The Department refunded my overpaid sales tax but wouldn't pay me the interest because I couldn't show I'd passed it on to my customer -- but my company merged with that customer, so there's no longer a separate customer to refund. Do I still get the interest?

Plain-English summary

A dealer received a refund of overpaid Virginia retail sales and use tax for the period April 2009 through October 2012 -- but the Department paid back only the tax itself, not the interest, because the dealer couldn't show it had refunded that interest to the customer who actually bore the tax. The dealer appealed, explaining that it had since merged with that same customer, making it impossible to issue a separate refund to a now-nonexistent, distinct entity. It argued that if the merger was good enough to justify a tax refund to the dealer in the first place, the same logic should apply to the interest.

Why dealers normally don't get interest without a pass-through promise. Virginia Code § 58.1-1833 A generally allows interest on tax overpayments, but carves out sales tax specifically: "[n]o interest will be paid on sales taxes refunded to a dealer unless the dealer agrees to pass such interest on to the purchaser." The Department's regulations (23 VAC 10-210-3040; 23 VAC 10-20-200) repeat the same rule. The reason: in an ordinary sales tax transaction, it's the CUSTOMER who paid the tax and is entitled to the benefit of any refund and interest -- not the dealer who merely collected and remitted it. Without the pass-through requirement, a dealer could pocket interest that rightfully belongs to someone else.

The pass-through doesn't have to happen before the Department pays the dealer. The Department pointed to its own earlier ruling, P.D. 19-60 (6/11/2019), which had already clarified that a dealer doesn't need to PREPAY the interest to its customer before receiving it from the Department -- the dealer's right to the interest is merely CONTINGENT on eventually paying or crediting it to the purchaser, not conditioned on doing so first.

The merger satisfies the requirement automatically. Because the dealer and its former customer became the same legal entity after the underlying transactions occurred, there's no longer a separate party to refund -- a refund to the dealer now IS, as a matter of law, also a refund to the (former) customer. The Department held that the contingency built into § 58.1-1833 A is satisfied by the merger itself, with no further action required. The auditor was instructed to adjust the account and issue the previously-withheld interest.

What this means for you

Dealers awaiting a sales tax refund who have since merged with (or acquired) the customer

If your business has combined with the customer that originally bore the tax, tell the Department -- the merger itself can satisfy the "pass interest through to the purchaser" requirement, since there's no longer a distinct party left to refund separately.

Dealers generally seeking refund interest

Remember that Virginia's rule cuts against dealers by default: you must agree to (eventually) pass refunded interest through to your customer. You don't have to prepay it before the Department releases the funds to you, but you do need a plan -- or, as here, a structural reason -- for the interest to end up with the party that actually paid the tax.

Accountants advising on corporate mergers with sales tax history

Flag any pending or potential sales tax refund claims before a merger closes -- this ruling shows the Department will treat a subsequent merger as resolving the dealer/purchaser pass-through problem, which can unlock interest that might otherwise have been stuck.

Common questions

Q: Why didn't I get interest along with my sales tax refund?
A: Virginia law (§ 58.1-1833 A) withholds interest on a sales tax refund to a dealer unless the dealer agrees to pass that interest on to the purchaser who actually paid the tax.

Q: Do I have to refund my customer first before the Department will pay me the interest?
A: No -- per P.D. 19-60, the Department can pay the dealer first; the dealer's entitlement is just contingent on eventually passing the interest through to the purchaser.

Q: What if my company merged with the customer, so there's no separate entity left to refund?
A: Per this ruling, the merger itself can satisfy the pass-through requirement -- since the dealer and the former customer are now the same entity, a refund to the dealer is legally also a refund to the customer.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-1833 A -- interest on tax overpayments; sales tax refunded to a dealer draws no interest unless the dealer agrees to pass it to the purchaser
• 23 VAC 10-210-3040 and 23 VAC 10-20-200 -- regulations implementing the same rule

Prior ruling the Department relied on (described here, not linked): P.D. 19-60 (6/11/2019) (a dealer's refund of interest is not conditioned on prepaying the purchaser -- only on eventually passing the interest through).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-101

Original ruling text

October 3, 2024

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

Dear *:

This will respond to your letter in which you appeal the denial of interest on the retail sales and use tax refund issued to * (the “Taxpayer”) for the period April 2009 through October 2012.

FACTS

The Taxpayer filed a refund claim for an overpayment of sales tax for the period at issue. The Department issued a refund for the tax but did not include interest on the amount refunded because the Taxpayer was unable to show that it had refunded interest to its customer. The Taxpayer filed an application for correction contending it merged with the customer and issuing a refund to the customer is no longer possible. The Taxpayer reasons that, if the merger is sufficient for purposes of refunding the underlying tax, it should also be sufficient for purposes of refunding interest and that a refund to the Taxpayer is fundamentally a refund to the customer.

DETERMINATION

Virginia Code § 58.1-1833 (A) states,

Interest shall be allowed and paid upon the overpayment of any tax administered by the Department, the refund of which is permitted or required under the provisions of this article . . . No interest will be paid on sales taxes refunded to a dealer unless the dealer agrees to pass such interest on to the purchaser.

Similarly, Virginia regulations provide that interest will generally be paid, but again clarifies that no interest will be paid on sales tax refunded to a dealer unless the dealer agrees to pass such interest on to the purchaser. See Title 23 of the Virginia Administrative Code (VAC) 10-210-3040, and Title 23 VAC 10-20-200. Interest represents a fee for the use of money that was properly due to another party. The intent of the restriction on interest paid on refunded sales tax transactions is to ensure that the correct party ultimately receives the interest. In a typical sales tax transaction, it is the purchaser that pays the tax and is entitled to a refund and any applicable interest. The policy behind restricting the interest paid is to ensure that a dealer does not benefit from the interest related to the use of money that was ultimately paid by and refunded to its purchaser.

In Public Document (P.D.) 19-60 (6/11/2019), the Department analyzed both Virginia Code § 58.1-1833 A and Title 23 VAC 10-20-180 A 2 and found that interest can be refunded to a dealer prior to the dealer refunding or crediting the interest to a purchaser. Accordingly, while neither the law nor regulations require that a dealer prepay refund interest to a purchaser to be eligible for a refund of the interest, the refund of interest to such dealer is legally contingent on the payment or credit of the interest to the purchaser.

In this case, the Taxpayer and its customer became the same entity after the transactions at issue occurred. Under the circumstances, a refund to the Taxpayer is also a refund to the customer. Because the Taxpayer is not required to prepay itself interest before the Department is obligated to pay interest on the refund, the auditor will adjust the account and issue interest on the amount of tax previously refunded.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public document cited is available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) or via email at **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4384-C

Related Documents

19-60