Did a microarray scanner used only to study competing technology and develop a new scanner qualify for Virginia's R&D exemption?

Subject

Scanner used exclusively for product research qualified for exemption

Plain-English summary

Virginia exempted a microarray scanner used exclusively to analyze technology and develop the manufacturer's own comparable product. The optical-scanner manufacturer bought the machine without tax, studied its technology for competitive product development, and did not use it in manufacturing or administrative work.

Virginia's exemption covered tangible personal property used directly and exclusively in basic research or experimental research and development. The regulation included research aimed at advancing products or technology and improving existing products.

Because the scanner's only use was research and development of the taxpayer's new product, Virginia removed it from the paid audit assessment and directed a refund of the related tax and interest.

What this means for you

• Research equipment must be used directly and exclusively in qualifying experimental or laboratory R&D.
• Studying an existing product to develop a comparable or improved product can qualify.
• Manufacturing or administrative use could undermine an exclusive-use claim.
• Clear documentation of the equipment's actual function is central to the exemption.

Common questions

Was the scanner used to manufacture the taxpayer's products?

No. The ruling states that it was not used in manufacturing or administration.

Why did the competitive analysis qualify?

The taxpayer analyzed the scanner's technology to develop its own product, an activity Virginia treated as exempt research and development.

What relief was granted?

The audit item was removed, and the related tax and interest were to be refunded.

Citations and references

• Va. Code § 58.1-609.3(5).
• 23 VAC 10-210-762.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-144

Original ruling text

July 26, 2010

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

Dear *:

This reply is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period April 2006 through March 2009.

FACTS

The Taxpayer is a manufacturer of optical image scanners and digitizers. The Taxpayer purchased a microarray scanner exempt of the sales tax. The Taxpayer was audited by the Department, and tax was assessed on the purchase of the scanner. The Taxpayer asserts that the scanner was purchased for research purposes only and was evaluated to assist in the development of a comparable machine. The Taxpayer protests the assessment of use tax on this purchase, contending that it qualifies as tangibles personal property used exclusively in exempt research and development activities.

DETERMINATION

Virginia Code § 58.1-609.3 5 provides an exemption from the retail sales and use tax for "tangible personal property purchased for use or consumption directly and exclusively in the basic research or research and development in the experimental or laboratory sense." Title 23 of the Virginia Administrative Code 10-210-762 asserts that "generally, a research activity which has as its goal the advancement of products, knowledge or technology, the development of new uses for existing products, technology or processes, or the improvement of existing products will be entitled to the

exemption."

Based on the information provided, the scanner at issue is not used in the Taxpayer's manufacturing or administrative functions. The Taxpayer analyzed the scanner's technology to assist in the development of its own product for competitive purposes. Therefore, based on the fact that the scanner was used exclusively in the research and development of the Taxpayer's new product, the purchase qualifies for exemption under Va. Code § 58.1-609.3 5. Because the audit assessment was paid in its entirety by the Taxpayer, it will be revised to remove this item and the appropriate tax and interest will be refunded.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this letter, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-4014851449.M