or developing new benefits and uses associated with existing
pharmaceuticals. Petitioner's team assists the pharmaceutical clients in all facets of the studies,
including custom set up and logistics planning, daily query resolution, and final data
calculations. Although Petitioner offers testing services for all four clinical trial phases, nearly
all testing conducted at the New York location supports phase II and III clinical testing.
Petitioner does perform a small amount of Phase IV testing at its New York facility.
Petitioner also provides project management services. Petitioner’s project managers
work with the pharmaceutical clients to:
• Plan and document all laboratory requirements and custom reporting services for the
study;
• Manage all set-up activities to ensure that study databases, laboratory supplies, and
investigator site training are in place. Depending on the contract it has with a client,
Petitioner may provide site training for client investigators who work at clinical trial sites,
evaluate documentation provided to these investigators, and/or prepare a laboratory
manual for the sites to reference when processing and shipping samples to Petitioner;
• Present laboratory requirements and procedures;
• Monitor studies. Petitioner may contact a testing site if it failed to provide all the
necessary information requested on the requisition form designed for that testing
protocol. During the clinical trial, Petitioner also monitors the mechanics of the testing
occurring at its facility.
• Supply study metrics to monitor key performance indicators and overall study progress;
and/or
• Conduct all study closeout activities for data lock and final data submission.
Petitioner’s laboratory has five separate components:
(1) Intake -- Lab assistants process human blood samples and codes are assigned to
samples to identify the test subject as well as the trial protocol. Defective samples are also
screened. During processing of the samples, two test tubes are created. The first tube is sent to

-3-

TSB-A-15(14)S
Sales Tax
March 20, 2015

one of Petitioner’s labs for safety testing and the other tube is sent to another of Petitioner’s labs
to test for efficacy. The screening of defective samples is necessary to guarantee accurate and
detailed test results. Without Petitioner’s screening practices at the intake level, defective
samples could enter the testing pool and taint test results. Furthermore, the intake lab codes and
formats the samples so that the trial protocol and testing requirements are apparent to the testing
labs. As a result, intake processing is a required first step in all of Petitioner’s testing. Test tubes,
lab tables, lab chairs, computers, printers and processing equipment are among the items
employed to process the samples and assign identification codes. Industrial refrigerators are
used to store the samples until ready for each step in testing.
(2) Safety Testing -- Licensed technologists conduct various tests that monitor
cholesterol, blood cell count and other factors to determine if the drug is harming the patient.
These tests are more routine in nature. In addition to the items also used during the intake
process, Safety Testing requires the use of testing machinery, flasks, slides, microscopes and
other laboratory equipment. Petitioner’s safety testing provides the pharmaceutical client with
the data and test results necessary for acquiring FDA approval for the studied drug. Side effect
results, appropriate dosage amounts, and hazard information are identified.
(3) Efficacy Testing -- Licensed technologists conduct highly technical testing for the
specific condition the client is seeking to alleviate to determine whether the drug is effective in
producing the desired impact. These tests could include molecular, genetic or radioactive testing,
depending on the specific testing required by the clinical trial protocol. Efficacy testing requires
many of the same supplies and testing tools used during Intake and Safety Testing and the results
will be provided by the client to the FDA as part of the approval process.
(4) Additional Testing -- Occasionally, pharmaceutical clients request additional testing
to determine whether a drug has any unintended benefits and uses. These additional testing
procedures use special testing machinery and procedures in an effort to look for unanticipated
results.
(5) Infectious Disease Testing -- Infectious disease testing is implemented only where the
trial protocol demands specific testing procedures pertaining to infectious diseases such as
Hepatitis C. Infectious disease testing is isolated from the routine safety and efficacy testing.
Traditional Petri dish and incubation procedures are utilized to screen out samples of individuals
who have diseases that could compromise testing.
In addition to the testing labs, Petitioner’s facility has a specific laboratory designated for
assay development. The purpose of this research is to develop testing assays that can be used for
examining specific cells to determine whether they contain particular markers. In other words,
these tests identify whether a specific condition exists. Examples of such assays developed for
testing purposes on a mass market basis would include strep throat swab tests and pregnancy
tests. This lab produces new testing assays for its clients, who then use them for ongoing
research.
Petitioner’s facility maintains a large supply of industrial refrigerators that are used for
storing samples before, during and after testing, as well as for storing other materials used in the
testing process. In addition, the facility maintains an on-site quality assurance group and other
administrative departments, including information technology (IT) and Global Data Services.

-4-

TSB-A-15(14)S
Sales Tax
March 20, 2015

Petitioner’s on-site quality assurance group works closely with each department to document and
monitor adherence to the highest standard operating procedures required worldwide. This
ensures that the tests are valid for drug approval in various countries. The group's goal is to
ensure quality, consistency and full regulatory compliance through a single quality standard and
set of operating procedures. The quality assurance group conducts rigorous internal audits to
ensure that Petitioner’s quality standards for its processes are achieved. In addition, through
Petitioner’s central laboratories' Information Technology and Global Data Services Departments,
Petitioner is able to offer its pharmaceutical clients a global repository for study data gathered for
that client at various trial sites. The data compiled by Petitioner for a particular client is
restricted to use by that client, and Petitioner’s contracts have a strict confidentiality clause. The
facility also maintains traditional payroll and human resources departments.
In performance of its testing, Petitioner purchases laboratory supplies, equipment and
other materials for use in Petitioner's research and development activities. These items include
lab coats, goggles, gloves, test tubes, flasks, reagents, microscopes, slides, lab tables, lab chairs,
sterilizers, industrial refrigerators, technical journals, testing/processing machinery, printers,
centrifuges, Petri dishes and other supplies and laboratory equipment. In addition, Petitioner
purchases large amounts of electricity and natural gas for direct use in powering its testing
machinery, lab refrigerators and other laboratory operations.
Analysis
We conclude that Petitioner’s activities in the five components described above and the
assay development constitute "research and development in the experimental or laboratory
sense" for purposes of Tax Law §§ 1115(a)(10) and 1115(b)(ii).
The Tax Law provides an exemption for tangible personal property used directly and
predominantly in research and development in the experimental or laboratory sense. Generally,
research and development in the experimental or laboratory sense means research that has as its
ultimate goal the “basic research in a scientific or technical field of endeavor, the advancing the
technology in a scientific or technical field of endeavor, the development of new products, the
improvement of existing products, or the development of new uses for existing products.” See
20 NYCRR § 528.11(b). This research and development exemption does not include the
activities of “ordinary testing or inspection of materials or products for quality control or the
performance of efficiency surveys, management studies, consumer surveys, advertising,
promotions or research in connection with literary, historical or similar projects.” See Tax Law
§§ 1115(a)(10), 1115(b)(ii); 20 NYCRR § 528.11(b)(2). Direct use in research and development
means actual use in the research and development operation. Tangible personal property for
direct use would broadly include materials worked on, and machinery, equipment and supplies
used to perform the actual research and development work. Usage in activities collateral to the
actual research and development process is not deemed to be used directly in research and
development. See 20 NYCRR § 528.11(c)(1). Predominantly used in research and development
means that the item is used directly in production “over fifty percent of the time. . . .” See 20
NYCRR § 528.11(c)(2).

-5-

TSB-A-15(14)S
Sales Tax
March 20, 2015

Petitioner states that the only testing its facility provides is the testing of samples from
various stages of clinical trials conducted to determine the safety and efficacy of new drugs and
medicines being developed by its clients that have not yet received FDA approval for a particular
use. Petitioner and its employees process its tests in such a manner as to provide data to clients
seeking FDA approval. Based upon the Petitioner’s description of its activities, Petitioner’s test
processing services are performed for a client seeking to develop a new product or improve an
existing product. Occasionally, Petitioner also will assist clients in determining whether an
existing drug has any unintended benefits or alternative uses. In each of these cases, Petitioner is
engaging in exempt research and development activities in the research and developmental sense
within the meaning of Tax Law §§ 1115(a)(10) and 1115(b)(ii). See 20 NYCRR § 528.11(b)(1);
TSB-A-09(21)S; TSB-A-97(51)S; TSB-A-88(4)S. Accordingly, Petitioner's purchases of
tangible personal property for use or consumption directly and predominantly in testing samples
related to the development of clinical trial drugs qualify for the exemption from sales tax under
Tax Law § 1115(a)(10). See 20 NYCRR § 528.11(c)(3); TSB-A-97(51)S.
However, not all of Petitioner’s activities are “directly and predominately” involved in
research and development. For example, Petitioner also offers a project management service.
While that service is not subject to tax pursuant to Tax Law § 1105(c), tangible personal property
used by Petitioner in performing that service, including stationery or supplies used in preparing
written reports, would not qualify for exemption under Tax Law § 1115(a)(10) because they are
not used directly and predominately in research and development. Accordingly, such purchases
would be subject to tax under section Tax Law § 1105(a). The exemption also does not include
the activities of “ordinary testing or inspection of materials or products for quality control” so
tangible personal property used by Petitioner predominantly for this purpose would not qualify
for the exemption. Other items, such as goggles or lab coats, may be used in a manner that is
indirectly related to the research and development activities. These items would also not qualify
for the exemption. Petitioner must demonstrate how individual items of tangible personal
property are used in order to establish an entitlement to this exemption.
Petitioner may make untaxed purchases of tangible personal property that qualify for the
exemption by giving the supplier(s) a properly completed form ST-121, Exempt Use Certificate
within 90 days of the purchase date.
Finally, Petitioner asks whether its purchases of electricity and natural gas are exempt from
sales and use tax pursuant to Tax Law § 1115(b)(ii) as purchases for use or consumption directly
and exclusively in research and development in the experimental or laboratory sense. Tax Law §
1115(b)(ii) provides an exemption for gas and electricity, and gas and electric service used or
consumed directly and exclusively in research and development in the experimental or laboratory
sense. However, use in activities collateral to the actual research and development process is not
deemed to be used directly in the research and development process. As noted above, for the
purposes of this exemption, the sales tax regulations define the term "directly” as “actual use in
the research and development operation” and “exclusively” used in research and development to

-6-

TSB-A-15(14)S
Sales Tax
March 20, 2015

mean that 100% percent of the electricity or gas is used for such a purpose. See 20 NYCRR §
528.11(c).
While Petitioner is engaged in research and development in the experimental or
laboratory sense, not all of the electricity and natural gas it uses are directly and exclusively used
for such purpose. For example, the portion of electricity used to power payroll and human
resource computers is subject to tax, as is the electricity used by Petitioner in its storage of study
data for its clients. Likewise, the natural gas consumed to heat or cool the portions of the
building where these activities occur would likewise not be exempt from tax. Electricity or gas
used in assay development would be exempt under Tax Law § 1115(b)(ii) only if the assay
development process itself qualifies as the research and development of a new assay or test.
Electricity and steam consumed as part of Petitioner’s project management services are not used
exclusively in research and development, and therefore are subject to tax.
Petitioner must maintain adequate records with respect to the allocation of gas and
electricity used directly and exclusively in research and development and that used for nonexempt purposes. Petitioner has the burden of showing that the utilities are used in an exempt
manner. Therefore, Petitioner must, when claiming a refund or credit, submit an engineering
survey or documentation of the formula applied to arrive at the amounts of exempt utility
purchases. See 20 NYCRR § 528.11(c)(4)(iii); TSB-A-88(4)S.

DATED: March 20, 2015

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.