Comprehensive Analysis of the Consumer Survey Exclusion within the Rhode Island Research and Development Tax Credit Framework

Consumer surveys are systematic data collection efforts designed to assess market preferences, user sentiment, or commercial viability rather than resolving technical uncertainties through scientific experimentation. Under Rhode Island tax law, these activities are explicitly excluded from qualifying for research and development incentives because they lack the requisite basis in the "experimental or laboratory sense" required by statute.

The distinction between a qualifying research activity and an excluded consumer survey is the fundamental boundary where technological innovation meets market-driven optimization. While contemporary product development often relies on iterative feedback from end-users to ensure commercial success, the Rhode Island General Laws and the associated guidance from the Rhode Island Division of Taxation maintain a rigid separation between the resolution of technical uncertainty and the gathering of commercial intelligence. This report provides an exhaustive examination of how this exclusion functions across the three primary research incentives in Rhode Island: the elective facility deduction, the investment tax credit for research property, and the incremental research expense credit. By analyzing statutory language, administrative regulations, and the state’s alignment with federal standards, this analysis illuminates the rigorous compliance requirements that taxpayers must meet to ensure their development activities are not recharacterized as non-qualifying market research or consumer sentiment analysis.

Statutory Framework and the Scope of Exclusions

Rhode Island’s commitment to fostering a high-tech economy is codified in Title 44 of the General Laws, which provides several distinct but overlapping incentives for research and development. Each of these incentives—found in §§ 44-32-1, 44-32-2, and 44-32-3—contains a consistent list of excluded activities, with "consumer surveys" featuring prominently as a prohibited category for tax relief.

The Elective Deduction for R&D Facilities

Under R.I. Gen. Laws § 44-32-1, a taxpayer may elect to take a one-year write-off for expenditures paid or incurred during the taxable year for the construction, reconstruction, or acquisition of any new, not used, property that is used principally for research and development in the experimental or laboratory sense. This elective deduction is a powerful tool for capital-intensive firms, allowing them to deduct the entire cost of a new research facility in a single year, provided the property is situated in Rhode Island and is depreciable for federal tax purposes.

However, the statute is remarkably clear about the limitations of what constitutes "experimental or laboratory" use. Section 44-32-1(b)(1) explicitly states that research and development purposes do not include:

• Ordinary testing or inspection of materials or products for quality control.
• Efficiency surveys.
• Management studies.
• Consumer surveys.
• Advertising or promotions.
• Research in connection with literary, historical, or similar projects.

The inclusion of consumer surveys in this list demonstrates the legislature's intent to differentiate between the physical sciences—where one discovers new knowledge about the laws of nature—and the social or behavioral sciences, which underpin market research and consumer behavior analysis. If a facility is used even partially for consumer surveys, the taxpayer must carefully evaluate the "principally used" standard, which the Division of Taxation defines as more than 50% of the usable business floor space. If the survey-related activity exceeds the threshold of non-qualifying use, the entire facility deduction may be placed at risk, or at a minimum, requires a proportionate reduction in the allowable deduction.

The Research and Development Property Credit

The second pillar of the Rhode Island incentive regime is the 10% credit for research and development property under R.I. Gen. Laws § 44-32-2. This credit applies to tangible personal property and other tangible property, including buildings and structural components, that are acquired, constructed, or reconstructed after July 1, 1994. To qualify, the property must have a useful life of three years or more and be used principally for research and development in the experimental or laboratory sense.

The property credit statute mirrors the exclusionary language of the facility deduction. Section 44-32-2(b) reiterates that the definition of research and development shall not be deemed to include consumer surveys or advertising. This consistency ensures that a taxpayer cannot bypass the restrictions of the facility deduction by opting for the property credit instead. The following table summarizes the eligibility criteria and the impact of the consumer survey exclusion on various property types.

Property Type	Eligibility Criteria	Impact of Consumer Survey Exclusion
Laboratory Buildings	Must have situs in RI and 3+ year useful life.	Disqualified if principally used for user-group testing or focus groups.
Scientific Equipment	Must be depreciable under IRC § 167 or § 168.	Qualifying if used for chemical analysis; non-qualifying if used for market preference data entry.
Computer Hardware	Must be acquired by purchase as defined in IRC § 179(d).	Disqualified if used to host software platforms whose primary function is consumer data collection.
Pilot Models	Must be developed to resolve technical uncertainty.	Non-qualifying if the "model" is used primarily to gauge consumer aesthetic reaction.

The interaction between these statutes is restrictive. A taxpayer is explicitly prohibited from taking a deduction for research facilities under § 44-32-1 for any property for which they have claimed the 10% property credit under § 44-32-2. This prevents the "double-dipping" of incentives on the same capital investment. Furthermore, the property credit must be utilized before the research expense credit, which targets the operational costs of the research.

The Research and Development Expense Credit

The most frequently utilized incentive is the Research and Development Expense Credit under § 44-32-3, which provides a tiered credit based on the taxpayer's qualified research expenses (QREs) that exceed a base period amount. Rhode Island has adopted the federal definition of QREs as found in Section 41 of the Internal Revenue Code (IRC). By incorporating IRC § 41, Rhode Island automatically imports the federal exclusion of market research and consumer surveys found in IRC § 41(d)(4)(D).

For expenses incurred after January 1, 1998, the credit calculation for corporations, sole proprietors, and pass-through entities follows a tiered rate based on the "Rhode Island Excess".

Rhode Island Excess Expenditure Tier	Credit Rate Percentage
First $111,111.00 of Excess QREs	22.5%
Amounts in Excess of $111,111.00	16.9%

Data source: Rhode Island Division of Taxation Regulation 280-RICR-20-20-2.

The exclusion of consumer surveys in the context of the expense credit primarily affects wage claims. If a company employs staff whose duties include both technical development and the administration of consumer preference trials, the company must meticulously track hours to exclude the time spent on the latter. Under the "Substantially All" rule adopted from federal regulations, if at least 80% of an employee’s services constitute qualified research, then 100% of their wages may be included in the QRE calculation. However, if the time spent on excluded activities—such as consumer surveys, management studies, or quality control—causes the qualified research portion to drop below 80%, the taxpayer may only claim the portion of wages specifically attributable to qualified research.

Deep Dive: The Legal Meaning of "Consumer Surveys"

While the statutes list "consumer surveys" as an exclusion, they do not provide a granular definition of the term. For this, practitioners and the Division of Taxation look to federal regulations and judicial interpretations, as Rhode Island law specifically ties its definitions to the Internal Revenue Code.

Distinguishing Technical Uncertainty from Commercial Uncertainty

The core of the consumer survey exclusion lies in the nature of the uncertainty the activity seeks to resolve. To qualify for the R&D credit, an activity must satisfy the "Section 174 Test," which requires that the expenditure be incurred in connection with the taxpayer's trade or business and represent a research and development cost in the "experimental or laboratory sense". This standard is met only if the information sought is intended to eliminate uncertainty concerning the "capability, methodology, or appropriate design" of a business component.

In contrast, consumer surveys resolve "commercial uncertainty." Commercial uncertainty includes questions such as:

1. Which product features do users prefer?
2. How should the product be priced relative to competitors?
3. What color or aesthetic design will maximize sales?
4. Is the user interface "intuitive" for a non-technical audience?

Even if the resolution of these questions requires systematic data collection and analysis, they are not considered "experimental" because they do not rely on the hard sciences—such as physics, chemistry, biology, or computer science—to resolve a technical failure or design challenge. The IRS Audit Techniques Guide, which informs state-level audits, emphasizes that research related to "style, taste, cosmetic, or seasonal design factors" is not for a qualified purpose.

The Role of User Interface (UI) and User Experience (UX)

In the software industry, the line between qualified research and excluded consumer surveys is particularly thin. Software developers often engage in "user testing" to refine their products. Guidance suggests that if the purpose of the testing is to determine whether the software functions correctly across different hardware configurations or to resolve bugs in the underlying code, the activity may qualify as a "process of experimentation".

However, if the testing is used to gather feedback on whether users find the layout "pleasing" or whether a specific icon is "recognizable," the activity is classified as a consumer survey. This is because the uncertainty being resolved is one of human psychology and preference, not the technological capability of the computer system.

Comparison with Quality Control and Testing

The exclusion of consumer surveys is often grouped with the exclusion of "ordinary testing or inspection of materials or products for quality control". Quality control involves testing to ensure a product meets established standards or to identify defects in a finalized design. Consumer surveys are similarly positioned after the primary technical hurdles have been cleared—they are "post-experimental" activities aimed at market readiness rather than technical discovery.

Activity Category	Goal of Activity	R&D Status in RI
Basic Research	Advancement of existing knowledge and technology.	Qualified.
Experimental Development	Resolving technical design hurdles via scientific method.	Qualified.
Quality Control	Identifying defects in production to ensure consistency.	Excluded.
Consumer Surveys	Gathering data on user preference or brand reception.	Excluded.
Efficiency Surveys	Analyzing time and motion to improve business operations.	Excluded.

Local State Revenue Office Guidance and Administrative Rules

The Rhode Island Division of Taxation (Division) provides specific guidance through regulations, form instructions, and administrative decisions. These materials illustrate how the state's revenue officers apply the statutory exclusions in practice.

Regulation 280-RICR-20-20-2: Calculation and Limitations

Regulation 280-RICR-20-20-2 serves as the primary administrative rule for the Research and Development Expenses Credit. It reinforces that the credit is limited to one-half (50%) of the tax otherwise payable after all other available credits have been used. This "50% cap" is a significant limitation that prevents a company from entirely eliminating its tax liability through R&D activities alone.

The Division's guidance on the "Order of Credits" is critical for taxpayers who engage in multiple incentive programs. The R&D expense credit must be applied in the following sequence:

1. Enterprise Zone Business Credit.
2. Investment Tax Credit (§ 44-31-1).
3. Research and Development Property Credit (§ 44-32-2).
4. Research and Development Expense Credit (§ 44-32-3).

This hierarchy means that a taxpayer must first exhaust their 10% property credit before they can apply the incremental expense credit. For a taxpayer whose primary R&D property is disqualified because it is used for consumer surveys, this ordering rule becomes moot, as neither credit would be allowable.

Administrative Decision 2024-16 and Federal Conformity

Administrative Decision 2024-16 highlights a fundamental principle of Rhode Island tax administration: the "piggyback" rule. In this case, the Division successfully argued that if the Internal Revenue Service (IRS) adjusts a taxpayer's federal income to disallow a federal credit that serves as the basis for a state credit, the state credit is automatically disallowed as well.

While AD 2024-16 specifically dealt with the Earned Income Tax Credit, the same principle applies to the R&D credit. Because R.I. Gen. Laws § 44-32-3 and Reg 280-RICR-20-20-2 tie the definition of "qualified research" directly to IRC § 41, any IRS disallowance of expenses—such as the reclassification of claimed R&D as excluded consumer surveys—must be reported to the Rhode Island Division of Taxation via an amended return. Failure to do so can result in a notice of deficiency, interest, and penalties.

Form RI-7695E Instructions: Documentation of Rhode Island Locations

The instructions for Form RI-7695E, the form used to claim the expense credit, require the taxpayer to list the complete addresses of the Rhode Island locations where the qualified research expenses were incurred. The Division uses this information to verify the "Situs" requirement—that the research was performed within the state's borders.

In the context of consumer surveys, this location data is scrutinized to ensure that facilities claimed as research sites are not actually customer-facing retail locations or marketing offices. If the address provided is associated with a call center or a retail testing environment, the Division is likely to flag the claim for an audit to determine if the activities are excluded consumer surveys.

Interplay Between Rhode Island Law and Federal IRC § 174

To fully understand the consumer survey exclusion, one must analyze the interaction between the R&D credit (IRC § 41) and the deduction for research and experimental expenditures (IRC § 174). Under federal and Rhode Island law, an activity must first satisfy the Section 174 "uncertainty" test to be eligible for the R&D credit.

The Section 174 Test as a Barrier to Consumer Surveys

The Section 174 test requires that expenditures be for "research and development in the experimental or laboratory sense". This definition excludes expenditures for the acquisition of another's patent, model, or production process, and importantly, it excludes consumer surveys and management studies.

Historically, Section 174 allowed for the immediate expensing of R&D costs. However, following the Tax Cuts and Jobs Act (TCJA), these expenses must now be capitalized and amortized over five years for domestic research and fifteen years for foreign research.

Rhode Island Decoupling and the 2025 Legislative Shift

A pivotal moment for Rhode Island taxpayers occurred on June 29, 2025. Just days before the federal One Big Beautiful Bill Act (OBBBA) was signed into law—which allowed for the permanent full expensing of certain R&D costs at the federal level—Rhode Island enacted legislation to "decouple" from any income tax provisions of the OBBBA that affect corporate and individual taxpayers.

This decoupling means that while a business might be able to immediately deduct domestic R&D expenses federally under new IRC § 174A, they must continue to capitalize and amortize those same expenses for Rhode Island state tax purposes. This divergence creates a significant administrative burden:

1. Qualified R&D Expenses: Capitalized and amortized over 5 years for Rhode Island.
2. Consumer Survey Expenses: Deductible as ordinary and necessary business expenses under IRC § 162, as they do not qualify as Section 174 R&D.

The following table demonstrates the tax treatment of expenses based on their classification in Rhode Island.

Expense Category	Federal Treatment (Post-OBBBA 2025)	RI Treatment (Post-Decoupling 2025)
Technical Prototyping	Immediate Expensing (Section 174A).	5-Year Amortization (Section 174).
Consumer Surveys	Immediate Deduction (Section 162).	Immediate Deduction (Section 162).
Laboratory Supplies	Immediate Expensing (Section 174A).	5-Year Amortization (Section 174).
Market Research	Immediate Deduction (Section 162).	Immediate Deduction (Section 162).

This creates a perverse incentive: because consumer surveys do not qualify for the R&D credit, they are not subject to the mandatory capitalization rules of Section 174. Consequently, a taxpayer might find that while they lose the 22.5% tax credit, they gain an immediate 100% deduction for "consumer surveys," whereas "qualified research" must be spread over 60 months for Rhode Island purposes.

The Four-Part Test: Application and Exclusions

To successfully claim the Rhode Island Research and Development Expense Credit, an activity must pass the "Four-Part Test" derived from IRC § 41(d). The consumer survey exclusion effectively causes a project to fail at least three of these four tests.

The Permitted Purpose Test

The research must relate to a new or improved function, performance, reliability, or quality of a business component. The "permitted purpose" specifically excludes "style, taste, cosmetic, or seasonal design factors". Since the primary goal of a consumer survey is typically to assess these very factors—how a product looks or feels to the end-user—the activity fails to have a qualifying purpose under Rhode Island law.

The Elimination of Uncertainty Test

The taxpayer must show they intended to discover information that would eliminate uncertainty regarding the "capability, methodology, or appropriate design" of the product. Consumer surveys do not resolve "capability" (whether the thing can be built) or "methodology" (how to build it), but rather "demand" (whether anyone wants it).

The Technological in Nature Test

The process of experimentation must rely on the "hard sciences". Consumer surveys, which are rooted in sociology, psychology, and market analytics, are classified as "social sciences" and are thus per se excluded from the definition of technological research in Rhode Island.

The Process of Experimentation Test

This test requires that substantially all of the activities involve a "systematic process" of evaluating alternatives through modeling, simulation, or trial and error. A consumer survey is generally a data-gathering event, not an experimental process designed to resolve a technical failure in a laboratory setting.

Practical Example: The Biomedical Sector

To illustrate the application of these rules, consider a Rhode Island-based biotechnology firm, "Narragansett Bio," which is developing a new wearable glucose monitor.

Phase 1: Qualified Research (The Sensor)

Narragansett Bio's engineers are working on a new electrochemical sensor that can detect glucose levels through sweat. They are uncertain if the enzyme on the sensor will remain stable for more than 48 hours. They develop 20 different chemical formulations and test them in a controlled laboratory environment at their Providence facility.

• Analysis: This activity satisfies all four tests. It is technological in nature (biochemistry), resolves a technical uncertainty (enzyme stability), has a permitted purpose (improved reliability), and uses a process of experimentation (chemical trials).
• Result: The wages of the biochemists and the cost of lab supplies qualify as QREs for the 22.5% credit. The laboratory equipment qualifies for the 10% property credit under § 44-32-2.

Phase 2: Excluded Consumer Survey (The Wristband)

Once the sensor is functional, Narragansett Bio conducts a study to determine the most "fashionable" material for the wristband. They invite 50 potential customers to their facility to try on wristbands made of silicone, leather, and woven nylon. The participants fill out surveys regarding which material is most "comfortable" and "stylish".

• Analysis: This is a classic "consumer survey." It resolves commercial uncertainty regarding "style and taste". It relies on social science (preference analysis) rather than the hard sciences.
• Result: The wages of the staff coordinating the study must be excluded from the QRE calculation. The cost of the sample wristbands does not qualify as research supplies. Any dedicated room in the facility used for these focus groups must be excluded from the "principally used" calculation for the facility deduction under § 44-32-1.

Phase 3: Excluded Management Study (The Launch)

Simultaneously, the firm hires a consultant to conduct an "efficiency survey" of the manufacturing line to ensure the device can be produced at a cost that allows for a specific market price.

• Analysis: Efficiency surveys and management studies are explicitly excluded alongside consumer surveys in § 44-32-1 and § 44-32-2.
• Result: The consultant fees are entirely disqualified for both the property and expense credits.

Audit and Compliance: The "Substantially All" Threshold

The Rhode Island Division of Taxation requires that taxpayers maintain "contemporaneous records" to support their R&D claims. In the event of an audit, the Division will look for documentation that identifies the technical uncertainty and the specific process used to resolve it, while filtering out activities like consumer surveys.

The 80% Rule (Substantially All)

A critical mechanism in audit defense is the "80% Rule." Federal regulation (Treas. Reg. § 1.41-2(d)(2)), adopted by Rhode Island, allows a taxpayer to claim 100% of an employee’s wages if at least 80% of their time is spent on "qualified services".

Employee Role	% Time on Technical R&D	% Time on Consumer Surveys	Wage Eligibility
Lead Engineer	85%	15%	100% of Wages Qualify.
UI/UX Designer	60%	40%	60% of Wages Qualify (80% Rule not met).
Marketing Manager	10%	90%	0% of Wages Qualify.
Lab Technician	95%	5%	100% of Wages Qualify.

If a company claims 100% of a designer's wages, but an auditor finds that a significant portion of their time was spent analyzing consumer surveys for "look and feel," the auditor may disallow the entire claim for that employee unless the taxpayer can prove the specific split through time logs or project documentation.

Recapture of Property Credits

Taxpayers must also be wary of the "Recapture" provisions of R.I. Gen. Laws § 44-32-2(f). If property that was granted the 10% credit "ceases to be in qualified use" before the end of its useful life, the taxpayer must add back the difference between the credit taken and the credit allowed for actual use.

If a building was originally constructed as a research lab (qualifying for the 10% credit) but is converted three years later into a call center or a "consumer experience center" for market surveys, this constitutes a change in use. The taxpayer would be required to add back the unearned portion of the credit in the year the change occurs.

The recapture ratio is calculated as follows:

$$ \text{Add-back Amount} = \text{Original Credit} - \left( \text{Original Credit} \times \frac{\text{Months of Qualified Use}}{36} \right) $$

(Note: 36 is the denominator for property with a 3-year useful life; longer-life property uses a different scale).

Implications for Rhode Island Industries

The consumer survey exclusion impacts different sectors of the Rhode Island economy in varied ways.

Information Technology and Software

In the IT sector, Rhode Island encourages target industries like "Cyber-physical systems" and "Data analytics". However, the Internal Use Software (IUS) rules are particularly stringent. Software developed for internal use (e.g., an HR platform) is generally excluded unless it meets a "high threshold of innovation" (HTI) test. If the software is intended for external sale, the consumer survey exclusion still applies to UI/UX testing. Companies must differentiate between "Beta Testing" (identifying technical bugs) and "User Acceptance Testing" (determining if consumers find the product desirable).

Agriculture and Food & Beverage

For the agricultural and food industries, the exclusion separates "agronomy" from "marketing".

1. Qualified: Trialing new fertilizer blends for nutrient uptake or developing climate-resilient crop rotations.
2. Excluded: Conducting "taste profiles" or "consumer preference surveys" for a new food product.

Even though a "sensory analysis" firm might be used to profile flavors, these costs only qualify for the credit if they are used to resolve a technical hurdle in the formulation (e.g., shelf-life stability) rather than just identifying what tastes better to the average consumer.

Manufacturing and Defense

Rhode Island has a robust "Defense shipbuilding and maritime" sector. In this domain, the consumer survey exclusion is less of a factor because the "consumer" is often a government entity with specific technical requirements. However, "Efficiency surveys" aimed at reducing manufacturing time for ship components are still excluded under § 44-32-1.

Future Outlook and the 2026 Sunset

Taxpayers must be aware of the "Expiration" of certain incentives. Under R.I. Gen. Laws § 44-32-2(l), the Research and Development Property Credit is scheduled to sunset.

• Sunset Date: No credits shall be allowed for tax years beginning on or after January 1, 2026.
• Carryforward: Credits earned for tax years ending on or before December 31, 2025, may still be carried forward for the standard seven-year period.

This sunset makes it imperative for firms to correctly classify their property now. If a firm claims the 10% credit on a facility used for consumer surveys in 2024, and the credit is disallowed in a 2027 audit, the firm may not be able to "correct" the error by applying the credit to a different, qualifying piece of property, as the window for new credits will have closed.

Summary of Compliance Standards

The following table summarizes the key guidance from the Rhode Island Division of Taxation regarding the consumer survey exclusion.

Statutory/Regulatory Source	Key Mandate regarding Consumer Surveys
R.I. Gen. Laws § 44-32-1(b)(1)	Excludes consumer surveys from the elective facility deduction.
R.I. Gen. Laws § 44-32-2(b)	Excludes consumer surveys from the 10% R&D property credit.
Reg 280-RICR-20-20-2	Imports IRC § 41 definition of QREs, which excludes market research.
Form RI-7695E Instructions	Requires specific Rhode Island location data to verify R&D vs. marketing use.
AD 2024-16	Establishes that if the IRS disallows a credit (e.g., due to survey exclusion), RI will also disallow.
OBBBA Decoupling (2025)	Forces RI firms to amortize R&D while immediately deducting non-R&D (surveys).

Final Thoughts

The exclusion of consumer surveys from the Rhode Island R&D tax credit is a rigid boundary that requires taxpayers to maintain a clear distinction between the "experimental sense" of their work and its "commercial application." Under Rhode Island General Laws, the intent of the incentive is to subsidize the risk of scientific failure, not the cost of market success.

The 2025 decoupling from the federal OBBBA adds a layer of complexity; it creates a tax environment where the "punishment" for conducting qualified R&D is the mandatory capitalization of costs over five years, whereas "excluded" activities like consumer surveys enjoy an immediate deduction, though they lose the 16.9% to 22.5% tax credit. This paradox underscores the necessity for professional guidance to determine the optimal classification of activities.

Finally, with the 2026 sunset of the property credit approaching, the importance of correct classification is heightened. Taxpayers who fail to properly segregate non-qualifying "consumer survey" floor space or equipment from their research environment risk the recapture of credits and the loss of future incentives as the state transitions away from the property-based credit system. Accurate documentation that differentiates between technical uncertainty and commercial preference remains the single most effective defense against the disallowance of these high-value state tax benefits.