Rulings of the Tax Commissioner

June 23, 2015

Dear *****:

This is in response to your letter seeking guidance regarding the process by which the ***** ("the City") may obtain recognition that it qualifies for the sales and use tax revenue entitlement for an arena or other qualifying facility ("arena entitlement") under Va. Code § 15.2-5921 et seq.  This letter also explains the calculation of the City's arena entitlement, the timing of the sales tax revenue distributions, and the specific procedures the City must follow in order to ensure that it timely receives its sales tax entitlement.

BACKGROUND

Legislation enacted during the 2013 and 2014 Virginia General Assembly sessions (Acts of Assembly, 2013, Chapter 767 and Acts of Assembly, 2014, Chapter 738 and Chapter 742) enable the City to receive a portion of the sales and use tax revenues generated from transactions made within a qualifying "facility" in the City.  The term "facility" is defined to include an arena or stadium seating at least 15,000, and used either to conduct NHL or NBA games or to hold conferences and entertainment events.  Qualifying facilities also include: 1) sports team offices, practice facilities, and performance facilities, 2) offices, restaurants, concessions, retail, or lodging facilities operated adjacent to or in connection with the arena or structure, and 3) parking lots, garages, or other directly related properties.  Additionally, this arena entitlement includes sales tax revenues generated within a "temporary facility," used for the team's home games while a qualifying facility is being constructed.

The arena entitlement includes sales and use tax revenues generated from transactions connected with the development and construction of the qualifying facilities, such as purchases or leases of materials, equipment, and other tangible personal property used to construct the facility.  Any tax revenues generated in connection with the construction or development of a temporary facility, however, will not be included in the arena entitlement.

As plans for a qualifying facility in the City are in the proposed stage, the statute requires that the City or its Development Authority satisfy one of the following requirements before January 1, 2018, or the arena entitlement will lapse: 1) execute a lease with an NBA or NHL team; 2) issue bonds for a conference or entertainment arena; or 3) contract for the construction, development, operation or maintenance of the facility.

The arena entitlement will expire on the earliest of: 1) the maturity date of any bonds issued, to the extent that the City or its Development Authority issues bonds to fund the project; 2) the expiration of the City or its Development Authority's contractual obligations for the facility's construction, development, operation, or maintenance, or 3) July 1, 2043.

PROCEDURES

Calculation of Arena Entitlement

Va. Code § 15.2-5926 entitles the City of *****, subject to appropriation, to "sales and use tax revenues, which is defined in Va. Code § 15.2-5921 as "tax collections under the Virginia Retail Sales and Use Tax Act (Va. Code § 58.1-600 et seq.)."  The Retail Sales and Use Tax is imposed upon the sale or use of tangible personal property in Virginia at a combined state and local rate of 5.3 percent.  This includes a 4.3 percent state sales tax and a 1 percent local sales tax.  Sales in the Northern Virginia and Hampton Roads regions, including sales in the City, are subject to an additional 0.7 percent regional sales and use tax.  Thus, the combined state and local sales and use tax for sales made in the City is 6 percent.

Under Va. Code § 15.2-5921, certain tax revenues are specifically excluded from the arena entitlement, including: (i) the revenue generated by the one-half percent sales and use tax increase enacted by the 1986 Special Session of the General Assembly; (ii) the one percent state sales and use tax revenue distributed among the counties and cities of the Commonwealth pursuant to subsection D of § 58.1-638; and (iii) any sales and use tax revenues generated by increases and allocation changes imposed by the 2013 Session of the General Assembly.

House Bill 2313 (Acts of Assembly 2013, Chapter 766) increased the combined rate of the state and local Retail Sales and Use Tax from 5 percent to 5.3 percent and imposed the new 0.7 percent regional sales and use tax in the Hampton Roads and Northern Virginia regions.  House Bill 2313 also made two changes to the allocation of the sales and use tax in order to devote additional revenue to transportation and public education.

First, it committed General Fund revenue to the Highway Maintenance and Operating Fund ("HMOF") according to a schedule that increased the amount committed annually, beginning in Fiscal Year 2014.  Any allocation increases after Fiscal Year 2015 were contingent upon passage of federal legislation granting remote collection authority to qualifying states.  Because Congress failed to enact such federal legislation by the January 1, 2015 deadline, the HMOF allocation increases froze at the Fiscal Year 2015 rate, or an amount equal to 20 percent of a 0.50 percent tax.

Second, the legislation distributed a portion of General Fund revenue equal to the revenue generated by a 0.125 percent sales tax to the Public Education Standards of Quality Fund/Local Real Estate Property Tax Relief Fund ("SOQ Fund") to be used for the state's share of Standards of Quality basic aid payments.  This 0.125 percent revenue also must be excluded from the arena entitlement calculation.

Although not set out in Va. Code § 15.2-5921 et seq., the arena entitlement also excludes the 0.25 percent portion of sales tax revenues derived from the 2004 sales tax rate increase and appropriated to the Public Education SOQ Fund pursuant to Item 157.10 and Part 3, § 3-5.05 of the 2004 Appropriation Act.  This 0.25 percent revenue continues to be appropriated to public education in subsequent budgets and is unavailable for distribution to the City.

After taking into account the exclusions enumerated above, any remaining sales and use tax revenues generated from sales made within a qualifying facility will be part of the arena entitlement.  This remainder includes the local 1 percent sales and use tax that is generally distributed to the city or county of the seller's "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 arena 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 a qualifying facility within the City. In these cases, the sales and use tax revenues would be distributed to the City.

Example: Real property contractor purchases materials directly from a supplier located in Locality A that will be used in the construction of the qualifying arena. Although Virginia's sourcing rules generally would entitle Locality A to the local sales tax revenues generated from the purchase, because the materials are purchased to construct a qualifying arena, the local sales tax revenues would be distributed to the City of *****, as part of its arena entitlement, rather than Locality A.

Once certified, the City will be entitled to a 3.025 percent combined sales and use tax, as shown in the table below.

Process for Arena Entitlement Recognition

Step One: City Submits Ruling Request to the Department of Taxation

Upon signing a lease with an NBA or NHL team, issuing bonds to fund the arena, or entering into a contract for the construction, development, operation or maintenance of a qualifying facility, the City must submit a written ruling request to the Department seeking recognition that it qualifies for the arena entitlement.  The ruling request should provide a detailed description of the plans for the facility and include documentation, such as copies of contracts, bond documents, leases, plans, and any additional documents evidencing that: 1) one of the three scenarios enumerated above has occurred; and 2) the structure or structures will satisfy the definition of "facility" under Va. Code § 15.2-5921.  The ruling request must also include a time line that highlights important dates, such as the anticipated beginning and ending dates of construction and commencement of the facility's operation.  Ruling requests should be addressed to:

Virginia Department of Taxation
Attention: Policy Development Division
Post Office Box 2475
Richmond, Virginia 23218-2475

The Tax Commissioner will issue a ruling indicating whether the City qualifies for the Arena Entitlement.

Step Two: Contractors Register for Arena Entitlement Treatment

Once the City receives a ruling that it qualifies for the arena entitlement, each real property contractor that will be engaged in construction with respect to the qualifying facility must register with the Department of Taxation so that the sales and use tax on his taxable purchases may be flagged as arena entitlement revenues.  The Department will provide each contractor with a special certificate to alert vendors and suppliers not to collect sales and use taxes on these transactions.  The contractor will be required to accrue and remit use tax on qualifying purchases directly to the Department.  The ruling letter will provide information regarding the appropriate contact person at the Department to assist the facility's real property contractors with registration to file and pay use tax regarding the arena's construction.

Step Three: City Identifies Applicable Vendors

The City must notify the Department of each vendor that anticipates operating in the qualifying facility so that the Department can flag the sales tax revenues remitted by these vendors as arena entitlement revenues.  The City must submit the list of vendors, as well as any changes to the list that may occur after the initial submission, to the contact at the Department identified in the ruling letter who will also serve as a point of contact for any issues related to flagging applicable merchants for the arena entitlement.

Process for Filing Returns

Retailers registered to collect and remit sales and use taxes in Virginia must file a Form ST-9, Virginia Retail Sales and Use Tax Return and remit any taxes collected by the twentieth day of the month following the month in which the tax was collected. Vendors operating in qualifying facilities in the City must follow the same process. Contractors making taxable purchases for the arena construction will be required to remit use tax, as discussed above.

Timing of Sales Tax Distributions

Commencement of Distributions

As sales tax revenues from construction transactions will be included in the arena entitlement, the State Comptroller will need to make revenue transfers to the City before construction is completed.  Accordingly, provided the Tax Commissioner has issued a letter ruling that the City qualifies for the arena entitlement, the State Comptroller will begin remitting qualifying tax revenues to the City as soon as a transaction generates sales or use tax revenues for a qualifying facility.

Example: Real property contractor purchases taxable building materials for use in constructing a qualifying facility and accrues and remits use taxes to the Department on these purchases.  Once the Department has processed the use tax returns, the State Comptroller will make the required distributions of sales tax revenues to the City.

Frequency of Distributions

The Comptroller will distribute the state tax portion 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:

                    1^st Quarter                                  July 1 – September 30

                    2^nd Quarter                                 October 1 – December 31

                    3^rd Quarter                                  January 1 – March 31

                    4^th Quarter                                  April 1 – June 30

In order to distribute this portion, the Department will need to verify the accuracy of the amounts that will be distributed before the Comptroller can make the distributions.  This is expected to be completed within 45 days after the close of the quarter in which the return was filed.

The Department will distribute the local option portion on a monthly basis, in the same manner as with the local sales tax revenues generated in non-qualifying facilities under the general process.

Example:  A merchant operating in the arena generates sales tax revenues beginning in October, 2017.  The merchant must file the monthly return, Form ST-9 by November 20, 2017 for the transactions conducted in October.  The Department would begin processing the local option payments by December 6 and would distribute the City's local tax entitlement on December 16, 2017.  The State Comptroller would distribute the state portion within 45 days of the close of the second quarter, or by February 15, 2018.

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 its arena entitlement.  The Code of Virginia provisions cited, along with other reference documents, are available online at http://law.lis.virginia.gov/vacode.  If you have any questions about these procedures, you may contact ***** in the Policy Development Division at *****.

Sincerely,

Craig M. Burns
Tax Commissioner