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Working with External Customers
Service center core facilities are created to support the sponsored research of the university and are not allowed to operate for a profit. The university does realize that for a service center core facility to operate efficiently and keep costs down, it may offer its services to external users, especially where there is excess capacity. However, it is important for the service center to have a mechanism in place to track costs to insure that the federal government is not burdened with higher rates.
The service center core facility can charge rates in excess of their approved rates to nonfederal external users, provided that the revenue stays in the service center core facility and is factored in to the future rates. This additional surcharge should only be used to offset the additional costs that the service center incurs as a result of dealing with external parties. The service center core facility should continue to operate at a break-even point.
If sales to external parties are expected to become a substantial part of the service center core facility business, then it should account for it separately from the service center. In this case, the service center will be required to demonstrate to the Office of Cost Analysis that it has the systems in place to properly divide expenses between the two accounts. For more information see:
- Unrelated Business Income Tax
- Rates for External Customers
- Process to Begin Working with External Customers
If the university, as a tax-exempt entity, carries on a trade or business that is not substantially related to our mission, then we may be subject to unrelated business income tax (UBIT). Service center core facilities should be aware that sales to external parties may trigger this tax. Questions regarding UBIT and sales tax can be directed to the Tax Office.
Three elements must be present for an activity to be considered unrelated to the university’s tax-exempt purposes:
- The activity must be a “trade or business.”
- It must be regularly carried on.
- It must not be substantially related to the university’s exempt purposes.
Trade or Business
The term “trade or business” generally includes any activity carried on for the production of income from selling goods or performing services. An activity does not lose its identity as a trade or business merely because it is carried on within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. See IRS Code 1.513-1(b).
Regularly Carried On
Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. See IRS Code 1.513-1(c)(1).
Short-term activities are not “regular” for an exempt organization if the activities are of a kind normally conducted by a taxable business on a year-round basis. Intermittent, casual or sporadic activities are generally not regular. However, year-round activities are regular even if they are conducted only one day a week.
Further, seasonal activities may be regularly carried on even though they are conducted only for a short period each year. See IRS Code 1.513-1.
Related to University Exempt Purpose
To be related to the university’s educational- or research-exempt purpose, there must be a substantial causal relationship, i.e., the activity must contribute importantly to the accomplishment of the exempt purpose (other than the university’s need to produce income). See IRS Code 1.513-1(d)(2).
Even if an activity meets the definition of an unrelated trade or business, it may not be subject to tax if it meets one of the criteria for a statutory exception. Examples of statutory exceptions include sponsored research and clinical trial/drug testing.
Income from certain research grants or contracts may be exempt from the unrelated business income tax depending on the type of research. The following types of research are exempt:
- Research performed for any level of government (see IRS Code 512(b)(7))
- Research performed by a college, university or hospital “for any person” (see IRS Code 512(b)(8))
- Research performed for any person in the case of an organization operated primarily for purposes of carrying on “fundamental” research (as distinguished from “applied”), the results of which are freely made available to the general public (see IRS Code 512(b)(9))
The regulations further limit these exclusions by providing that research does not include activities of a type ordinarily carried on incidental to commercial or industrial operations. Ordinary testing and inspection of products or materials is not exempt. See IRS Code 1.512(b)-1(f)(4).
Clinical Trial/Drug Testing
Drug studies that are normally taxable but may be made exempt by involving medical training or patient care:
- FDA drug testing in which drugs are offered to patients who have the disease for which eventual commercial use of a particular drug is intended, as contrasted to patients receiving care for unrelated medical reasons, has been determined to be a related activity exempt from UBIT. See IRS Code PLR 8230002.
- Testing of drugs solely to meet FDA requirements is taxable even though the test results are freely available for publication if it is not established that the testing contributes to the training of students or to patient care. See IRS Code 68-373.
- Outside laboratory testing services providing an additional supply of human tissue samples needed for the training of medical students, interns, residents, medical technologists and nurses do not constitute an unrelated trade or business by virtue of contributing importantly to a hospital’s medical education program. See IRS Code 85-109.
- Where the performance of diagnostic laboratory testing is otherwise available within the community, testing of specimens from private office patients of a hospital’s staff physicians constitutes an unrelated trade or business subject to UBIT. See IRS Code 85-110.
- Normally taxable drug testing conducted by students has been ruled exempt. See IRS Code PLR 7936006.
- Experimental construction and production testing by students that was more than incidental was found exempt. See IRS Code PLR 8445007.
- Clinical testing of developmental equipment apart from student involvement was subject to UBIT. See IRS Code PLR 7902019.
If you have additional questions, please contact the Tax Office at email@example.com or 443-997-8688.
Johns Hopkins Research Core Fee Structure
|User Type||User Description||Fee Structure|
|JHU Internal||All entities using internal orders or cost centers for purchases||Direct Costs|
|External - Academic||Non-profit academic medical institutions project specific activities||Direct Costs|
|External - FastForward/Startup Partner||Tenants of the Johns Hopkins Bioscience Park and FastForward startups with up to $4 million in capitalization.||Direct Costs plus 20%|
|External – Non-Academic||All for-profit commercial business and institutions including pharmaceutical companies.|
Minimum of Direct Costs plus applicable Indirect Cost rate (72%) and a maximum up to market rate if it exceeds Direct Cost plus IDC.
For example, based on the scenario below, the Core could charge $300:
Direct Cost + IDC for $100 service: $100 + $72 = $172
Market Rate Outside of JHU for service: $300
Please review the following questions to determine what steps are necessary prior to beginning work with an external customer.
1. Will Johns Hopkins faculty, fellows, staff, or students be contributing intellectually to the project or data collection? Will any JH intellectual property be used in the provision of services? Or, could there be any JH claim to intellectual property resulting from the use of services or instruments?
- If no, please proceed to the next question.
- If yes, please contact the Office of Research Administration to determine if this work requires a research collaboration agreement.
2. Will the work involve non-JH personnel working in your facility?
- If no, please proceed to the next question.
- If yes, please obtain the required visitor appointments and approvals through your departmental Human Resources.
3. Will the customer be providing data and/or materials (software, chemicals, monoclonal antibodies, cell lines, transgenic animals, etc.) to analyze and/or test?
4. Will the external customer be using a purchase order or a credit card to purchase their services or instrument use time?
- If the external customer is using a Purchase Order, please create an invoice in SAP using the FV70 process. Please contact your finance office if you have further questions.
- If using a credit card, please follow the instructions on the Treasury Office website to create a new customer account or process through the iLab core management system if your core facility has implemented the program.