Collecting available sales tax refunds should be an essential part of your or your client’s overall compliance and mitigation strategy. These refunds are a direct benefit to a business’s profit margin, but are not always obtained without challenge and sometimes require additional appeals through your state’s tax authority or court system.
The Virginia Tax Commissioner Ruling P.D. 23-92 highlights these challenges and shows that tax authorities are not always correct in their initial decisions on your refund claims. This case concerned an electrical contractor seeking a refund over sales tax paid on purchases that qualified for the exemption on purchases used in a data center. An appeal can be a useful tool for reducing your tax liability through a judgment or settlement and setting a precedent for future transactions.
How Virginia Sales Tax Generally Applies to Construction Contractors
The construction industry can be complex from a sales and use tax perspective because of the combination of services and tangible personal property provided in these transactions. Virginia takes a relatively standard approach by treating contractors as the consumers of the tangible personal property they use and transfer to customers as part of their services. Administrative Code Section 23 VAC 10-210-410(A) makes contractors responsible for paying the sales tax on their materials at the time of purchase and prohibits them from charging and collecting sales tax from customers.
Some contractors wear multiple hats in their business, and can also operate as retailers and fabricators of tangible personal property. Under certain guidelines established in subsections (B) through (F) of 23 VAC 10-210-410, a contractor may be able to purchase materials using a resale exemption certificate and collect sales tax from customers. Contractors that also operate as retail dealers in Virginia must obtain a Certificate of Registration and make regular sales tax return filings.
Virginia’s Sales and Use Tax Exemption Requirements for Data Center Purchases
Virginia offers several sales tax exemptions for property bought in a variety of commercial and industrial contexts, some of which apply to real property contractors. One of those exemptions is for certain purchases used in a qualifying data center under Virginia Code Section 58.1-609.3(18). The exemption was created as an economic development initiative and only applies to purchases between July 1, 2010, and June 30, 2035, at data centers that meet the following requirements:
- The data center must be in a Virginia locality.
- The data center must result in a new capital investment of $150 million on or after January 1, 2009.
- The data center must result in the creation of at least 50 new jobs by the data center operator and its tenants collectively on or after January 1, 2009.
Lower thresholds of these requirements exist for data centers located in a distressed locality as identified through the Virginia Economic Development Partnership Authority. The Code Section describes the types of purchases and leases that can qualify for the data center sale tax exemption as computer equipment or software used in the processing, storage, retrieval, or communication of data, such as the following:
- Servers
- Routers
- Connections
- Chillers
- Backup generators
- Other enabling hardware
What Happened in Virginia Tax Commissioner Ruling P.D. 23-92?
An electrical contractor protested the Department of Taxation’s denial of their refund claim. The claim was made after the contractor did not receive a refund from vendors for sales tax paid on purchases used in the buildout of a data center between September 2018 and April 2019. Specifically, the purchases were for items (1) to construct a power distribution system that would deliver power to a server rack and (2) to build a hot aisle containment system.
The Department initially denied the refund claim for two reasons. First, the Department alleged it was unclear if the purchases qualified for exemption. Second, the Department argued the purchases were not exempt because they were not directly shipped to the data center. The Commissioner overturned the denial on appeal by citing P.D. 10-121. This prior ruling relies on the inclusion of “chillers” in § 58.1-609.3(18) to reason that items used to provide the proper temperature and humidity environment in the data center qualify for the exemption. The ruling also noted that property does not have to be directly delivered to the data center to qualify for the sales tax exemption, an issue previously decided in P.D. 21-126.
How Long Do You Have to File and Appeal a Sales and Use Tax Refund Claim in Virginia?
When sales tax refund requests are not possible through your vendor or dealer, a customer can file a refund claim with the Virginia Department of Taxation under its guidelines. You must file a sales tax refund claim within three years from the last day to timely file the original return for the period under Code Section 58.1-1823.
If the Department denies the refund claim, a taxpayer has the right to appeal the decision, either through an informal review or through the Tax Commissioner. The appeal to the Tax Commissioner must be filed within 90 days from the date of the issued denial notice. Taxpayers can further appeal an unfavorable decision from the Tax Commissioner by seeking review in Virginia’s local circuit court.
Get Help with a Virginia Sales Tax Refund Claim Today
Sales tax refunds are a valuable component of your tax compliance strategy that can generate real returns for your business margins. If you have questions about a potential refund claim in Virginia, our sales tax professional may be able to provide support along the way, including administrative appeal of denied claims. Receiving a refund claim denial notice can be disheartening, but an appeal may provide a successful outcome in situations where the Department was misinformed on a legal or factual issue with the claim. Alternatively, an appeal can also provide an opportunity for an offer in compromise to resolve your claim.
Contact our team today for help with a Virginia sales tax refund or appeal.