How does Virginia calculate, collect, and distribute the sales and use tax revenue entitlement for a qualifying sports or entertainment project like the one in Virginia Beach?

Plain-English summary

Virginia law lets certain localities keep a slice of the state and local sales tax generated within a large, qualifying "sports or entertainment project" -- to help fund the public investment that made the project possible. This ruling walks through exactly how that entitlement is calculated and paid out for the Virginia Beach project, a development representing at least $100 million of investment (sports and/or entertainment facilities, plus related offices, retail, restaurants, lodging, and parking) within a defined district of the city.

The entitlement started when the City's development authority signed a binding development agreement on December 20, 2019, and it runs until July 1 following the 20th anniversary of the project's completion. It covers sales and use tax generated by transactions that happen on the project's premises -- including construction-related purchases that wouldn't have happened but for the project.

Not all of the tax collected counts toward the entitlement, though. Virginia's combined state and local sales tax rate in the city is 6% (a 4.3% state tax, a 1% local-option tax, and a 0.7% regional tax that applies in certain areas including Virginia Beach). Several slices of that rate are earmarked by law for specific statewide purposes -- transportation funding and public education standards of quality -- and those slices are carved out before the entitlement is calculated: 0.5% for the Commonwealth Transportation Fund, 1.0% distributed to localities based on school-age population, 0.7% for regional transportation, and three more slices (0.25%, 0.125%, 0.1%, and 0.3%) dedicated to education and transportation funds. After all those exclusions, the City's actual entitlement rate works out to 3.025% of the 6% total.

The money flows through two separate channels. The 1% local-option portion is distributed monthly, the same way ordinary local sales tax revenue is distributed to any city or county. The remaining 2.025% is distributed quarterly by the Comptroller, generally within about 45 days after the close of the quarter, once the Department verifies the reported amounts are accurate. The entitlement is also reduced by the amount of any separate entitlement the project might receive under two other statutes (Va. Code §§ 58.1-3851.1 and 58.1-3851.2), to avoid stacking multiple incentive programs on the same revenue.

To make sure the right tax dollars get credited to the entitlement, every retailer physically located within the project and every contractor working on it must register for its own Virginia sales and use tax certificate at that location; contractors get a letter from the Department telling their vendors not to charge them sales tax, so the contractor can instead self-accrue and remit use tax directly. The City has to designate a point of contact and keep the Department updated with current lists of the retailers and contractors operating within the project, so their tax payments are properly attributed. The Tax Commissioner also reports the entitlement amount to key legislative committees each year before July 1.

What this means for you

Localities administering a similar sports-or-entertainment-project tax entitlement

Expect the entitlement rate to be well below the full combined sales tax rate once statutory transportation and education carve-outs are subtracted -- budget accordingly, and designate a single point of contact to keep the Department's retailer/contractor lists current so payments are credited correctly.

Retailers and contractors working within a qualifying project district

You (or your contractor) must separately register for a Virginia sales and use tax certificate tied to your location within the project. Contractors will typically be told by the Department not to let vendors charge sales tax on project purchases, and instead must self-accrue and remit use tax directly to the Department.

Anyone trying to reconcile why a city's "sales tax entitlement" percentage looks lower than the local sales tax rate

The gap is intentional -- several slices of the combined rate are earmarked by state law for statewide transportation and public education funding and are excluded from any project entitlement, regardless of which locality or project is involved.

Common questions

Q: Does the entitlement cover 100% of the sales tax collected within the project?
A: No. After excluding the portions of the tax rate dedicated to the Commonwealth Transportation Fund, regional transportation, and public education standards of quality, the Virginia Beach project's entitlement works out to 3.025% out of the area's 6% combined rate.

Q: How often does the money actually get paid to the City?
A: The 1% local-option share is distributed monthly like ordinary local sales tax revenue. The remaining 2.025% is distributed quarterly by the Comptroller, typically within about 45 days after the close of the quarter, once the Department verifies the reported figures.

Q: Do individual stores and contractors within the project need to do anything special?
A: Yes -- each retailer at the project must obtain its own Virginia sales and use tax registration for that location, and each contractor working on the project must do the same; contractors are instructed not to pay sales tax to vendors and instead accrue and remit use tax directly to the Department.

Citations and references

• Va. Code § 15.2-5933 (entitlement calculation, commencement, and expiration)
• Va. Code § 15.2-5928 (definitions of "sports or entertainment project" and "sports and entertainment district")
• Va. Code §§ 58.1-638 F(1), 58.1-638.1, 58.1-638 F(2), 58.1-638 G, 58.1-638.3 (tax-rate components excluded from the entitlement)
• Va. Code §§ 58.1-3851.1, 58.1-3851.2 (offsetting entitlement provisions)
• 2019 Acts of Assembly, Chapter 793 (Senate Bill 1790) (authorizing the City's entitlement)
• Tax Bulletin 22-12 (food and essential personal hygiene product rate change effective January 1, 2023)

Subject

Administration : Entitlement for Sports or Entertainment Project - Calculation, Procedures for Localities, Retailers, Contractors, Distribution; Reporting to General Assembly.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-156

Original ruling text

November 15, 2022

Dear *:

This is in response to your letter regarding the sales and use tax revenue entitlement for the Virginia Beach Sports or Entertainment Project provided by Va. Code § 15.2-5933. This ruling confirms that the project qualifies for the Retail Sales and Use Tax (“sales and use tax”) entitlement and explains the calculation of the entitlement, the timing of the distributions, and the procedures that must be followed in order to ensure timely receipt of the revenues.

ANALYSIS

Legislation enacted during the 2019 Virginia General Assembly session (Senate Bill 1790, 2019 Acts of Assembly , Chapter 793) authorizes the City to receive a portion of the sales and use tax revenues generated from transactions taking place upon the premises of a qualifying sports or entertainment project in the City.

The term “sports or entertainment project” is defined under Va. Code § 15.2-5928 to include sports facilities, entertainment facilities, or both, representing at least $100 million of investment in the sports and entertainment district of the City, including any office, restaurant, concessions, retail, residential, and lodging facilities that are owned and operated adjacent to or in connection with such sports or entertainment project, film and sound studios and any other sports or entertainment-related infrastructure, and any other directly related properties, including onsite and offsite parking lots, garages, and other properties. The term includes multiple facilities located on multiple properties, provided that such facilities share a nexus of ownership or management.

Sports and entertainment district” is defined under Va. Code § 15.2-5928 to mean the geographic area in the City located south of 21st Street, north of Norfolk Avenue, east of Birdneck Road, and west of the Virginia Beach Boardwalk.

Under Va. Code § 15.2-5933, the entitlement commences upon the execution of a binding development agreement for a sports or entertainment project and the entitlement will expire on July 1 following the twentieth anniversary of the completion of construction of the project. As the City’s Development Authority entered into an agreement on December 20, 2019, for the development of a qualifying sports or entertainment project, the project qualifies for the entitlement under Va. Code § 15.2-5926 et seq., beginning on December 20, 2019.

Calculation of Entitlement

Va. Code § 15.2-5933 entitles the City to the sales and use tax revenues, as defined in Va. Code § 15.2-5928, generated by transactions taking place upon the premises of the sports or entertainment project, including transactions generating revenues in connection with the development and construction of such project that would not be generated but for the existence of such project.

The sales and use tax is imposed at a combined state and local rate of 5.3 percent. This includes a 4.3 percent state tax and a 1.0 percent local option tax. Sales in certain regions of the state, including sales in the City, are subject to an additional 0.7 percent regional tax. Thus, the combined state and local tax rate in the City is 6 percent.

Currently, however, the tax is levied on food for home consumption and essential personal hygiene products at the rate of 2.5 percent, which is comprised of a 1.5 percent state tax and the 1.0 percent local option tax. Beginning January 1, 2023, the 1.5 percent state tax levied on these items is eliminated. Food and essential personal hygiene products will continue to be subject to the 1.0 percent local option tax and will continue to be exempt from all regional and additional local tax rates. For more information, please see Tax Bulletin 22-12.

Va. Code § 15.2-5928 excludes from the entitlement the revenue generated by (i) the 0.5 percent tax paid into the Commonwealth Transportation Fund (‘CTF”); (H) the 1.0 percent tax distributed among counties and cities on the basis of school-age population; and (iii) 0.7 percent tax in certain localities for regional transportation purposes. Additionally, revenues dedicated to local education and transportation are excluded from the entitlement:

• The 0.25 percent tax dedicated to the Public Education Standards of Quality under Va. Code §§ 58.1-638 F(1) and 581-638.1

• The 0.125 percent tax dedicated to the Public Education Standards of Quality under Va. Code §§ 58.1-638 F(2) and 58.1-638.1

• The 0.1 percent tax dedicated to the CTF under Va. Code § 58.1-638 G

• The 0.3 percent tax dedicated to the CTF under Va. Code § 58.1-638.3

After taking into account the exclusions enumerated above, the City is entitled to a 3.025 percent tax entitlement, as summarized in the table below.

Total Sales and Use Tax Rate

6.0%

Less Commonwealth Transportation Fund

(0.5%)

Less Public Education Based on School Age Population

(1.0%)

Less Regional Transportation

(0.7%)

Less Public Education SOQ

(0.25%)

Less Public Education SOQ

(0.125%)

Less Commonwealth Transportation Fund

(0.1%)

Less Commonwealth Transportation Fund

(0.3%)

Total Sales and Use Tax Entitlement

3.025%

The 3.025 percent tax includes the 1.0 percent local option tax which is generally distributed to the city or county of the sellers “place of business” for intrastate sales, and to the city or county to which the goods are destined for interstate sales. “Place of business” means the business location in Virginia that first takes the purchaser’s order, in person, by purchase order or by letter or telephone. For purposes of the sports or entertainment project entitlement, there may be some cases in which revenues from the sales and use tax originate from purchases of construction materials made outside the City and used in the construction of the sports or entertainment project within the City. In these cases, the tax revenues will be distributed to the City as part of its sports or entertainment project entitlement.

Finally, under Va. Code § 15.2-5933, the amount of this entitlement will be reduced by the amount of any entitlement that the project receives pursuant to the provisions of Va. Code § 58.1-3851.1 or § 58.1-3851.2.

Procedures Related to the Entitlement

Procedures for Retailers

Each retailer located within the project must obtain a sales and use tax certificate of registration from the Department for that location.

Procedures for Contractors

Each contractor that works on the project must obtain a sales and use tax certificate of registration from the Department for that location. The Department will provide each contractor with a letter to notify vendors not to collect tax on the contractor’s purchases for the project. The contractor will be required to accrue and remit use tax on qualifying purchases directly to the Department on its monthly or quarterly sales and use or business consumer use tax return.

Procedures for the City

The City will need to designate an individual to be its point of contact to work with the Department regarding the entitlement. In order for the tax revenues remitted by retailers located within the project and contractors working on the project to be treated as entitlement revenues, the City will need to provide lists of such retailers and contractors to the Department and update them as needed. The City should inform the Department of any new retailers and contractors as soon as possible in order to minimize delays in receiving the entitlement with respect to them.

Distribution of the Entitlement

The Department will distribute the 1.0 percent local option portion of the entitlement on a monthly basis, in the same manner as with other local sales and use tax revenues under the general process.

The Comptroller will distribute the 2.025 percent portion of the entitlement on a quarterly basis. Tax revenues will be collected and processed within each of the following quarterly periods and distributed after the close of the period:

1st Quarter July 1 — September30

2nd Quarter October 1 — December 31

3rd Quarter January 1 — March 31

4th Quarter April 1 — June 30

As the Department will need to verify the accuracy of these amounts before the Comptroller can make the distributions, these distributions will typically be completed within 45 days after the close of the quarter in which the return was filed.

Reports to the General Assembly

Under the second enactment of 2019 Acts of Assembly , Chapter 793, the Tax Commissioner will report to the Chairmen of the Senate Committee on Finance, the House Committee on Finance, and the House Committee on Appropriations, annually prior to July 1, the amount of this entitlement.

CONCLUSION

I hope this has responded to your inquiry as to the process the City must follow in order to ensure that it receives the proper amount of sales tax revenues pursuant to the entitlement. If you have any questions about these procedures, you may contact * in the Office of Tax Policy, Policy Development Division at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

CMB/sk

Related Documents

22-12