Tennessee has long had an exemption from sales tax for qualifying manufacturing machinery purchased and used in the state. As of July 1, 2015, Tennessee also exempts qualifying research and development machinery and equipment (including repair parts and labor, similar to the industrial machinery exemption). To qualify for the exemption, the company must apply on form RV-F1325101 and state whether the equipment will be used for one of the following:
- basic research in a scientific field of endeavor;
- advancing knowledge or technology in a scientific or technical field of endeavor;
- the development of a new product, whether or not the new product is offered for sale;
- the improvement of an existing product, whether or not the improved product is offered for sale;
- the development of new uses of an existing product, whether or not a new use is offered as a rationale to purchase the product; or
- the design and development of prototypes, whether or not a resulting product is offered for sale.
Per the application, research and development does not include ordinary testing or inspection of materials or products used for quality control (other than that occurring during the activities listed above), market research, efficiency surveys, consumer surveys, advertising and promotions, management studies, or research in connection with literary, historical, social science, psychological, or other similar nontechnical activities.
The application requires a description of the research and development conducted at the facility, a list of the machinery and equipment to be purchased, and other information. It is important to note that the exemption may apply to other industries outside of fabricating or processing goods for resale (“manufacturing”). Also, research and development equipment that is eligible for sales tax exemption is also eligible for the franchise/excise tax industrial machinery tax credit.
These are some complicated issues but could result in some substantial tax benefits for your business. Make sure you consult a state and local tax expert to ensure you are not leaving any money on the table. For more information check out State and Local Tax services.