Is a computer system used partly for medical research and education, and partly for billing and other tasks, exempt from sales tax as research-and-development property?

Plain-English summary

Drs. J.V. Aquavella and G.K. Jackson (Ophthalmic Lens Division) bought a large computer system they said was used predominantly for research and education in ophthalmology, and only minimally for patient billing and scheduling. They asked whether the system is exempt from sales tax. The exemption at issue, Tax Law § 1115(a)(10), covers property used directly and predominantly in research and development in the experimental or laboratory sense; otherwise § 1105(a) taxes the purchase.

The Department applied 20 NYCRR 528.11 and sorted the described uses:

• Not exempt use: patient billing and scheduling — no exemption is provided for this.
• Not direct R&D: a slide catalog storing patient histories used as lecture exhibits; a medical-record research program that aids in describing patients' cases; and graphic displays monitoring a patient's intraocular pressure and the effect of drugs (Examples A, B, and D).
• Direct R&D: preparing manuscripts recording the results of laboratory tests on animals (Example C) is direct use in research and development.

The rule that decides it: property is exempt only if it meets both the direct-use test and the predominant-use test — over 50% of the time used directly in R&D (528.11(c)(2)–(3)). Because the doctors didn't state how the system's time was split, the Department held the computer qualifies for the exemption only if it is used predominantly (more than 50%) in activities that qualify as research and development.

What this means for you

"Used for research and education" isn't enough — the exemption is about direct R&D and the 50% line. Education, teaching aids, clinical record-keeping, and patient monitoring are valuable, but they aren't "research and development in the experimental or laboratory sense." Only genuine experimental/laboratory research (like recording controlled test results) counts as direct use.

Mixed-use equipment is taxable unless qualifying use is the majority. A computer that does billing, scheduling, teaching, and some research is taxable unless more than half its use is direct R&D. Administrative and collateral uses count against you.

Document the usage split. The doctors lost the clear answer they wanted because they didn't show what share of the system's time went to each function. If you claim § 1115(a)(10), keep records establishing over-50% direct R&D use. (Compare TSB-A-85(13)S and 85(17)S, applying the same over-50% test to CAD/CAM and CAD design systems.)

Common questions

Q: Our practice's computer is mostly for research and teaching. Is it tax-exempt?
A: Only if over 50% of its use is directly in qualifying research and development. Teaching-slide catalogs, clinical record programs, and patient monitoring don't count as direct R&D, and billing never does.

Q: What use here did qualify as R&D?
A: Preparing manuscripts that record the results of laboratory tests on animals — that's direct use in research and development.

Q: We can't say exactly how the time splits. Can we still claim the exemption?
A: You need to prove over-50% direct R&D use. Without that, the purchase is taxable.

Citations and references

Statutes:

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

Regulation:

• 20 NYCRR 528.11 — defines R&D (basic research, advancing technology, new/improved products, new uses); direct use excludes collateral activities; predominant use means over 50% of the time; property is exempt only if it meets both tests

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_8s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(8)S
Sales Tax
May 15, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840103A

On January 3, 1984 a Petition for Advisory Opinion was received from J.V. Aquavella M.D.,
and G.K. Jackson M.D. - Partners D/B/A Ophthalmic Lens Division, 919 Westfall Road, Rochester,
New York 14618.
The issue raised is whether a computer system purchased for use in research and education
in a medical field is subject to the New York State sales tax.
Petitioner describes the computer as a large system with a high technology medical language.
Petitioner contends that the computer system is used predominantly for "Research and
Educational Purposes" in the Field of Ophthalmology, and only in a minor capacity for patient billing
and scheduling.
Petitioner supplies examples and explanations of the various applications of data print out
material in the medical area:
Example (A) Slide catalog with retrieval function for storing patients medical histories,
which are used as exhibits in lectures.
Example (B) Medical record research program containing the charts of individual patient's
diseases and treatment, the program aids in describing patient's cases.
Example (C) Research manuscript recording the results of laboratory tests on animals.
Example (D) Graphic displays useful in monitoring a patient's intra ocular pressure and the
effect of drugs.
Petitioner fails to state what portion of the system's storage capabilities and operating time
is applicable to each function.
Section 1105(a) of the Tax Law imposes a tax on "the receipts from every retail sale of
tangible personal property, except as otherwise provided in this article." Section 1115(a)(10)
provides an exemption for "tangible personal property purchased for use and consumption directly
and predominantly in research and development in the experimental or laboratory sense".
The Sales and Use Tax Regulations, Section 528.11, provide the following definition: (b)(1)
Research and development in the experimental or laboratory sense means research which has as its
ultimate goal:
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(8)S
Sales Tax
May 15, 1985

(i)

Basic research in a scientific or technical field of endeavor;

(ii)

Advancing the technology in a scientific or technical field of
endeavor;

(iii)

The development of new products;

(iv)

The improvement of existing products;

(v)

The development of new uses for existing products.

(c)(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, 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 use directly in research and development. (2) Tangible personal property is used
predominantly in research and development if over 50 percent 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.
The use of the computer for patient billing and scheduling is not an activity for which an
exemption is provided in the Tax Law. Computer usage in any of the capacities described in the
foregoing examples (A), (B) and (D) does not constitute employment directly in research and
development in the experimental or laboratory sense.
The preparation of manuscripts recording the results of laboratory tests constitutes direct use
of the system in research and development.
However, unless the computer is used predominantly (more than 50%) in activities which
qualify as research and development, it does not constitute property to which the exemption provided
in Section 1115(a)(10) of the Tax Law is applicable.

DATED: April 24, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.