Sales Tax Exemption for Qualified Research When the Research is Funded

Statutes: Section 77.54(57d)(b), Wis. Stats. (2015-16)

Wis. Adm. Code: Section Tax 11.20(2), Wis. Adm. Code (August 2014 Register)

Introduction: This tax release explains the sales and use tax exemption for qualified research when the research is funded.

Background: Section 77.54(57d)(b), Wis. Stats. (2015-16), provides an exemption from Wisconsin sales and use tax for the following:

The sales price from the sale of and the storage, use, or other consumption of machinery and equipment, including attachments, parts, and accessories, and other tangible personal property or items or property under s. 77.52(1)(b) or (c) that are sold to any of the following and that are consumed or destroyed or lose their identities while being used exclusively and directly in qualified research:

  1. A person engaged in manufacturing in this state at a building assessed under s. 70.995.
  2. A person engaged primarily in biotechnology in this state.
  3. A combined group member who is conducting qualified research for another combined group member and that other combined group member is a person described under subd. 1. or 2.

"Qualified research" is defined in sec. 77.54(57d)(a)4, Wis. Stats. (2015-16), to mean "qualified research as defined under section 41(d)(1) of the Internal Revenue Code, except that it includes qualified research that is funded by a member of a combined group for another member of a combined group."

Tax Treatment:

For the sales and use tax exemption for machinery and equipment, including attachments, parts, and accessories, and other tangible personal property used exclusively and directly in certain qualified research, "qualified research" has the meaning provided under sec. 41(d)(1), IRC.

Section 41(d)(1)(B)(ii), IRC, provides that qualified research must be undertaken for the purpose of discovering information which is intended to be useful in the development of a new or improved business component of the taxpayer. Whether research meets the definition of "qualified research" is a determination made separately for each business component per sec. 41(d)(2)(A), IRC. Therefore, when determining whether the sales and use tax exemption applies, each business component is reviewed to determine whether qualified research has occurred.

Section 41(d)(1)(C), IRC, provides that "qualified research" does not include any activity described in paragraph (4). Subparagraph (4)(H) specifically excludes the following from "qualified research":

Any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity).

The sales and use tax exemption provides that the research can be funded and still be qualified research only if it is funded by a member of a combined group and the member is one of the following:

  • A person engaged in manufacturing in Wisconsin at a building assessed under sec. 70.995, Wis. Stats., or
  • A person engaged primarily in biotechnology in Wisconsin.

Therefore, machinery and equipment used for research where all or a portion of the research is funded by someone other than a member of a combined group, as described above, is not used exclusively in qualified research and does not qualify for the sales and use tax exemption.

October 30, 2018