I got a sales tax refund based on a retroactive exemption certificate -- why did Virginia calculate less interest on it than I expected?

Plain-English summary

A large multinational technology corporation had entered into a Memorandum of Understanding (MOU) with the Virginia Economic Development Partnership Authority (VEDA) that entitled it to retroactively claim sales and use tax refunds on data center assets placed in service starting in April 2014, under Virginia's data-center exemption (Va. Code § 58.1-609.3 18). The taxpayer requested a refund of sales tax it had paid on those assets for the period April 2014 through September 2016. When the Department calculated interest on the refund, it started the clock in March 2018, the date the completed refund claim was received -- rather than the much earlier date the general refund-interest rule would normally use.

The two competing interest rules. Virginia's general rule (Va. Code § 58.1-1833 A) says interest on an overpaid tax accrues starting 60 days after the tax was paid, or 60 days after the payment was originally due, whichever is later -- often a taxpayer-favorable, early start date. But a narrower exception (Va. Code § 58.1-623 E) cuts off interest before the refund claim is filed if the taxpayer simply failed to hand its vendor an exemption certificate that the Department had ALREADY issued at the time of purchase -- the idea being that a taxpayer who could have avoided paying the tax in the first place (by giving the vendor the certificate) shouldn't collect interest for sitting on that option.

Why the exception didn't fit here. The Department's auditor applied the narrower, less generous rule. But the Tax Commissioner found that didn't work on these facts: the exemption certificate had an "effective date" retroactive to January 2013, but the MOU the taxpayer needed to execute before the certificate could even exist wasn't signed until February 2017 -- well after the entire April 2014-September 2016 purchase period the refund covered. Since the certificate could not physically have existed yet during that period, the taxpayer could not have failed to give it to its vendors at the time of purchase (you can't hand over a document that doesn't exist yet). The § 58.1-623 E exception, by its own terms, only applies when a taxpayer had a "previously issued" certificate available and simply didn't use it -- not when no certificate existed at all.

Result. Because the narrow exception didn't apply, the general interest rule (§ 58.1-1833 A) controlled instead, entitling the taxpayer to interest starting much earlier than the Department had calculated. The case was sent back to field audit staff to recompute the interest correctly under the general rule.

What this means for you

Businesses awaiting a refund tied to a retroactive exemption or incentive certificate

If your exemption certificate (or similar incentive document) was issued or dated retroactively -- covering a period BEFORE the underlying agreement (like an MOU) was actually signed -- the Department cannot penalize you under the "you should have given the vendor the certificate" interest exception, because you couldn't have given vendors something that didn't exist yet. Check the ACTUAL execution date of any underlying agreement against the purchase period covered by your refund claim.

Accountants and tax professionals computing refund interest

Don't assume the narrower § 58.1-623 E interest limitation applies just because a taxpayer didn't present an exemption certificate to a vendor at the time of purchase -- confirm the certificate was actually AVAILABLE to be presented during that period. If it wasn't yet issued, the general, more generous § 58.1-1833 A interest rule should apply instead.

Businesses relying on economic-development MOUs with retroactive tax benefits

The certificate's stated "effective date" and the MOU's actual execution date can differ significantly -- as here, where the certificate was dated to January 2013 but the MOU wasn't signed until February 2017. Track both dates carefully, since they can affect refund interest calculations even when the underlying tax exemption itself isn't in dispute.

Common questions

Q: When does interest normally start running on a Virginia sales tax refund?
A: Under the general rule (Va. Code § 58.1-1833 A), interest accrues from 60 days after the tax was paid, or 60 days after the original due date, whichever is later.

Q: When does the narrower exception limiting refund interest apply?
A: Only when the taxpayer failed to give its vendor an exemption certificate that the Department had ALREADY issued at the time of the purchase -- it doesn't apply if no certificate existed yet during the purchase period.

Q: Why didn't the exception apply in this case?
A: The exemption certificate was retroactively dated to January 2013, but the taxpayer's Memorandum of Understanding -- required before the certificate could be issued -- wasn't executed until February 2017, well after the April 2014-September 2016 purchases at issue. The certificate simply didn't exist yet during that period.

Q: What happened as a result?
A: The Department's audit was sent back to field staff to recalculate interest using the general, more favorable rule.

Subject

Refunds : Interest - Exceptions to General Interest Statute

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-47

Original ruling text

April 6, 2021

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

Dear *:

This will reply to your letter in which you seek the correction of the calculation of interest on a refund of retail sales and use tax requested by * (the “Taxpayer”) for the period April 2014 through September 2016. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a multinational computer technology corporation specializing primarily in developing and marketing database software and technology, cloud engineered systems, and enterprise software products. The Taxpayer entered into a Memorandum of Understanding (MOU) with the Virginia Economic Development Partnership Authority (VEDA) on January 16, 2013, which entitled the Taxpayer to retroactively request refunds for data center assets placed into service beginning in April 2014. The main contention in the appeal is the incorrect calculation of interest on a refund of overpayments of the Virginia retail sales and use tax. Interest on the requested refund was calculated from the date the completed refund request was received, which was March 2018. The Taxpayer contends the interest calculated on the Department’s refund is understated and that such interest should have been calculated pursuant to the provisions of Virginia Code § 58.-1833 A.

DETERMINATION

Virginia Code § 58.1-1833 A states that interest shall be allowed and paid upon the overpayment of any tax administered by the Department. Such interest shall accrue from a date sixty days after payment of the tax, or sixty days after the last day prescribed by law for such payment, whichever is later.

In this case, the date for interest accrual calculation was based on Virginia Code § 58.1-623 E, which sets out an exception to the general rule for interest payments found in Virginia Code § 58.1-1833 A. Virginia Code § 58.1-623 E provides that if a taxpayer fails to give a dealer an exemption certificate previously issued by the Department, no interest shall be paid on a refund claim for any period prior to the date the taxpayer makes a complete refund claim to the Department. The Taxpayer was issued an exemption certificate in accordance with the provisions of Virginia Code § 58.1-609.3 18, which requires, among other things, the execution of a MOU. Here, while the certificate of exemption has an effective date beginning in January 2013, the MOU was executed by the Taxpayer in February 2017. Therefore, the certificate of exemption could not have been issued prior to February 2017, but was retroactively dated to January 2013.

Virginia Code § 58.1-623 E specifically applies to instances in which “a taxpayer fails to give the dealer at the time of purchase an exemption certificate previously issued by the Department ”. [Emphasis added.] Because the exemption certificate could not have been issued prior to the signing of the MOU (February 2017), and the period for which the refund is being requested is April 2014 to September 2016, the Taxpayer could not have provided the certificate of exemption to its vendors because it was not yet in existence. Therefore, the provisions of Virginia Code § 58.1-623 E do not apply in this instance.

Because the exception to the calculation of interest provided in Virginia Code § 58.1-623 E does not apply, the interest should be calculated pursuant to Virginia Code § 58.1-1833 A. Therefore, the audit will be returned to the appropriate field audit staff to make the adjustments to interest.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions concerning this determination, please contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2106.A