February 27, 2025
Re: § 58.1-1821 Appeal: Retail Sales and Use Tax
Dear *****:
This will reply to your letter submitted on behalf of ***** (the “Taxpayer”) in which you dispute the denial of a retail sales and use tax refund for the periods May 2016 through December 2016, and March 2017 through June 2017.
FACTS
The Taxpayer, a communications company that provides high-speed satellite broadband and secure networking systems, obtained a data center exemption certificate from the Department effective for the periods at issue. Purchases of equipment were shipped either directly to its Virginia location or to a warehouse for storage located in ***** (State A). Equipment stored in State A was delivered to the Virginia data center as needed.
The Taxpayer filed a refund claim for the periods, asserting it erroneously accrued and paid tax on exempt data center equipment used in its Virginia data center. Under review, the Department granted a portion of the requested refunds but denied the remainder because invoices evidencing the receipt of equipment from State A at the Virginia facility were not provided. The Taxpayer filed an application for correction contending that the equipment it sent to its Virginia facility qualifies for the data center exemption.
DETERMINATION
Strict Construction of Exemptions
The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, the Virginia Supreme Court requires strict construction of sales tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Research Analysis Corporation, 214 Va. 161 (1973), Commonwealth v. Community MotorBus, 214 Va. 155 (1973), and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).
Data Center Exemption
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 Department has previously addressed the issue of delivery and storage of data center equipment in Public Document (P.D.) 21-126 (9/21/2021) and P.D. 23-67 (6/21/2023). In those rulings, the Department decided that the delivery of equipment, otherwise eligible for the exemption, to storage facilities for later use in a data center could be purchased exempt of the retail sales and use tax.
The Taxpayer operates a qualifying data center in Virginia and can purchase or lease eligible tangible personal property used in its data center exempt of the tax by presenting the exemption certificate to its vendors at the time of the purchase. Delivery of the equipment at issue to the storage facility does not preclude the Taxpayer from purchasing the equipment exempt of the tax.
Taxpayer Records
The Taxpayer indicates that, because it purchases its equipment in bulk, it cannot provide invoices for equipment that it shipped to the Virginia data center from the State A warehouse. Virginia Code § 58.1-633 A states that every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due, and “such other pertinent information as may be required by the Tax Commissioner.” This recordkeeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470, which promulgates:
Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include:
a) A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use;
b) A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase;
c) A record of all deductions and exemptions claimed in filing sales or use tax returns, including exemption and resale certificates, returned or repossessed goods, and bad debts;
d) A record of all tangible property used or consumed in the conduct of the business;
e) A true and complete inventory of the stock on hand and its value, taken at least once each year.
The Department reviews transactions based on the documentation presented for each transaction. This is consistent with longstanding policy that the retail sales and use tax is a transactional tax, and the determination as to the taxation of a specific transaction is based on the underlying documents that support the transaction. Thus, documentation must be provided to prove the tax was paid on each transaction with a vendor. See P.D. 00-100 (5/25/2000).
With its application, the Taxpayer provided copies of capital project documents, equipment listings, use tax accruals for the equipment that was shipped to Virginia from State A, and an asset listing from its personal property tax returns it filed with the locality in which the data center was located. The asset listing from the personal property tax returns show that equipment qualifying for the exemption was located in Virginia and the documents provided show the use tax accruals for equipment and exempt equipment. While the capital project documents show hardware, software, and other equipment included in projects at the Virginia facility, they fail to show specific asset information that can be matched to the asset listings or the accruals on the Virginia tax returns.
Pursuant to Virginia Code § 58.1-205, any assessment of tax by the Department is prima facie correct, meaning the burden of proof is upon the taxpayer to show that the assessment is in error. Under Title 23 VAC 10-20-160 D 7, the denial of a refund claim by the Department is deemed to be an assessment. Accordingly, it is incumbent upon a taxpayer to maintain records evidencing the transactions for which a refund claim is made.
In order to grant the Taxpayer’s request, it must be able to show by clear and cogent evidence that the equipment on which it claims tax was accrued and was actually used in the Virginia data center at the time the accrual was made. The Taxpayer has failed in its burden to do so. Accordingly, the denial of the refund is upheld.
The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents 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 Adjudication and Resolution Division, at ***** or *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4400.B