Sales and Use Tax Exemption (R&D)

The New York Sales and Use Tax Exemption for Research and Development permits firms to acquire tangible personal property and utilities free of tax when utilized directly and predominantly for scientific innovation. This mechanism offers immediate liquidity by lowering the cost of technical inputs, functioning as a vital precursor to the long-term fiscal benefits realized through the state’s R&D income tax credits.

The economic landscape of New York State has long been characterized by a strategic commitment to fostering a high-technology corridor, stretching from the financial hubs of Manhattan to the burgeoning biotech and aerospace clusters in Long Island and the Hudson Valley. Central to this strategy is a dual-layered tax incentive program designed to subsidize the high risks associated with technical experimentation. While the federal Research and Experimentation credit remains the baseline for innovation incentives in the United States, New York has established a distinct and more granular set of exemptions and credits that address both the operational expenses (OPEX) and capital expenditures (CAPEX) of research-intensive firms. The primary consumption-based incentive, the Research and Development Sales and Use Tax Exemption, is codified under Tax Law Section 1115(a)(10), which provides a point-of-sale relief from the combined state and local sales tax rates that can reach as high as 8.875 percent in certain jurisdictions. This exemption is not merely a courtesy to business; it is a fundamental shift in the tax base intended to prevent the cascading of taxes on the tools of innovation.

The integration of these sales tax exemptions with income-based credits—such as the Excelsior Research and Development Tax Credit and the Life Sciences Research and Development Tax Credit—creates a comprehensive fiscal environment where companies can recoup a significant portion of their research investment. Understanding the nuances of these programs requires an exploration of the rigorous “direct and predominant” use tests, the 100 percent exclusivity requirement for utilities, and the evolving definitions of “qualified research” which now must navigate the complexities of federal changes like the One Big Beautiful Bill Act (OBBBA) and the capitalization requirements of Internal Revenue Code Section 174.

Statutory Foundation of the Sales and Use Tax Exemption

The Mechanism of Section 1115(a)(10)

The foundational authority for the R&D sales tax exemption in New York is Tax Law Section 1115(a)(10). This statute provides that receipts from the sale of tangible personal property purchased for use or consumption directly and predominantly in research and development in the experimental or laboratory sense are exempt from the retail sales tax and the compensating use tax. The phrasing “experimental or laboratory sense” is the pivot upon which the entire exemption turns. It does not encompass every activity occurring within a corporate laboratory but rather isolates those endeavors whose ultimate goal is the advancement of technology or the creation of new products.

Under the administrative regulations set forth in 20 NYCRR 528.11, the New York State Department of Taxation and Finance (DTF) further delineates the scope of these activities. Research and development is interpreted through the lens of its objective, which must fall into one of several high-level categories: basic research in a scientific or technical field, the advancement of technology within a field of endeavor, the development of new products, the improvement of existing products, or the development of new uses for existing products. This structure intentionally mirrors many aspects of federal innovation policy while maintaining state-specific criteria for what constitutes a “technical field”.

Statutory Provision	Target of Exemption	Standard of Use
Section 1115(a)(10)	Tangible Personal Property (Equipment, Supplies)	Directly and Predominantly (>50%)
Section 1115(b)(ii)	Utilities (Electricity, Gas, Steam, Refrigeration)	Directly and Exclusively (100%)
Section 1115(a)(12)	Production Machinery (Manufacturing)	Directly and Predominantly (>50%)

The exclusion of certain activities is as vital as the inclusion of others. The law explicitly states that research and development does not include the ordinary testing or inspection of materials or products for quality control, efficiency surveys, management studies, consumer surveys, advertising, or promotions. Furthermore, research in connection with literary, historical, or similar projects is categorically excluded from the sales tax exemption, as these do not satisfy the “experimental or laboratory” requirement in a scientific or technical sense.

Analyzing the Direct and Predominant Use Standards

The DTF applies a two-pronged test to determine whether a piece of tangible personal property qualifies for the exemption under Section 1115(a)(10). The first prong is “direct use,” which requires the property to be used to perform the actual research and development work. This broadly includes materials worked on, machinery, equipment, and supplies used during the experimentation phase. For example, a microscope used by a chemical manufacturer to observe the reaction of new pesticides is used directly in R&D. Conversely, usage in activities collateral to the actual process—such as a desk used by an administrator in the research department—is not considered “direct” use.

The second prong is “predominant use,” which is defined as being used more than 50 percent of the time in the qualifying R&D function. This is a time-based or frequency-based metric. If a multi-purpose lab computer is used 60 percent of the time for running complex chemical simulations (R&D) and 40 percent of the time for general internal email and scheduling (Administrative), it meets the predominant use test. However, if the usage ratio were flipped, the entire purchase would be subject to sales tax, as the exemption is binary rather than pro-rata for tangible personal property.

Revenue Office Guidance and Local Tax Application

Administrative Interpretations and Technical Bulletins

The Department of Taxation and Finance provides critical interpretive guidance through Technical Bulletins, most notably TB-ST-773, which summarizes the rules for research and development activities. This guidance clarifies that computer hardware and software, specifically CAD/CAM systems, are eligible for the exemption when used for technical design and experimentation. The bulletin also provides a stark distinction regarding services: while the machinery itself may be exempt, the charges for installation, maintenance, and repair performed on that exempt equipment are not exempt under Section 1115(a)(10). Sales tax must be paid on the labor and parts for repairs, even if the machine was purchased tax-free.

This service-related limitation is a frequent area of confusion for businesses. While manufacturing production machinery under Section 1115(a)(12) often enjoys an exemption for repair and maintenance services, the R&D exemption is narrower. Firms that operate both R&D and production phases must carefully bifurcate their service contracts to ensure compliance with these differing standards.

The Role of Local Taxing Jurisdictions

New York’s sales tax is not a single rate but a combination of state and local components. The state sales tax rate is currently 4 percent, but local jurisdictions (counties and cities) may impose their own taxes, usually ranging from 3 percent to 4.75 percent. Additionally, the Metropolitan Commuter Transportation District (MCTD) surcharge of 0.375 percent applies in New York City and the surrounding counties of Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester.

For the purposes of Section 1115(a)(10), the exemption generally applies to both the state and local portions of the sales tax. This means that a qualifying purchase in New York City (total rate 8.875 percent) would receive a full exemption of the 8.875 percent, not just the 4 percent state portion. However, businesses must be aware that certain “non-standard” local taxes might not be covered if they are not based on the general Section 1105 or 1110 authority. For example, specific environmental or sewer district taxes imposed at the local level may not follow the same exemption logic as the state-administered sales tax.

Tax Jurisdiction	State Rate	Local Rate	MCTD Surcharge	Total Potential Savings
New York City	4.0%	4.5%	0.375%	8.875%
Nassau/Suffolk	4.0%	4.25%	0.375%	8.625%
Albany County	4.0%	4.0%	0%	8.0%

Exclusive Use: The Higher Standard for Utilities

Perhaps the most challenging aspect of the sales tax exemption framework is the treatment of utilities. Under Tax Law Section 1115(b)(ii), gas, electricity, refrigeration, and steam (and their respective services) are exempt only if used or consumed directly and exclusively in research and development. The DTF interprets “exclusively” to mean 100 percent of the utility’s use.

Because utilities are typically delivered through a single meter for an entire building, achieving 100 percent exclusivity is often physically impossible without sub-metering or complex allocation. To address this, the DTF provides a mechanism for businesses to pay the sales tax to the utility provider and then apply for a refund or credit for the portion of the utility used in an exempt manner. This application must be supported by an engineering survey or other technical analysis that accurately computes the exempt usage. This survey must detail the power requirements of the R&D equipment versus the administrative or general lighting requirements of the facility.

The Excelsior Jobs Program R&D Tax Credit

Contextual Integration with Sales Tax Incentives

The Excelsior Jobs Program represents the state’s flagship economic development initiative, providing five fully refundable tax credits to businesses in targeted industries. While the sales tax exemption provides upfront relief on the purchase of equipment, the Excelsior Research and Development Tax Credit offers a back-end reward for the performance of the research activities themselves. These incentives are complementary; the sales tax exemption reduces the immediate cost of materials, which technically reduces the basis of the “qualified research expenses” (QREs) for the income tax credit, but ensures the company has more cash on hand to fund its workforce.

Under the Excelsior Program, the R&D credit component is equal to 50 percent of the portion of the Federal Research and Development tax credit that relates to expenditures conducted within New York State. This credit is further capped at 6 percent of the research expenditures attributable to activities conducted in New York. For companies engaged in “qualified green projects,” which include endeavors aimed at reducing greenhouse gases or creating clean energy solutions, the cap is increased to 8 percent of NY research expenditures.

Eligibility and Strategic Alignment

Participation in the Excelsior Jobs Program is not an entitlement; it requires a certification from the Empire State Development (ESD) corporation. To qualify, firms must satisfy certain job creation or capital investment thresholds, which vary by industry. For instance, scientific research and development firms must create at least five net new jobs, whereas distribution firms may be required to create 50.

Industry Category	Minimum New Jobs Required	Strategic Focus
Scientific R&D	5 Jobs	Technical Innovation
Software Development	5 Jobs	Digital Infrastructure
Manufacturing	5 Jobs	Physical Goods Production
Life Sciences	5 Jobs	Biological & Health Sciences
Financial Services	25 Jobs	Back-office Operations

Once certified, the business enters into a 10-year agreement with the state. To earn the credits, the firm must meet its annual job and investment milestones, which are verified by the ESD through performance reports before a Certificate of Tax Credit is issued. This multi-layered process ensures that the tax benefit is tied to actual economic expansion within the state.

Life Sciences Research and Development Tax Credit Program

A Specialized Pathway for Bio-Innovation

Recognizing that early-stage biotechnology and pharmaceutical firms often have high research costs but low headcounts, New York established the Life Sciences Research and Development Tax Credit Program. This program is distinct from the Excelsior Jobs Program and is often more beneficial for small, pre-revenue life sciences startups.

The credit amount is determined by the size of the company’s workforce. For a qualified life sciences company that employs 10 or more persons, the credit is 15 percent of its qualified research expenditures in New York. For those with fewer than 10 employees, the credit rate increases to 20 percent. This credit is fully refundable and can be claimed for up to three consecutive years.

The program is restricted by several caps:

• Annual Cap: $500,000 per taxpayer per year.
• Lifetime Cap: $1.5 million total over the three-year benefit period.
• Aggregate Statewide Cap: $10 million per year is allocated for the entire program.

A critical point for corporate strategy is that the Excelsior Jobs Program and the Life Sciences R&D Tax Credit are generally mutually exclusive. A firm that chooses to participate in the Life Sciences program cannot simultaneously claim the Excelsior R&D credit for the same expenditures. Therefore, a founder must analyze whether the higher, immediate percentage of the Life Sciences credit (20 percent for 3 years) outweighs the lower-percentage but longer-duration benefits (6 percent for 10 years) and the additional jobs/investment credits offered by the Excelsior Program.

Federal Compliance and the “Qualified Research Expense” (QRE) Definition

Adherence to IRC Section 41 and 174

New York State generally follows the federal guidelines for determining what constitutes a “qualified research expense”. These expenses typically include wages for employees performing qualified services, supplies used in research, and a percentage (usually 65 percent) of contract research costs.

To qualify as research under the federal standard (which New York adopts), an activity must satisfy a Four-Part Test:

1. Permitted Purpose: The activity must relate to a new or improved function, performance, reliability, or quality of a business component.
2. Elimination of Uncertainty: The activity must be intended to discover information to eliminate uncertainty concerning the development or design of a product or process.
3. Process of Experimentation: The activity must involve a systematic process of evaluating one or more alternatives, such as modeling, simulation, or trial and error.
4. Technological in Nature: The research must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

The Shift from Expensing to Amortization

A significant shift in the tax landscape occurred with the Tax Cuts and Jobs Act (TCJA), which required research expenditures under IRC Section 174 to be capitalized and amortized over five years (domestic) or 15 years (foreign) for tax years beginning after December 31, 2021. This replaced the longstanding option to immediately deduct these expenses.

However, the introduction of the One Big Beautiful Bill Act (OBBBA) in 2025 has provided significant relief, restoring the option for full immediate expensing for domestic R&D expenditures under a newly created Section 174A. This federal change has direct ripple effects on how New York businesses calculate their taxable income and their R&D credits, as the state’s tax base is closely linked to federal adjusted gross income. If a taxpayer capitalizes their expenses, the amount of the R&D credit taken under Section 41 may require an adjustment to the capitalized account under Section 280C(c) to prevent a “double benefit”.

Local Governance: New York City Biotechnology Tax Credit

In addition to state-level programs, New York City provides its own Biotechnology Tax Credit to support small life sciences firms operating within the five boroughs. This credit applies against the Business Corporation Tax, the General Corporation Tax, or the Unincorporated Business Tax.

To qualify for the NYC credit, a firm must meet several criteria, including having 100 or fewer full-time employees (with 75 percent based in the city), annual product sales of $10 million or less, and a research-to-sales ratio that exceeds the National Science Foundation average. The credit is highly specific in its components:

• Property Purchase: 18 percent of the cost of R&D property purchased and placed in service during the year.
• Research Expenses: 9 percent of qualified research expenses paid or incurred.
• Employee Training: 100 percent of high-technology training expenditures, capped at $4,000 per employee per year.

The NYC credit is also refundable or can be applied as a credit against the next year’s tax liability if it exceeds the current year’s tax. However, the total credit for all taxpayers is capped at $3 million annually, meaning the Department of Finance may allocate credits proportionally if claims exceed this amount. This local incentive, when layered with the Section 1115(a)(10) sales tax exemption and the state’s R&D credit, can effectively subsidize a vast majority of a New York City startup’s early-stage technical costs.

Comprehensive Example: The “PrecisionBio” Case Study

To visualize the interplay of these complex rules, consider PrecisionBio, a hypothetical biotechnology startup based in a lab facility in Brooklyn. PrecisionBio is developing a new diagnostic tool for early-stage oncology detection.

Phase 1: Capital Acquisition and Facility Setup

PrecisionBio purchases $500,000 in laboratory equipment, including DNA sequencers and cryostatic storage units. They also purchase $50,000 in office furniture and $20,000 in general-use janitorial supplies.

• Sales Tax Exemption: PrecisionBio issues Form ST-121 to the equipment vendor, claiming an exemption under Section 1115(a)(10). Since the sequencers are used 100 percent for research, they save 8.875 percent ($44,375) in New York City sales tax upfront. However, they must pay the full 8.875 percent sales tax on the office furniture and janitorial supplies, as these are not used “directly” in the research process.

Phase 2: Operations and Utility Allocation

The laboratory operates on a continuous cycle to maintain cell cultures. The monthly electric bill is $5,000. PrecisionBio hires an engineer to perform a survey, which determines that the DNA sequencers and climate-controlled storage (direct R&D) consume 90 percent of the facility’s electricity, while the remaining 10 percent is used for general lighting and the lobby.

• Utility Tax Treatment: PrecisionBio cannot purchase the electricity tax-free because the use is not “exclusive” (100 percent R&D). They pay the sales tax each month and then file Form AU-11 with the DTF at the end of the quarter to request a refund for the tax paid on the 90 percent of electricity used for exempt purposes.

Phase 3: Scaling and Income Tax Credit Election

PrecisionBio now has eight full-time employees and incurs $1.2 million in QREs (mostly wages and lab supplies). They must choose between the Excelsior Jobs Program and the Life Sciences R&D Tax Credit Program.

• Option A: Excelsior: If they qualify by adding jobs, they could get a credit for 50 percent of their federal R&D credit, capped at 6 percent of their $1.2M NY expenditures ($72,000). This credit could be claimed for 10 years.
• Option B: Life Sciences: As a company with fewer than 10 employees, they are eligible for a 20 percent credit of their $1.2M NY expenditures ($240,000), capped at the $500,000 annual limit. This is much higher than the Excelsior credit but is only available for three years.

PrecisionBio elects the Life Sciences R&D Tax Credit to maximize immediate cash flow during their critical pre-revenue stage. Additionally, they file for the NYC Biotechnology Tax Credit, claiming an additional 9 percent of their research expenses and 18 percent of their equipment costs against their city tax liability.

Administrative Compliance and Audit Readiness

Form ST-121: The Exempt Use Certificate

The primary document for securing the sales tax exemption at the point of sale is Form ST-121, the Exempt Use Certificate. Businesses must provide a properly completed certificate to the vendor within 90 days of the delivery of the property or the performance of the service. The vendor is then relieved of the obligation to collect the tax, provided they accept the certificate in good faith and retain it for their records.

For R&D purposes, the purchaser must check the box for “tangible personal property used directly and predominantly in research and development” or “utilities used directly and exclusively in research and development”. Failure to provide a valid certificate can lead to the assessment of tax, interest, and penalties during an audit.

Recordkeeping Requirements: TB-ST-770

New York maintains rigorous recordkeeping standards for all registered vendors and businesses. Under Tax Bulletin ST-770, records must be sufficient to independently determine the taxable status of each sale and purchase. For R&D firms, this necessitates a “gold standard” of documentation:

• Dated Records: All invoices, purchase orders, and general ledger entries must be clearly dated to correspond with the period of R&D activity.
• Proof of Direct Use: Descriptions of equipment must clearly link them to a scientific or technical project. For instance, an invoice for “Lab Supplies” is less defensible than one specifying “Reagents for Genome Sequencing Experiment #402”.
• Usage Logs: For equipment that is shared between R&D and non-R&D functions, the firm should maintain a log to prove that the “predominant” (>50 percent) usage threshold was met.
• Engineering Surveys: For utility refunds, a formal survey performed by a qualified professional is often necessary to survive a DTF audit of the AU-11 refund claim.

Audit Risk and the “Quality Control” Pitfall

One of the most common reasons for the denial of the R&D sales tax exemption is the conflation of research with quality control (QC). During an audit, the DTF will scrutinize whether the equipment is used for development or for inspection of products already in production.

Consider a manufacturing plant that produces medical devices. If a testing machine is used to test a new prototype’s durability under extreme heat, that is exempt R&D. However, if that same machine is moved to the production line to test every 100th finished device to ensure it meets safety standards before shipping, that usage is “quality control” and is taxable. If a single machine is used for both, and the QC usage exceeds 50 percent of the time, the entire exemption for that machine is lost.

Economic Impact and Statistical Trends

Usage Statistics and Tax Expenditure Values

The fiscal impact of these incentives is reported annually by the New York State Department of Taxation and Finance in its Annual Report on New York State Tax Expenditures. While the specific dollar value of the Section 1115(a)(10) R&D exemption is often bundled with broader manufacturing and production exemptions, the collective value of these consumption-tax relief measures is in the hundreds of millions of dollars annually.

Statistics from the 2023-2024 fiscal year show that business taxes—which include the R&D income tax credits—generated $25.6 billion in state revenue. The R&D incentives act as a “multiplier” for state revenue over the long term; research suggests that every $1 of R&D tax credit can stimulate between $1.1 and $4.0 of new private-sector R&D investment. This investment, in turn, fuels the high-wage employment that provides $53.8 billion in personal income tax collections—the state’s largest revenue source.

Sectoral Distribution of R&D Incentives

The concentration of R&D claims is highly skewed toward technology-intensive sectors. Based on data from the Tax Expenditure Review Commission and other state modeling, the following sectors dominate the R&D tax credit landscape:

Industry Sector	Percentage of Total R&D Claims
Information & Software	35%
Manufacturing	30%
Professional, Scientific, and Technical Services	17%
Wholesale/Retail (with R&D divisions)	8%
Other (BioTech, Agriculture, etc.)	10%

This distribution underscores the importance of the sales tax exemption for the “Information & Software” and “Manufacturing” sectors, where heavy investments in high-end server hardware, specialized CAD software, and physical production prototypes are commonplace.

Future Outlook and Policy Directions

The Evolving Definition of Technological Innovation

The New York tax code is increasingly being updated to reflect modern technical realities. The inclusion of CAD/CAM software as a form of “tangible personal property” for the R&D exemption was a major administrative step in acknowledging the digitalization of research. Similarly, the expansion of the Excelsior R&D credit cap to 8 percent for “green projects” reflects the state’s legislative priority on combating climate change through technical innovation.

However, challenges remain. The “exclusive use” requirement for utilities (Section 1115(b)(ii)) is often cited by business groups as an outdated and overly burdensome hurdle that fails to account for modern, flexible lab spaces. There are ongoing discussions in the legislature regarding the modernization of these standards to align more closely with the 50 percent “predominant use” rule applied to equipment, which would simplify compliance for many startups.

The Impact of Federal Tax Modernization

The reinstatment of full domestic R&D expensing under the federal One Big Beautiful Bill Act (OBBBA) in 2025 has provided a much-needed stabilizer for the New York innovation economy. By allowing firms to immediately deduct their R&E costs rather than amortizing them over five years, the federal government has effectively increased the short-term cash flow of innovative firms. For New York businesses, this means that the state-level R&D credits—which are often calculated as a percentage of the federal credit—will likely see a rise in claim values as the underlying federal basis is restored to its pre-TCJA strength.

Final Thoughts

The synergy between New York’s Sales and Use Tax Exemption and its R&D income tax credits forms a robust fiscal engine that powers one of the nation’s most innovative economies. By providing immediate relief at the point of purchase through Section 1115(a)(10), the state effectively lowers the “cost of entry” for technical experimentation. This operational subsidy is then reinforced by the deep, long-term benefits of the Excelsior and Life Sciences programs, which reward the successful scaling of innovative projects and the creation of high-value jobs.

For the business professional, the lesson is clear: these incentives are powerful but require meticulous management. The “experimental or laboratory sense” standard is a narrow gateway, and the “direct and predominant” use tests are the primary checkpoints for state auditors. Companies that invest in robust contemporaneous documentation, maintain a clear separation between R&D and quality control, and properly utilize tools like Form ST-121 will find that New York’s tax framework is not a burden to be navigated, but a strategic asset to be leveraged. As the state continues to refine its definitions of innovation and align with evolving federal standards, the ability to integrate these consumption and income tax benefits will remain a cornerstone of technical and financial success in the Empire State.