I collected Virginia sales tax that I think was exempt for research and development — can I get a refund from the Department before I pay my customer back?

Plain-English summary

A company that builds warehouse automation developed a prototype robotic system to pick and sort mobile totes for a retailer's Virginia warehouse, and it collected and remitted Virginia sales tax on the components, labor, and training it sold the retailer. Later it filed a refund claim, arguing the components qualified for the research-and-development (R&D) exemption. The Department denied the refund — first on procedure, and it noted the claim would also fail on the merits.

Procedure: refund the customer first. When a dealer collects sales tax that should not have been charged, the way to recover it is to refund the customer first, then seek reimbursement from the Department (§ 58.1-625 C; the Department's Retail Sales and Use Tax Refund Claim Procedures). That sequence exists to prevent misallocating the local share of the tax and to account for any dealer's discount already taken. Here the customer asked for its money back, but the company refused to refund the customer until the Department paid it first. Because it never refunded the customer, there was no valid refund claim — and none within the statute of limitations — so the Department denied it and declined to rule on the exemption.

Merits: the exemption would not have applied anyway. The R&D exemption covers tangible property used directly and exclusively in basic research or R&D in the experimental or laboratory sense (§ 58.1-609.3 5). Two problems:

• Same entity must buy and research. To claim the exemption, the entity that conducts the research must also be the entity that purchases the property. Here the automation company built and tested the prototype — not the retailer that bought it — so the retailer did not qualify, even though it had provided an R&D exemption certificate.
• The seller paid no tax to refund. The company had bought the parts tax-free using a resale certificate and then resold them to the retailer. Since it paid no tax on its own purchases, there was nothing to refund to it; as a dealer (§ 58.1-612), it correctly collected tax on a sale to a customer who did not qualify for the exemption.

What this means for you

Dealers who over-collected sales tax

You cannot get a refund from the Department by holding your customer's money. The rule is customer first: refund (or credit) the customer the erroneously collected tax, then claim reimbursement from the Department under its Procedures. Conditioning the customer refund on the Department paying you first means you have no valid claim — and the statute of limitations keeps running while you wait.

Claiming the R&D exemption

The exemption belongs to the entity that both buys and uses the property directly and exclusively in experimental or laboratory research. If a vendor builds and tests a prototype and then sells it to a customer, the customer is not the one conducting the research and generally cannot claim the exemption on that purchase — an R&D certificate from the customer does not change that. Match the buyer to the researcher before relying on the exemption.

Resale certificates and downstream sales

If you buy components tax-free for resale and then sell a finished system, you are a dealer making a taxable retail sale unless your customer qualifies for an exemption and gives you a valid certificate. You paid no tax on the parts, so there is nothing for you to be refunded; the exemption question rests with your customer.

Common questions

Q: Can the Department refund me before I pay my customer back?
A: No. For tax you collected from a customer, you must refund the customer first, then seek reimbursement from the Department. Refusing to refund the customer until the Department pays you means you have no valid refund claim.

Q: My customer gave me an R&D exemption certificate. Doesn't that cover the sale?
A: Only if the customer actually qualifies. The R&D exemption requires the entity that conducts the research to also purchase the property. If you (the vendor) built and tested the prototype, your customer is not the researcher and generally cannot claim the exemption.

Q: I bought parts with a resale certificate and resold them. Can I get an R&D refund?
A: No. You paid no tax on those parts, so there is nothing to refund to you. As a dealer you correctly collected tax on the resale unless your customer qualified for an exemption.

Q: Why does Virginia insist the customer be refunded first?
A: To prevent misallocation of the local portion of the tax and to properly account for any dealer's discount already claimed on the original return. The refund runs back through the same path the tax took.

Citations and references

Statutes:

• Va. Code § 58.1-625 C — a dealer must refund erroneously collected sales tax to the customer on request
• Va. Code § 58.1-609.3 5 — research and development exemption (property used directly and exclusively in experimental or laboratory research)
• Va. Code § 58.1-612 — definition of a dealer required to collect and remit the tax

Department guidance (described here, not linked): the Retail Sales and Use Tax Refund Claim Procedures (published on the Department's website), which require a dealer to refund the customer before seeking reimbursement from the Department.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-64

Original ruling text

May 14, 2025

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

Dear * :

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you dispute the denial of the retail sales and use tax refund claim submitted to the Department for the period April 2017 through December 2017.

FACTS

The Taxpayer, a company specializing in automation for warehouses, distribution centers, and hospitals, contracted with a retailer (the “Purchaser”) to develop a prototype automated robotic system to pick and sort mobile totes. This prototype was utilized at one of the Purchaser’s warehouses located in Virginia. The Taxpayer collected and remitted Virginia sales tax from the Purchaser for component parts, labor, and training that the Purchaser bought for assembling the system.

Subsequently, the Taxpayer submitted a refund claim for the taxable period at issue contending that it had erroneously collected and remitted tax for sales on components that qualified for the research and development exemption. The Department denied the refund claim because (1) the invoices included labor and training expenses that were not separately stated, (2) neither the Taxpayer nor Purchaser were engaged in research and development, and (3) neither entity operated a laboratory for the purpose of conducting research. The Taxpayer filed an application for correction, contending that it was entitled to a refund of the sales tax it collected and remitted because the purchase of equipment were exclusively made for exempt research and development purposes.

ANALYSIS

Refund Procedures

The Department’s policy with respect to refunds of sales taxes erroneously paid to vendors is addressed in the Retail Sales and Use Tax Refund Claim Procedures (the “Procedures”), which are available on the Department’s website. Taxpayers are required to request a refund from the dealer that made the sale to prevent misallocations of the local sales tax and to take into account any dealer’s discount that may have been taken on the return filed by the dealer. Consistent with Virginia Code § 58.1-625 C, dealers are required to refund sales tax erroneously collected on transactions exempt or not subject to the tax directly to the customer when requested to do so by the customer, except in certain very limited situations.

The documentation indicates that the Purchaser requested a refund or credit from the Taxpayer. The Taxpayer stated that it would not issue a refund to the Purchaser until a refund was received from the Department. The Department will not issue a refund for sales and use tax unless the Procedures are followed. In this case, Taxpayer’s refund claim cannot be considered because no refund was issued to the customer that paid the sales tax.

Research and Development Exemption

Virginia Code § 58.1-609.3 5 provides an exemption from the sales and use tax for “[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.” In order to qualify for the exemption, the property must be tangible personal property, the tangible personal property must be exclusively and directly used for research and development, and the research and development must be experimental or laboratorial.

The Taxpayer contends that it is entitled to a refund of the sales and use tax that it collected and remitted because the prototype automated robotic system it developed and assembled met the requirements of the research and development exemption. The auditor concluded that the exemption did not apply because neither the Taxpayer nor the Purchaser are engaged in research activities. The Taxpayer contends that it qualifies for the exemption because the prototype system was built in a test environment with the goal of developing a new automation process.

In this case, the Taxpayer is requesting a refund of sales tax paid by the Purchaser. The Taxpayer did not pay sales tax because it purchased the relevant parts, equipment, and supplies using a resale exemption certificate. The Taxpayer then sold the parts, equipment, and supplies at issue to the Purchaser. It is therefore irrelevant whether the Taxpayer qualifies for the research and development exemption.

According to the Taxpayer, the Purchaser provided a research and development exemption certificate. To qualify for the exemption, the entity that conducts the research and development must also be the entity that purchases the qualifying tangible personal property. The facts of the case indicate that the Taxpayer built and tested the prototype system instead of the Purchaser. As such, the Purchaser was not entitled to the exemption in this case.

DETERMINATION

As indicated above, the Taxpayer has failed to fulfill the requirements of the Procedures for requesting a refund. Accordingly, a valid refund request was not filed within the statue of limitations and the Taxpayer’s request for a refund is denied.

Further, the Department declines to make a determination as to the applicability of the research and development exemption absent of a valid refund request.

Finally, the exemption applies to the purchase of tangible personal property. If the Taxpayer did not pay tax on items purchased to conduct research and development, it cannot then receive a refund of tax on such purchases. As a dealer under Virginia Code § 58.1-612, the Taxpayer appropriately collected and remitted sales and use tax on the sale of tangible personal property because the Purchaser did not qualify for the exemption.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public document cited are 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 and Legal Affairs, Tax Adjudications and Resolution Division, at or **.

Sincerely,

Kristin L. Collins

Deputy Tax Commissioner

Commonwealth of Virginia

AR/3598.B