Can an R&D company buy a computer tax-free as research equipment when most of the computer's actual running time is spent on financial and administrative work?

Plain-English summary

Otisca Industries, Ltd., does research and development (hoping to commercialize fossil-fuel patents within five years) and has no commercial business activity. In 1979 it bought a computer whose size and speed were chosen for anticipated future scientific calculations. Less than 25% of the computer's capacity goes to financial and administrative needs — but that use accounts for about 75% of the actual running time, though scientific use sometimes spikes far higher. The company paid no sales tax, treating the computer as used solely for R&D. It asked whether that was correct.

The Department held the computer is taxable — it fails the R&D exemption's use test.

• The R&D exemption. Section § 1115(a)(10) exempts tangible personal property used directly and predominantly in research and development in the experimental or laboratory sense (excluding routine quality-control testing, efficiency surveys, management studies, consumer surveys, advertising, and the like).
• The regulation defines the tests by time. Under 20 NYCRR § 528.11(c): direct use means actual use in the R&D operation (activities collateral to the R&D process don't count); property is used predominantly in R&D only if it is used directly in that function over 50% of the time; and property qualifies only if it meets both the direct and predominant tests.
• Administrative use is collateral — and it dominates. The computer's financial and administrative use — about 75% of actual running time — is collateral to R&D and is not time spent directly in R&D. So the computer is not used directly in R&D more than 50% of the time.
• Result. Failing the § 528.11(c) direct-and-predominant-use test, the computer is not exempt under § 1115(a)(10), and tax was due — for State and local sales taxes alike. (That the computer was chosen for future scientific capacity, or that research use sometimes exceeds other uses, did not change the outcome.)

What this means for you

The R&D exemption is measured by actual-use time, not capacity or intent. New York asks how the property is actually used — over 50% of the time directly in R&D. Buying a machine "for" research, or sizing it for future science, doesn't qualify it if day-to-day use is mostly something else.

"Collateral" administrative use is not R&D use. Finance, administration, and other back-office tasks are collateral to the research process. Time spent on them counts against the exemption, not for it.

You must pass both the direct and the predominant test. Direct use (actually in the R&D operation) and predominant use (over half the time) are separate hurdles under § 528.11(c). Miss either — as with a mostly-administrative computer — and the purchase is taxable.

Common questions

Q: I run an R&D company. Can I buy a computer tax-free as research equipment?
A: Only if it's used directly in R&D more than 50% of the time (20 NYCRR § 528.11(c)). A computer used mostly for finance and administration doesn't qualify, even at an R&D company.

Q: Does it matter that I bought it for its scientific capacity or that research use sometimes spikes?
A: No. The test is actual direct-use time over the period, not capacity or occasional peaks. Predominant administrative use defeats the exemption.

Q: Why doesn't administrative use count as R&D?
A: It's collateral to the research process. Only actual use in the R&D operation is "direct use" under the regulation.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on receipts from retail sales of tangible personal property
• Tax Law § 1115(a)(10) — exemption for property used directly and predominantly in research and development (experimental or laboratory sense)

Regulations:

• 20 NYCRR § 528.11(c) — definitions of "direct use" (actual use in the R&D operation; collateral activities excluded) and "predominant" use (over 50% of the time), and the requirement to meet both tests

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(27)S
Sales Tax
August 16, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820310A

On March 10, 1982 a Petition for Advisory Opinion was received from Otisca Industries,
Ltd., P.O. Box 127 Salina Station, 501 Butternut Street, Syracuse, New York 13208.
The issue raised is whether receipts from the purchase of a computer which is employed for
both scientific calculations and financial and administrative purposes is subject to the sales taxes
imposed under Article 28 of the Tax Law and authorized under Article 29 of the Tax Law.
Petitioner is engaged in research and development and has no business activity in any
commercial area. Petitioner hopes to develop certain fossil fuel patents which will become
commercial products within the next five years.
During 1979 Petitioner purchased a computer, the size and speed of which were criteria for
selection based on anticipated future use in making complex scientific calculations. Less than
twenty-five per cent of the capacity of the computer is devoted to financial and administrative needs.
However, such usage normally accounts for approximately seventy-five per cent of the actual usage
time of the computer. Petitioner states that during certain periods of time the scientific usage of the
computer may greatly exceed the financial and administrative use. Petitioner points out, however,
that the amount of any such future direct use for research and development cannot be accurately
projected.
Petitioner states that it did not pay sales tax on the purchase of the computer because it
considered it to be used solely for research and development, or in support of the total research
objective of Petitioner's organization.
Section 1105(a) of the Tax Law imposes the State sales tax on receipts from retail sales of
tangible personal property. Section 1115(a)(10) of the Tax Law, however, exempts from such tax
receipts from the sale of: "Tangible personal property purchased for use or consumption directly and
predominantly in research and development in the experimental or laboratory sense. Such research
and development shall not be deemed to include the ordinary testing or inspection of materials or
products for quality control, efficiency surveys, management studies, consumer surveys, advertising,
promotions, or research in connection with literary, historical or similar projects."
The Sales and Use Tax Regulations provide the following definitions, applicable herein: "(1)
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,

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-82(27)S
Sales Tax
August 16, 1982

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. (2) Tangible personal property is used predominantly in research and
development if over fifty per cent of the time it is used directly in such function. (3) Tangible
personal property is exempt only if it meets the tests of direct and predominant use." 20 NYCRR
528.11(c). (emphasis supplied)
Petitioner states that financial and administrative needs will normally account for
approximately seventy-five per cent of the actual usage time of the computer, even though during
certain periods of time the scientific usage may greatly exceed the other uses. The use of the
computer for administrative and financial purposes constitutes an activity which is collateral to
Petitioner's research and development activities, and the time thus spent does not constitute time
spent directly in research and development. 20 NYCRR 528.11(c). Inasmuch as the use of the
computer fails to satisfy the requirements set forth at 20 NYCRR 528.11(c), quoted above, it does
not constitute property to which the exemption provision contained in section 1115(a)(10) of the Tax
Law is applicable. The foregoing considerations are equally applicable to local sales taxes imposed
pursuant to the authority of Article 29 of the Tax Law.

DATED: July 21, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau