Pharmaceutical / Biotech / CRO

Pharmaceutical companies, including Biotech and CRO’s (Contract Research Organizations), represent a key industry for TaxMatrix. Since our inception, we have worked with taxpayers ranging from start-ups with no sales to some of the largest companies in the world. For sales & use tax recovery, everything depends on purchases of fixed assets and expenses. The complexity in the pharma industry depends on “how” purchases are used.  

There are four different types of companies:

• Research & Development Only
• Research & Development for Other Companies
• Pharmaceutical Manufacturing
• Pharmaceutical Manufacturing for Other Companies

Companies involved in drug development and drug discovery (in-house or funded research) may have numerous sales tax exemptions availed to them depending on the State. In many cases, the tax code or law may be too ambiguous to decipher, so the company ends up not taking the exemption. In some states, the taxpayer needs to register as a particular type of company (i.e. R&D) to take the exemption. And companies that only perform R&D or manufacturing may have limitations compared to performing both under the same roof.

One important distinction that sometimes causes confusion is an R&D tax credit vs. a sales tax exemption. An R&D credit is a function of federal income tax by deducting expenses related to research and development. A sales tax exemption is based on state sales tax law exempting items for purchase.  

Exemptions for pharma companies (dependent on the state) are numerous:

• Research & Development
• Manufacturing Equipment
• Utilities used in R&D and/or Manufacturing
• Production Machinery Repair Parts
• Electrical Components, Screws, Nuts, Bearings, Washers, Filters, Pumps, etc.
• Production Tools and Supplies
• Pollution Control
• Kit Building Assembly
• Processing
• Material Handling Equipment, Repair Parts (if used within an Integrated Production Process)
• Forklifts, Cranes, etc. if used in manufacturing
• Abrasives, Grease, Fuel, Welding Gases, Gas Cylinders, Electricity, Natural Gas, etc.
• Cost of Goods Sold (COGS)
• Material incorporated into the final product
• Safety Clothing or Equipment
• Gloves, Coveralls, Ear Plugs, Hard Hats, Glasses, Safety Shoes, etc.
• Packaging Supplies
• Pallets, Boxes, Strapping, Wrap, etc.
• Property purchased solely for research and development
• Software used in manufacturing or R&D

Utilities are often an exempt expense, but sometimes have different implications depending on whether the company is performing R&D and/or manufacturing under the same roof. States deem these exemptions as either predominant use or apportionment. For predominant use, if a certain amount of energy is used in manufacturing, the entire bill is exempt. For apportionment, only the amount used in manufacturing is exempt. Most states require a utility study to be completed in order to qualify for the exemption, which is something we perform as part of our success-based refund review. Unless the site has experienced an expansion or had additional, integral equipment added, a study can be used as a document of record for 3-5 years to keep taking the exemption moving forward.

R&D sometimes mirrors the same utility sales tax exemption as manufacturing, but again that depends on the state. A case in point is Indiana. If more than 50% of utilities are used in manufacturing, the whole utility bill is sales tax exempt in Indiana. However, if the company does not manufacture the product, only the portion used in R&D qualifies for the sales tax exemption.

A big misconception is that purchases are taxable if companies are performing funded research for other companies. In fact, in most states, these would qualify as exempt purchases. TaxMatrix performs extensive work with multi-state CROs in this arena, and have been successful filing refunds on purchases used to perform research for other companies.

Software is another frequent area that may not be clearly defined. If the software’s usage can be broken out for usage in manufacturing or R&D, it can be an exempt purchase. Other factors include whether it is custom or canned software, and where the software and hardware is purchased vs. the State of actual usage. The same goes for Interim Storage whereby products are simply stored in a particular state, but used elsewhere. Thus, it is important to note that analysis of where and how an item is being used is paramount in understanding if a sales tax exemption should be taken.

TaxMatrix services every U.S. taxing jurisdiction, but these are the states where we file the most refunds and defend the most audits in the pharmaceutical industry:

STATE	STATUTE	FILING ENTITY
Colorado	3 Years	State
Indiana	3 Years	State
Maryland	4 Years	State
Massachusetts	3 Years	Vendor
Missouri	10 Years	State
New Jersey	4 Years	State
New York	3 Years	State
North Carolina	3 Years	Vendor
Pennsylvania	3 Years	State
Wisconsin	4 Years	Vendor