If Virginia denies my refund request for tax paid on DEQ-certified pollution control equipment because of restrictions in a Department cover letter, can I win that denial on appeal?

Plain-English summary

A contractor that builds and repairs wastewater and sewage treatment plants for Virginia localities had obtained DEQ certifications for equipment used on several projects. Along with the exemption certificate, the Department had sent a "Notice of Sales Tax Exemption" containing restrictions, including language that the equipment must "remain with the project" and that the exemption "does not apply to... purchases or rentals... used in performance of this contract." When the contractor requested a refund of sales tax it had paid on transactions involving DEQ-certified property, the Department denied the refund, citing that same restrictive language. The contractor appealed the denial.

This ruling reaches the identical conclusion as a companion ruling for the same taxpayer issued the same day, P.D. 23-1: the restrictions in the Department's own Notice cover letter don't override an actual DEQ certification. Once DEQ, the agency legally responsible for certifying pollution control equipment, has certified specific property, that certification controls the exemption under Va. Code § 58.1-609.3(9) -- the Notice's cautionary language exists to help taxpayers understand typical scope, not to impose an independent additional restriction. The Department found the refund had been improperly denied on that basis.

Rather than calculating and issuing the refund itself, the Department remanded the case to the audit staff, directing them to reconsider the refund request consistent with this determination (and any additional information the taxpayer had provided), issue a refund for any tax paid on exempt certified purchases or rentals, and provide a written explanation of any remaining portion of the request that stays ineligible. If the contractor disagrees with that follow-up determination, it has a fresh 90-day window to appeal.

What this means for you

Contractors or businesses whose refund request for DEQ-certified equipment was denied based on Department cover-letter restrictions

Restrictive language in a Department "Notice of Sales Tax Exemption" cover letter, such as requirements that equipment "remain with the project" or exclusions for rented equipment, does not override an actual DEQ certification. If your refund was denied on that basis alone, this ruling, and its companion, P.D. 23-1, support appealing.

Anyone pursuing a refund of erroneously paid sales tax on certified pollution control equipment

Expect the process to run through the audit staff even after a favorable Department determination -- the Commissioner's ruling establishes the legal principle, but the actual refund calculation and any remaining disputed items get worked out at the audit level, with appeal rights preserved if you disagree with that follow-up result.

Common questions

Q: Can a refund for DEQ-certified pollution control equipment be denied based on restrictions in the Department's exemption-certificate cover letter?
A: No -- as this ruling confirms, cover-letter restrictions in the "Notice of Sales Tax Exemption" don't override an actual DEQ certification; a valid certification controls the exemption regardless of that cover-letter language.

Q: What happens after the Department rules that a refund denial was improper?
A: The case typically gets sent back to the audit staff to actually process the refund and issue a written explanation of the result, rather than the Commissioner calculating the refund directly in the ruling itself.

Q: Is this ruling related to any other Virginia rulings on the same issue?
A: Yes -- P.D. 23-1, issued the same day for the same taxpayer, addresses the identical DEQ-certification-versus-cover-letter-restriction issue in the context of a prospective ruling request rather than a refund appeal.

Citations and references

• Va. Code § 58.1-609.3(9) (exemption for certified pollution control equipment and facilities)
• Va. Code § 58.1-3660 (definition and certification of pollution control equipment)
• 23 VAC 10-210-2090 (pollution control equipment exemption regulation)
• Va. Code § 58.1-1821 (administrative appeal of an assessment or refund denial)

Subject

Exemption: Pollution Control Equipment - Restrictions in Notice of Sales Tax Exemption

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-2

Original ruling text

January 6, 2023

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 a refund of the retail sales and use tax paid on certified pollution control equipment and facilities. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a business entity located in Virginia, contracts to construct and repair waste water and sewage treatment plants for Virginia localities. The Taxpayer obtained certifications from the Virginia Department of Environmental Quality (DEQ) that certain tangible personal property for several projects qualified as pollution control equipment pursuant to Virginia Code § 58.1-3660.

The Department issued the corresponding ST-11A exemption certificate along with a “Notice of Sales Tax Exemption” (the “Notice”), which contained several restrictions on the use of the sales tax exemption. The Notice states that the equipment must “remain with the project” and “the exemption does not apply to: purchases or rentals… used in performance of this contract.” The Taxpayer requested a refund of sales and use tax paid on transactions for property certified by DEQ, but TAX denied the requested refund citing the restrictive language in the Notice. The Taxpayer appealed, requesting that the refund be allowed.

DETERMINATION

Virginia Code § 58.1-609.3 (9) provides an exemption from the retail sales and use tax for “[c]ertified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section.”

Title 23 of the Virginia Administrative Code 10-210-2090 addresses the sales and use tax exemption for pollution control equipment and facilities. Subsection B defines “pollution control equipment and facilities” as “any real or tangible personal property, equipment, facilities or devices used primarily for the purpose of abating or preventing air or water pollution in Virginia.” The regulation goes on to say that “[a]ny property which is certified as used for these purposes is not subject to the tax…” [Emphasis added.] Under this policy, if the property used directly to abate pollution has been certified as pollution control equipment by a state certifying agency, it is exempt from the Retail Sales and Use Tax.

In this case, DEQ is the state agency authorized to verify pollution control equipment for purposes of the exemption. As such, DEQ is the agency responsible for evaluating and issuing the appropriate certification. The Department’s position is that any property certified by the appropriate state certifying authority as pollution control equipment and facilities qualifies for exemption from the tax. Further, the limitations indicated on the Notice do not prevent the Taxpayer from engaging in tax exempt transactions for equipment or property used to abate or prevent pollution that has been certified by the appropriate agency.

However, any property that has not been certified by the appropriate state agency would not benefit from the exemption. As such, the cover letter provided with the exemption certificate is intended to provide guidance as to what types of property may not be included in a DEQ certification but is not intended to override such certification.

This case will be returned to the appropriate audit staff to reconsider the Taxpayer’s request for refund consistent with this determination, and to consider any additional information that has been provided by the Taxpayer. After review, the auditor will issue a refund of any tax paid on exempt purchases or rentals of certified property and will provide an updated written explanation of any part of the Taxpayer’s request for refund that remains ineligible for refund. If the Taxpayer continues to disagree with any part of the auditor’s determination, it may appeal within 90 days of such determination pursuant to Virginia Code § 58.1-1821.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4024-C

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