August 3, 2023
Re: § 58.1-1821 Refund 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 tax submitted by ***** (the “Taxpayer”) for the period September 2018 through April 2019. I apologize for the delay in responding to your request.
FACTS
The Taxpayer, an electrical contractor, provided support to build a data center in Virginia. The Taxpayer paid sales tax on its purchases made during the audit period and was unable to receive a refund from the vendors. The Taxpayer filed a refund request with the Department, claiming that the purchases were exempt as they were used in a qualifying data center. After reviewing the information provided with the request, the Department denied the Taxpayer’s refund claim because it could not be determined if the purchases qualified for exemption. In addition, the refund was also denied because the property was not shipped directly to the data center. The Taxpayer appeals, contending the property was not required to be delivered directly to the data center in order to qualify for the exemption.
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…
The Taxpayer cites Public Document (P.D.) 10-121 (6/29/2010), P.D. 13-183 (10/18/2013), and P.D. 19-64 (6/21/2019) to support the claim that the purchases at issue qualify for exemption from the tax. Further, the Taxpayer correctly notes that Virginia Code § 58.1-609.3 18 does not require that the property be delivered directly to the data center in order to qualify for the exemption. See P.D. 21-126 (9/21/2021). Therefore, at issue in this instance is whether the property used in the project qualifies for exemption pursuant to the statute.
Certain property included in the Taxpayer’s request was used to construct a power distribution system to deliver power to the server rack. This allows the data center to power and operate exempt computer and server equipment. In addition, the contract required the Taxpayer to configure a hot aisle containment system to provide the proper environment for the data center to operate equipment, such as computers.
Pursuant to P.D. 10-121, power distribution and other electrical equipment used to provide electricity to exempt equipment in data centers are exempt from the tax. In addition, the determination also concludes that: “[t]o the extent that chillers, computer room air conditioners (CRACs), heating, ventilating, and air conditioning (HVAC) systems, cooling towers, and similar items are used to provide the proper environment in the data center, e.g., temperature and humidity, such equipment would qualify for the data center exemption.” Based on the information provided by the Taxpayer with its appeal, the property included in the Universal (“Vendor 1”) invoices provide power, electricity, and the proper environment to exempt equipment in the data center. The property included in the NJ Sullivan (“Vendor 2”) invoices also qualify as “…specialized pieces of equipment that are specifically designed to ensure that the servers and other exempt equipment function properly.” P.D. 10-121. Accordingly, I find that the data center exemption applies to the property at issue.
CONCLUSION
Based on this determination, the Taxpayer’s refund request will be returned to the appropriate refund audit staff. The Taxpayer will be contacted 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 contact with the auditor.
The Code of Virginia section and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions regarding the refund process, please contact the auditor. 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/3725.G