Pharmakinetics Laboratories, Inc. v. Comptroller of the Treasury

GILBERT, Chief Judge. The appellant, Pharmakinetics Laboratories, Inc. (Pharmakinetics) claims that it is engaged in “research and development.” Thus, it says, it is exempt from retail sales tax and use tax as to certain company purchases of materials. A hearing examiner for the Comptroller of the Treasury, the Maryland Tax Court, and the Circuit Court for Baltimore City (Allen, J.) have each in turn ruled that Pharmakinetics is not a research and development lab. Consequently, as the matter reaches us, Pharmakinetics must pay the assessed taxes.

Four witnesses testified before the tax court on behalf of Pharmakinetics. The Comptroller offered no witnesses, but did submit a draft of a registration statement prepared by Pharmakinetics for use with the Securities and Exchange Commission (SEC). The record before us shows that Pharmakinetics performs bioavailability and bioequivalency studies for drug companies on a contractual basis. The purpose of such studies is to determine the rate and extent that an active drug ingredient or therapeutic component is present in the bloodstream of a person who is given a certain drug formulation.

These tests are required by the Food and Drug ⁶²¹ Administration (FDA) before marketing of the drug is permitted. Bioavailability testing compares the effectiveness of a particular formulation, e.g., a tablet, with the pure form of the drug. Bioequivalency testing determines the comparative bioavailabilities for an existing drug on the market vis a vis a new product that will potentially replace or serve as a substitute for an existing drug; for example, a generic drug substituting for an original brand name version. These studies are conducted according to “protocols,” or methodologies, written by Pharmakinetics’ specialist staff.

Each drug study requires the development of a unique protocol. Md.Ann.Code art. 81, §§ 326 and 375 provide that materials used in research and development are exempt from retail sales tax and use tax. Section 324(t) defines “research and development” to mean: “[B]asic and applied research in the sciences and engineering, and the design and development of prototypes and processes. Excluded from this definition are routine product testing, market research, sales promotion, sales service, research in the social sciences or psychology, and other nontechnical activities or technical and nontechnical services.” The tax court concluded that Pharmakinetics’ operation “falls somewhere in between the clearly definable categories as set forth in the statute.” Pharmakinetics’ work, the tax court said, goes beyond “routine product testing” and yet does not “altogether meet the requirements of ‘basic and applied research.’ ” Inasmuch as tax exemptions must be strictly construed against the taxpayer, the court held that the exemption be denied because the taxpayer did not meet its burden of proof.

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