What does Virginia Ruling of the Tax Commissioner P.D. 20-174 conclude about Dealer: Vehicle Repair Administration: Refund - Taxes Paid On Inventory, Statute of Limitations?

Plain-English summary

This ruling involves a heavy truck and equipment repair garage that had not registered for Virginia sales and use tax before the Department audited it. During the audit period (October 2012 through September 2018), the garage operated as a "using and consuming" contractor, meaning it paid sales tax to its vendors on parts and supplies rather than collecting tax from its own customers. The Department's audit reclassified many of those transactions as retail sales rather than contractor use, and assessed the taxpayer accordingly, even though the taxpayer had already paid sales tax to its vendors on the same items.

Because the taxpayer had effectively paid tax twice, on the same property, the auditor advised it to go back to its vendors and request refunds of the sales tax it had paid to them, and gave the taxpayer refund authorization letters to help. The taxpayer paid the assessment, followed the auditor's instructions, and recovered some, but not all, of the erroneously paid vendor taxes. It then appealed under Va. Code § 58.1-1821, asking the Department to credit it for the amounts it still could not recover from vendors.

The Tax Commissioner explained that Virginia's normal policy (from P.D. 96-358 and 23 VAC 10-210-3040) is to have the vendor who made the sale refund the tax directly to the customer, rather than having the Department issue audit credits, since only the vendor's net remitted tax (after any dealer's discount) can be refunded, and direct vendor refunds avoid misallocating the 1% local sales tax. But the Commissioner also noted that in limited past cases (P.D. 17-115 and P.D. 18-10), the Department allowed an audit credit for sales tax paid to vendors on items purchased for resale, where the taxpayer documented that it had paid the tax.

Applying that same limited exception here, the Commissioner agreed to allow the taxpayer a refund/credit for the sales tax it paid to vendors but could not recover, on the condition that the taxpayer document (1) that the vendors could not or would not refund the erroneously collected tax, and (2) what it had already recovered from vendors. The case was then sent back to the field audit staff to verify the documentation and calculate the actual refund amount, which is limited to whatever the auditor can verify.

What this means for you

Vehicle repair shops and other unregistered "using and consuming" contractors

If the Department's audit reclassifies your contractor purchases as retail sales after you've already paid vendor sales tax on the same items, you are not automatically stuck paying tax twice. The Department's default approach is to send you back to the vendor for a refund, but if you can show the vendor could not or would not refund the erroneously paid tax, you may be able to get an audit credit instead. Keep clear records of every refund request and response from vendors.

Business owners handling a sales/use tax audit assessment

This ruling shows the practical sequence: pay the assessment, appeal under Va. Code § 58.1-1821, and be prepared to substantiate both what you recovered from vendors and what you could not. The Commissioner's relief here was conditional and case-specific -- the refund amount was not decided in the ruling itself but left to the field auditor to verify against your documentation.

Accountants and tax professionals

Note the interplay between the general vendor-refund policy (P.D. 96-358; 23 VAC 10-210-3040, which limits refunds to the dealer's net remitted tax after any dealer's discount) and the narrower audit-credit exception recognized in P.D. 17-115 and P.D. 18-10. This ruling extends that exception where the client can document an inability to recover from the vendor. The Commissioner did not rule on any statute-of-limitations question; the ruling is about the refund mechanism and required documentation, not a timeliness bar.

Common questions

Q: Did the Tax Commissioner grant a full refund?
A: Not automatically. The Commissioner agreed in principle to allow a refund/credit for the sales tax the taxpayer paid to vendors but could not recover, but the actual dollar amount was left for field audit staff to verify based on documentation the taxpayer still had to provide.

Q: Why didn't the Department just refund the tax the taxpayer paid to its vendors?
A: Virginia's normal policy (P.D. 96-358; 23 VAC 10-210-3040) is that the vendor who made the sale should refund the tax directly to its customer, both to avoid misallocating the 1% local sales tax and because only the vendor's net remitted tax (after any dealer's discount) can be refunded. Department audit credits for this are the exception, not the rule.

Q: What did the taxpayer have to do to get the credit?
A: Furnish documentation showing the vendors could not or would not refund the erroneously paid tax, and provide information on whatever refunds it had already received from vendors identified in the audit. The final refund amount is limited to what the auditor can verify.

Q: Does this ruling address a statute-of-limitations defense?
A: No. Despite the subject line referencing "statute of limitations," the ruling text itself does not discuss or decide any statute-of-limitations issue -- it addresses only the mechanics and documentation needed for a refund of vendor-paid sales tax within an audit.

Citations and references

• Va. Code § 58.1-1821 (appeal of assessment to the Tax Commissioner)
• Va. Code § 58.1-603 (imposition of retail sales tax on sellers)
• Va. Code § 58.1-602 (definition of "retail sale")
• 23 VAC 10-210-3040 (refunds of erroneously collected sales tax; net-of-discount amount)
• P.D. 96-358 (12/6/1996) (Department policy favoring vendor refunds over audit credits)
• P.D. 17-115 (6/29/2017) and P.D. 18-10 (2/2/2018) (prior cases allowing audit credit for documented vendor-paid sales tax)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-174

Original ruling text

September 29, 2020

Re: § 58.1-1821 Appeal: Retail Sales and Use Tax

Dear *:

This will respond to your letter submitted on behalf of * (the “Taxpayer”), in which you request credit for Virginia sales and use taxes that were paid to vendors and remitted to the Department. This request is a result of an audit for the period October 2012 through September 2018. I apologize for the delay in responding to your request.

FACTS

The Taxpayer operates a full-service heavy truck and equipment repair garage. The Taxpayer was not registered for the Virginia sales and use tax prior to the Department conducting an audit. Rather, the Taxpayer operated as a using and consuming contractor during the audit period. As a result, the Taxpayer paid vendors the sales tax on the purchases of items that were subsequently assessed as retail sales transactions in the audit.

The auditor advised the Taxpayer to request refunds from the vendors to whom the sales taxes were paid in error. The auditor provided the Taxpayer with refund authorization letters to facilitate the refund requests. At the conclusion of the Department’s audit, the Taxpayer was issued an assessment for the period October 2012 through September 2018. The Taxpayer paid the assessment and appealed, requesting a refund for the Virginia sales and use taxes that were paid directly to the Taxpayer’s vendors but were not refunded.

DETERMINATION

Virginia Code § 58.1-603 imposes the sales tax on “every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth…” “Retail sale” is defined, in part, in Virginia Code § 58.1-602 as “ a sale to any person for any purpose other than for resale in the form of tangible personal property or services under this chapter…” [Emphasis added].

The Department’s policy with respect to refunds of sales taxes erroneously paid to vendors is addressed in Public Document (P.D.) 96-358 (12/6/1996). The Department prefers that the dealer that made the sale refund the tax to the customer to prevent misallocations of the 1% local sales tax and to take into account any dealer’s discount that may have been taken on the return filed by the dealer to report the sales transaction. Typically, refunds of this nature are not included as credits in the Department’s audits for these reasons.

Title 23 of the Virginia Administrative Code 10-210-3040 also addresses refunds for erroneously collected sales taxes. The regulation states that the amount of a sales tax refund will be “the net amount of state and local tax remitted by the dealer to the state on the transaction(s) generating the refund.” If a dealer files a timely return and deducts the dealer’s discount for the period for which the refund is claimed, the refund amount is reduced by the dealer’s discount taken. As such, if the dealer or the dealer’s customer applies to the Department for a sales and use tax refund, only the net amount of the tax paid by the dealer is refunded.

In accordance with the Department’s policy, the Taxpayer was instructed to seek refunds from its vendors of the sales taxes erroneously paid on purchases for resale that were included in the untaxed sales assessment. The Taxpayer followed the auditor’s instructions and requested the sales tax refunds from the vendors. However, the Taxpayer was unable to obtain refunds of all the erroneously paid sales taxes.

In limited circumstances, the Department will agree to issue refunds of erroneously paid sales or use taxes. In P.D. 17-115 (6/29/2017) and P.D. 18-10 (2/2/2018), the Tax Commissioner agreed to allow a credit in an audit for sales taxes paid to vendors on tangible personal property purchased for resale. The Taxpayers in these cases were required to provide documentation that the sales taxes were paid to the vendors.

In the instant case, the Taxpayer was unable to obtain refunds of some of the erroneously paid sales taxes identified in its audit. I will agree to issue the Taxpayer a refund based on certain requirements. The Taxpayer must furnish documentation that demonstrates the vendor(s) could not or would not refund the erroneous sales tax payments. The Taxpayer must provide information regarding the refunds that were received from the vendors identified in the audit. The refund amount issued to the Taxpayer will be based on and limited to the vendors and amounts that are verified by the auditor.

CONCLUSION

In accordance with this determination, the case will be referred to the appropriate field audit staff to review the documentation described above in order to verify and calculate the proper amount of the refund due to the Taxpayer. The auditor will contact the Taxpayer to obtain any information needed to evaluate the refund request. The Taxpayer should be prepared to provide the auditor with the necessary refund documentation.

The Code of Virginia sections, regulation, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2002C

Related Documents

18-10

17-98

96-358

17-115