September 21, 2021
Re: § 58.1-1821 Refund Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you request that the Virginia retail sales and use tax refund request for the period February 2018 through March 2019 be granted. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a battery manufacturer, sold batteries to ***** (the “Customer”). The Customer operates data centers in Virginia, and when the sales occurred, the sales tax was charged to the Customer on the sale of the batteries. After the sales took place, the Customer informed the Taxpayer that it had neglected to provide its Virginia data center exemption certificate when the sales were made, and requested a refund of the sales tax paid. The Taxpayer filed a refund request with the Department with respect to the sales tax charged on the sales of the batteries to its Customer. The documentation provided by the Taxpayer was reviewed by the Department’s audit staff and the refund was denied. The audit staff determined that the data center exemption did not apply to the sales at issue because the batteries were delivered to a storage facility, rather than being delivered directly to the Customer’s data centers.
The Taxpayer maintains that the exemption applies to the battery sales at issue and requests that the refund be granted. The Taxpayer states that the batteries sold to its Customer are reserve power batteries that are used as a backup power source for the data equipment. The Taxpayer provides a letter with the appeal from the Customer to support its contention. In this letter, the Customer states that due to limited storage capability at the data centers, in some cases equipment is first sent to a storage facility until the equipment is moved to the data centers for installation and usage.
DETERMINATION
Virginia Code § 58.1-609.3 18 provides, in pertinent part, that beginning July 1, 2010, and ending June 30, 2035, retail sales and use tax does not apply to:
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 the equipment exempted in this paragraph, provided that such computer equipment or enabling software is purchased or leased for use in a data center that (i) is located in a Virginia locality, (ii) results in a new capital investment on or after January 1, 2009, of at least $150 million, and (iii) results in the creation on or after July 1, 2009, of at least 50 new jobs by the data center operator and the tenants of the data center, collectively, 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. [Emphasis added.]
The refund request review resulted in a determination that the data center exemption does not apply to the batteries purchased by the Taxpayer’s Customer because the batteries were delivered to storage facilities in Virginia, rather than being delivered directly to the Customer’s data centers in Virginia. As such, the refund request was denied.
“Statutes granting tax exemptions are construed strictly against the taxpayer.” Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973). “Exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption.” Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1972). Based on this principle, if there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption.
Virginia Code § 58.1-602 defines storage as “any keeping or retention of tangible personal property for use, consumption or distribution in the Commonwealth, or for any purpose other than sale at retail in the regular course of business.” In the absence of a temporary storage exemption, tangible personal property placed in storage is subject to the retail sales and use tax. Generally, the retail sales and use tax applies to tangible personal property stored in the Commonwealth because an exemption for stored property does not exist in most instances. Virginia Code § 58.1-609.3 1 provides an exemption from the sales and use tax on personal property purchased by a contractor that is temporarily stored in Virginia pending shipment to another state or country.
Similarly, the data center exemption applies when the criteria of the statute have been met. The criteria does not include a requirement that a data center must use purchased items immediately. In fact, exemption specifically applies to the purchase of eligible equipment and software either “used or to be used” in the operation of the data center. The terms infer two types of purchase transactions. Those purchases used immediately and those to be used later.
Further, the rationale used to deny the refund conflicts with the intent of the data center exemption, which is designed to be interpreted broadly. The exemption applies when (i) the purchaser operates a qualifying data center, (ii) the tangible personal property purchased is for use in the qualifying data center and (iii) the property is of the kind stated in the statute. The statute does not require that the property be delivered directly to the data center in order to qualify for the exemption.
In addition, the Taxpayer’s customers rely on the dependability of the data centers to keep records secure and accessible. Under these conditions, a data center must be ready to repair, expand, or upgrade its systems contemporaneously. Keeping equipment and supplies in reserve is an essential part of data center operations. Prohibiting data centers from purchasing items for future use would significantly diminish the incentive the exemption is intended to provide.
The Department has previously addressed the issue of batteries in Public Document 10-121 (6/29/2010). The Tax Commissioner ruled that to the extent the electrical substation, power distribution equipment, cogeneration equipment, batteries and other electrical equipment are used to provide electricity to a data center, such property would be exempt.
The Customer operates qualifying data centers in Virginia, has been issued exemption certificates by the Department, and can purchase or lease tangible personal property used in its data centers exempt of the tax by presenting the exemption certificate to its vendors at the time of the purchases. Delivery of the batteries at issue to storage facilities until the Customer’s data centers were prepared to accept delivery does not preclude the Customer from purchasing the batteries exempt of the tax as provided Virginia Code § 58.1-609.3 18.
Accordingly, I find that the data center exemption applies to the batteries at issue. The batteries are reserve power batteries that are used as a backup power source for the Customer’s data center equipment. Accordingly, the Taxpayer is due a refund of the sales tax charged to the Customer on the sale of the batteries during the period at issue.
It is my understanding that the Taxpayer previously filed amended returns, original invoices, credit memos and exemption certificates related to these transactions with the Department. The Taxpayer will be contacted by the Department’s audit staff regarding the documentation needed to process the refund. If any additional documentation is required, the Taxpayer must provide such documentation to the audit staff within 60 days of such contact.
The Code of Virginia section and public document 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3280.P