June 21, 2019
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you protest the Department’s denial of a refund of sales and use taxes submitted by***** (the “Taxpayer”) for the period July 2018. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer manufactures uninterruptible power supply (UPS) systems and produces a range of both rotary UPS and static UPS technologies. The Taxpayer submitted amended returns to the Department in support of a refund request claim for *****. The refund request was made after the Taxpayer indicated it received a Retail Sales and Use Tax Certificate of Exemption from its customer, a general contractor, for purchases made from the Taxpayer for work performed at a data center (the “Qualifying Data Center”) in Virginia. For the transaction in question, the Taxpayer did not obtain a valid exemption certificate and collected and remitted sales tax to the Department.
Although the Taxpayer provided documentation in support of the request, several important documents, including an ST-11A certificate issued by the Department and an accompanying exemption letter issued by the Department to the Qualifying Data Center, were not included with the request for refund. Therefore, the initial refund request was denied on September 21, 2017. The Taxpayer later provided a Form ST-11A from the general contractor; however, the certificate was invalid as it was not issued by the Department. The general contractor later obtained and was issued a valid exemption letter from the Department on April 25, 2017.
DETERMINATION
Exemption Certificates
Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia. Virginia Code § 58.1-623 A provides:
All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A further explains:
The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
Pursuant to Virginia Code § 58.1-623 B, an exemption certificate must be signed by and bear the name and address of the taxpayer; indicate the number of the certificate of registration, if any, issued to the taxpayer; and indicate the general character of the tangible personal property sold, distributed, leased, or stored, or to be sold, distributed, leased, or stored in Virginia. Title 23 VAC 10-2010-280 B requires that reasonable care and judgment be exercised by all concerned to prevent the giving or receiving of false, fraudulent, or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.
The majority of Virginia Retail Sales and Use Tax exemption certificates are “self-executed” or “self-issued” by the taxpayer. Currently, the Department only issues exemption certificates to taxpayers who are engaged in specific types of businesses such as (1) data centers and their tenants under Virginia Code § 58.1-609.3 (18); (2) pollution control equipment and facilities under Virginia Code § 58.1-609.3 (9); (3) real property contractors allowed to purchase tangible personal property exempt of the tax in limited circumstances; and (4) resellers of stamped cigarettes under Virginia Code § 58.1-623.2. To obtain an exemption certificate issued by the Department, the taxpayer must apply in writing to the Department and demonstrate that it meets the statutory requirements for exemption.
In this case, the Taxpayer did not accept a valid exemption certificate from the general contractor at the time of the transaction. The general contractor later provided to the Taxpayer a self-executed Form ST-11A that was missing critical information and was not issued by the Department. In April 2017, approximately seven months after the transaction in question between the Taxpayer and general contractor occurred, the general contractor was issued an exemption letter by the Department. Because the Taxpayer obtained a valid exemption certificate from the general contractor after the date of the transaction, the Department must confirm that the general contractor’s use of the certificate was valid and proper for the specific transaction.
Data Center Exemption
In accordance with Public Document (P.D.) 10-121 (6/29/10), to qualify for the data center exemption, the property must be purchased or leased for use in a qualifying data center. A qualifying data center is a data center that (i) is located in a Virginia locality; (ii) on or after January 1, 2009 results in a new capital investment of at least $150 million; and (iii) on or after July 1, 2009, results in the creation of at least 50 new jobs associated with the operation or maintenance of the data center, provided that such jobs pay at least one and one-half times the prevailing average wage in that locality. Prior to claiming the exemption, any qualifying person claiming the exemption must enter into a memorandum of understanding with the Virginia Economic Development Partnership Authority (“VEDP”). A real property contractor may exercise the data center exemption for the purchase or lease of qualifying property by executing a Form ST-11A and presenting it to its vendors. The contractor is required to attach a copy of the exemption letter issued by the Department to the qualifying data center to the Form ST-11A.
Property Qualifying for the Exemption
In order for the purchase or lease of tangible personal property to qualify for the exemption, it must be computer equipment or enabling software purchased or leased for the processing, storage, retrieval, or communication of data, including but not limited to servers, routers, connections, and other enabling hardware, including chillers and backup generators used or to be used in the operation of equipment qualifying for the exemption. The exemption does not apply to other computer software otherwise taxable under the Retail Sales and Use Tax that is sold or leased separately from the computer equipment, nor does it apply to general building improvements or other fixtures. The data center exemption specifically applies to generators used in the operation of equipment qualifying for the data center exemption.
The data center in question qualifies for the data center exemption under Virginia Code § 58.1-609.3 (18). The Taxpayer provided uninterruptible power supply equipment for use in the data center. Although the Taxpayer did not originally rely on an exemption certificate to make the sale, the Taxpayer collected and remitted the tax and later received an exemption letter from the Department. The transaction is now subject to greater scrutiny by the Department, and the refund request will be granted only if the Department can confirm that the general contractor’s use of the ST-11A certificate was valid and proper for the specific sales transaction reviewed in the refund audit.
CONCLUSION
Going forward, the Taxpayer should exercise reasonable care and judgment when accepting exemption certificates to ensure that sales are properly made exempt of the tax. The Taxpayer also must be certain that the required information, as stated in Virginia Code § 58.1-623, is provided on the exemption certificate and that the proper procedures under Virginia Code § 58.1-609.3 (18) are followed. The Taxpayer is also required to retain exemption certificates to support the exempt sales made. See P.D. 16-199. Please note once again that a contractor is required to attach a copy of the exemption letter issued by the Department to the qualifying data center to the Form ST-11A.
Based on this determination, the Taxpayer’s refund request will be returned to the appropriate field audit staff to be adjusted. The transaction in question will be afforded greater scrutiny by the field audit staff and the refund request will be granted only if the Department can confirm that the tangible personal property provided by the Taxpayer to the data center qualifies for exemption. After the refund audit is revised and adjusted by the Department’s audit staff, the proper amount will be refunded to the Taxpayer. If any refund is to be issued, the Taxpayer will be issued refunds for the tax and interest as soon as practicable. Refund interest, computed from the date of payment, will be added to the amounts refunded. You will be notified of the results of the review and will be provided a copy of the revised audit report.
The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1723H