This Policy Statement has been cited in IP 2000(26)
Exemption from Sales and Use Taxes for Items
Used Directly in the Biotechnology Industry
PURPOSE: This Policy Statement describes the exemption under Conn. Gen. Stat. §12-412(89) for sales and purchases of machinery, equipment, tools, materials, supplies and fuel used directly in the biotechnology industry. This Policy Statement defines many key terms and elaborates on how the exemption applies to purchases by biotechnology companies.
EFFECTIVE DATE: Effective upon issuance and applicable to all open tax periods beginning on or after July 1, 1996.
STATUTORY AUTHORITY: Conn. Gen. Stat. §12-412(89).
DEFINITIONS: These definitions apply for purposes of the exemption under Conn. Gen. Stat. §12-412(89):
1. Biotechnology is the application of technologies, such as recombinant DNA techniques, biochemistry, molecular and cellular biology, genetics and genetic engineering, biological cell fusion techniques, and new bioprocesses, using living organisms, or parts of organisms, to produce or modify products, to improve plants or animals, to develop microorganisms for specific uses, to identify targets for small molecule pharmaceutical development, or to transform biological systems into useful processes.
Biotechnology is performed in a number of fields, including pharmaceutical, environmental, agricultural and industrial research and development. Examples of biotechnology in each of these areas include:
Pharmaceutical biotechnology: activities performed in identifying a biological target molecule and a chemical compound or protein molecule that interacts with the target to elicit the desired pharmacological effect, and then testing the compound or protein on animals and humans. This field also includes activities performed in designing and developing drug delivery systems that are necessary for the drug to achieve its therapeutic effect.
Biosensor biotechnology: activities performed in developing a system or device (a biosensor) that measures or detects a chemical or organic molecule with the use of a biological material or tissue. This field also includes such activities as engineering bioluminescent reporter genes to test for the presence of a specific chemical or organic molecule; attaching enzymes, nucleic acids or antibodies to a solid surface to test for the presence of a specific chemical or organic molecule; DNA fingerprinting techniques; and techniques to detect the presence of disease using polymerase chain reaction processes.
Environmental biotechnology: activities performed to improve remediation methods, such as developing organisms that break down pollutants in the environment and to develop methods or tools for environmental surveillance.
Agricultural biotechnology: activities performed to improve plants or animals, such as to make them more disease or pest resistant or faster maturing. This field includes aquacultural biotechnology, which includes activities performed to develop seafood products or to produce models for medical research.
Industrial biotechnology: activities performed to improve or create new methods for use in production, such as enzymes used in causing chemical reactions, in a dyeing process or to enhance food products.
2. Machinery and Equipment
Machinery means the basic machine itself, including all of its component parts and contrivances and all equipment or devices used or required to control, regulate or operate the machinery, including computers and data processing equipment.
Equipment means a device or apparatus used in applying technologies in biotechnology that is required for the process to take place or for the safety of persons working in biotechnology. The fact that equipment is required by practical necessity, such as ceiling lights, does not of itself qualify the equipment for exemption.
Following is a nonexclusive list of items considered to be machinery or equipment:
- Computers and peripherals;
- X-ray crystallography devices;
- Magnetic Resonance Imaging (MRI) equipment;
- Robotic systems that store and dispense research materials;
- Temperature regulated equipment to store research materials;
- Centrifuges and shakers;
- Fume hoods and related ventilation equipment; and
- Laboratory furniture
Because prewritten ("canned") software used on a machine eligible for the biotechnology exemption is considered equipment or a device used or required to control, regulate or operate the machinery, its purchase qualifies for exemption, whether or not the software is purchased in the same transaction with the machinery on which it is used.
The cost of services rendered in connection with either the creation of custom software or the customization of software, when the software is purchased with the machinery on which it is to be used which is exempted under the biotechnology exemption, is part of the sales price and gross receipts under Conn. Gen. Stat. §12-407(8) and (9). The cost of such software will be included within this exemption.
However, because this exemption applies only to tangible personal property and not to services, charges for computer and data processing services rendered in connection with the purchase of custom or customized software in a transaction separate from the purchase of the machinery on which such software is to be used are taxable under Conn. Gen. Stat. §12-407(2)(i)(A). (The tax on this service is being phased out in annual increments. See PS 98(3), Sales and Use Taxes on Computer-Related Services and Sales of Tangible Personal Property, for more information.)
3. Materials and supplies are items that become ingredient or component parts of an end product resulting from, or items that are used or consumed in, the application of technologies in biotechnology.
Following is a nonexclusive list of items considered to be materials or supplies:
- Disposable items (such as gels, plastic pipettes and tubes, filters, and needles);
- Laboratory animals;
- Animal care supplies, including such items as cages, bedding, feed, cleaning supplies and items purchased to comply with the federal Animal Welfare Act;
- Soil, fertilizers and mulch used in agricultural biotechnology;
Printed research materials, such as technical books, journals, reprints of published papers and subscriptions, whether such research materials are on paper or another tangible medium such as CD/ROMs. However, materials received solely by electronic means, such as over the Internet, are computer and data processing services (see PS 98(2), Sales and Use Taxes on Access to the Internet and Other On-line Sales of Goods and Services) and do not qualify for exemption under Conn. Gen. Stat. §12-412(89);
Forms, such as forms used to record test results or case report forms used to gather patient data; and
Items of personal apparel needed to preserve the safety of the employees or to maintain a level of purity required for biotechnology to take place, such as disposable garments, goggles and respirators. (Safety apparel is also exempt under Conn. Gen. Stat. §12-412(91).)
4. Tools include tools, instruments and utensils that are used or consumed in the application of technologies in biotechnology. Following is a nonexclusive list of items considered to be tools:
- Reusable glass items, such as slides, test tubes and beakers;
- Medical or surgical instruments, such as syringes, scalpels, clamps and probes;
- Nets used in aquacultural biotechnology; and
- Hand tools such as trowels used in agricultural biotechnology.
5. Fuel is a substance that is generally regarded as such that is used or consumed in the application of technologies in biotechnology, such as coal, gas or oil. Electricity is not considered to be a fuel.
6. Predominantly means more than 50 percent.
HOW THE DEPARTMENT OF REVENUE SERVICES (DRS) CONSTRUES THE TERM "USED DIRECTLY IN THE BIOTECHNOLOGY INDUSTRY": To determine whether items are used directly in the biotechnology industry, the Commissioner will examine the facts and circumstances of each case, using the following principles as guidelines:
Machinery, equipment, tools, materials, supplies or fuel that directly transform, or have a direct effect upon, the form, composition or character of raw materials to which technologies are being applied in biotechnology are used directly in the biotechnology industry.
Machinery, equipment, tools, materials, supplies or fuel, other than items described in subdivision (1), that are used predominantly in connection with or to perform an activity occurring during the application of technologies in biotechnology are used directly in the biotechnology industry.
Machinery, equipment, tools, materials, supplies or fuel, other than items described in subdivisions (1) and (2), that are used predominantly to control or monitor an activity occurring during the application of technologies in biotechnology, or predominantly to design a product as well as to control or monitor an activity occurring during such application of technologies, are used directly in the biotechnology industry.
Machinery, equipment, tools, materials, supplies or fuel used predominantly during the application of technologies in biotechnology to test or measure materials and products to which such technologies are being applied are items used directly in the biotechnology industry.
HOW THE DEPARTMENT CONSTRUES THE TERM "BIOTECHNOLOGY": DRS considers biotechnology to begin when research activities are performed in the laboratory, and to end when a product is ready for commercial production. DRS considers biotechnology to include all activities performed in research, development and testing that take place within those starting and ending points.
For example, pharmaceutical biotechnology typically begins with the process of identifying a target molecule that has a characteristic that is believed to be the cause of a disease. The company may refer to basic research already performed by others, such as universities, which have published their studies in professional journals and other periodicals.
The next step is to reproduce the molecule to create assays against which will be tested various chemical or organic compounds. The company may use high throughput screening, which uses a robotic system to store and retrieve thousands of chemical compounds to be tested against the molecular assays. A compound that is effective against the target becomes a lead compound and progresses to the next stage.
A lead compound must be transformed into a drug by making changes to its structure to improve its potency and to optimize its bioavailability (how it is absorbed into the bloodstream). The company needs to determine how the lead compound will work within the entire organism, and so begins to study the pharmacology of the compound to determine its effectiveness within animal models. Once it has determined that the lead compound will be effective against the target molecule, the company can start to refine the compound to be as effective as possible while eradicating or minimizing any undesirable effects on the patient.
The company must develop an appropriate formulation for the new drug to ensure that its bioavailability is optimal and reproducible. The company must also analyze the new drug to establish methods to assure its purity, stability and concentration, which will be applied as the quality control procedures during the drug’s manufacture, as well as developing an economical and environmentally sound method of synthesizing the compound in large quantities.
Compounds that emerge from these phases must undergo rigorous clinical evaluations to meet regulatory requirements for safety and efficacy, which are often performed for the pharmaceutical company by another company that specializes in performing clinical trials. The new drug is required by the federal Food and Drug Administration to undergo several phases of clinical trials, beginning with a small-scale trial for safety in Phase I. The new drug proceeds to Phase II, where it is administered to patients suffering from the condition addressed by the new drug to test its efficacy. If successful in Phase II, the new drug is administered to large numbers of patients to verify the efficacy in Phase III. Once approved by the FDA, physicians can prescribe the new drug. The company must continue to monitor the new drug and report any adverse reactions to the FDA; in addition, the FDA may in some cases require Phase IV studies to evaluate the drug’s long-term effects.
All of the activities described in this example, through the stage when the FDA has approved the new drug (which will exclude the Phase IV trial), are considered to be biotechnology as the term is used in Conn. Gen. Stat. §12-412(89). Items used directly in these activities qualify for exemption.
ITEMS THAT DO NOT QUALIFY FOR THE BIOTECHNOLOGY EXEMPTION:
Administration and General Management: The exemption for purchases of machinery, equipment, tools, materials, supplies and fuel does not apply to such items used predominantly in administration, general management, or any other activity that does not constitute the application of technologies in biotechnology as described herein. For example, a suite of computer applications including word processing, spreadsheet and organizer applications which is being purchased for use by the entire organization does not qualify for exemption. Similarly, purchases made to prepare for the manufacture of a new product of biotechnology after the appropriate governmental agency or agencies have approved the product for commercial production are not exempt.
Services: The exemption does not apply to the purchase of any services. Thus, for example, the following services are taxable: maintenance or repair services for machinery, equipment or tools, including adjustment and calibration; computer and data processing services, such as subscriptions to the Internet and the creation of custom software; janitorial services; and personnel services. Providers of such services must collect tax on their charges and may not purchase their machinery, equipment, tools, materials, supplies or fuel exempt from tax under Conn. Gen. Stat. §12-412(89).
Diagnoses: The exemption does not apply to purchases of items used to make patient diagnoses or conduct patient pathology tests, except when performed in clinical trials of a new biotechnology product.
Manufacturers: The exemption does not apply to purchases made by companies that produce biomedical instrumentation or inorganic biomaterials, even though such companies use organic materials in their research and development. The exemption also does not apply to purchases by businesses that manufacture items that will be used by biotechnology companies, such as chemicals or electrophoresis gels. (However, the manufacturers may be able to make exempt purchases under the exemptions of Conn. Gen. Stat. §12-412(18) and (34) or Conn. Gen. Stat. §12-412i.)
Real Property: The exemption does not apply to real property, including fixtures. For example, construction materials purchased to build a new laboratory do not qualify for exemption.
Repair or Replacement Parts: The biotechnology exemption does not apply to repair or replacement parts for machinery, equipment or tools, the purchase of which is exempt from sales and use taxes under Conn. Gen. Stat. §12-412(89). However, repair or replacement parts may qualify for partial exemption under Conn. Gen. Stat. §12-412i (see SN 93(1.1), The Manufacturing Recovery Act of 1992 Exemption for Purchases of Property Used in Manufacturing, Processing and Fabricating).
PURCHASES OF UTILITIES: Only fuel used directly in the biotechnology industry is exempt under Conn. Gen. Stat. §12-412(89). Gas or heating fuel not used directly, and electricity are exempt from tax only if their purchase qualifies under Conn. Gen. Stat. §12-412(3) or (16). For additional information about these exemptions, see PS 94(3.2), Gas, Electricity and Heating Fuel Purchased for Residential Use or for Use in Agricultural Production, in the Fabrication of Finished Products to be Sold, or in an Industrial Manufacturing Plant.
CERTIFICATE OF EXEMPTION: The purchaser of machinery, equipment, tools, materials, supplies or fuel must present CERT-129, Exemption for Items Used Directly in the Biotechnology Industry, to the seller to claim the biotechnology exemption. This certificate relieves the seller of the burden of proving that the property purchased is subject to the biotechnology exemption when the seller accepts it in good faith from a purchaser engaged in the application of technologies in biotechnology. If the purchaser makes any use of the property other than the use stated on the certificate, the property becomes subject to tax at the time of such use based upon the full purchase price.
EFFECT ON OTHER DOCUMENTS: This Policy Statement supersedes Special Notice 97(2).
EFFECT OF THIS DOCUMENT: A Policy Statement is a document that explains in depth a current department policy or practice affecting the liability of taxpayers.
FOR FURTHER INFORMATION: Please call the Department of Revenue Services during business hours, Monday through Friday:
- 1-800-382-9463 (toll-free within Connecticut), or
- 860-297-5962 (anywhere).
- TDD/TT (Telecommunications Device for the Deaf) users only call 860-297-4911.
FORMS AND PUBLICATIONS: Forms and publications are available all day, seven days a week:
- Internet: preview and download forms and publications from the DRS web site: http://www.ct.gov/drs; or
- Telephone: call 1-800-382-9463 or 860-297-4793 and select Option 2 from a touch-tone phone.
Sales and use taxes