Sales Tax State Activity Update -October 2008

Items purchased for R&D can fly for Manufacturing Exemption in Connecticut

The Connecticut’s Superior Court has determined that items purchased by Sikorsky Aircraft Corp, a helicopter manufacturer, are qualified for exemption from Connecticut sales and use taxes. As determined by the Connecticut’s Superior Court, the exemption applies regardless if the items purchased are for use in research and development or as part of the manufacturing process.

Pursuant to the General Statutes Sect. 12-412(78), Connecticut provides an exemption for materials, tools, fuel, machinery, and equipment used by an aircraft manufacturer in operating an aircraft manufacturing facility. Upon the audit of Sikorsky, the auditor concluded that a portion of the taxpayer's purchases did not qualify for exemption because they were purchased solely for research and development and not manufacturing as the statute requires. In conducting the review, the auditors considered how the taxpayer's purchases of materials, tools, fuel, machinery, and equipment were classified by accountants and did not consider how the purchases were actually used. Therefore concluding that purchases were solely used for R&D, and are not entitled for the exemption.

Sikorsky then challenged the audit, seeking a reversal of the auditor’s decision of denying the exemption. Sikorsky claimed that it used an integrated product team in the manufacture of helicopters that was composed of personnel from engineering, procurement, research, and production. Sikorsky incorporated all disciplines into teams that were responsible for each major component of the helicopter at every stage of the manufacturing process from design to finished product. The court found nothing in the exemption statute that precludes the use of materials, tools, fuel, machinery, and equipment as part of an integrated research and development process provided the use is made within an aircraft manufacturing facility in Connecticut for the production of aircraft. Despite those items having been charged to R&D for purposes of accounting, the items were used in the integrated manufacturing production process and, as such, the court deems them to be qualified for exemption.

The full text of the court’s decision may be viewed here. (Sikorsky Aircraft Corp. v. Law, Connecticut Superior Court, No. CV064009194, May 16, 2007)

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