Administrative Code

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Virginia Administrative Code
Title 23. Taxation
Agency 10. Department of Taxation
Chapter 210. Retail Sales and Use Tax

23VAC10-210-3071. Research; extent of the exemption.

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.

Historical Notes

Derived from VR630-10-92 §§ 2.1-2.5; revised July 1, 1969; January 1, 1979; January 1, 1985; amended, eff. July 1, 1994.

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