May 14, 2025
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***** :
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you dispute the denial of the retail sales and use tax refund claim submitted to the Department for the period April 2017 through December 2017.
FACTS
The Taxpayer, a company specializing in automation for warehouses, distribution centers, and hospitals, contracted with a retailer (the “Purchaser”) to develop a prototype automated robotic system to pick and sort mobile totes. This prototype was utilized at one of the Purchaser’s warehouses located in Virginia. The Taxpayer collected and remitted Virginia sales tax from the Purchaser for component parts, labor, and training that the Purchaser bought for assembling the system.
Subsequently, the Taxpayer submitted a refund claim for the taxable period at issue contending that it had erroneously collected and remitted tax for sales on components that qualified for the research and development exemption. The Department denied the refund claim because (1) the invoices included labor and training expenses that were not separately stated, (2) neither the Taxpayer nor Purchaser were engaged in research and development, and (3) neither entity operated a laboratory for the purpose of conducting research. The Taxpayer filed an application for correction, contending that it was entitled to a refund of the sales tax it collected and remitted because the purchase of equipment were exclusively made for exempt research and development purposes.
ANALYSIS
Refund Procedures
The Department’s policy with respect to refunds of sales taxes erroneously paid to vendors is addressed in the Retail Sales and Use Tax Refund Claim Procedures (the “Procedures”), which are available on the Department’s website. Taxpayers are required to request a refund from the dealer that made the sale to prevent misallocations of the local sales tax and to take into account any dealer’s discount that may have been taken on the return filed by the dealer. Consistent with Virginia Code § 58.1-625 C, dealers are required to refund sales tax erroneously collected on transactions exempt or not subject to the tax directly to the customer when requested to do so by the customer, except in certain very limited situations.
The documentation indicates that the Purchaser requested a refund or credit from the Taxpayer. The Taxpayer stated that it would not issue a refund to the Purchaser until a refund was received from the Department. The Department will not issue a refund for sales and use tax unless the Procedures are followed. In this case, Taxpayer’s refund claim cannot be considered because no refund was issued to the customer that paid the sales tax.
Research and Development Exemption
Virginia Code § 58.1-609.3 5 provides an exemption from the sales and use tax for “[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.” In order to qualify for the exemption, the property must be tangible personal property, the tangible personal property must be exclusively and directly used for research and development, and the research and development must be experimental or laboratorial.
The Taxpayer contends that it is entitled to a refund of the sales and use tax that it collected and remitted because the prototype automated robotic system it developed and assembled met the requirements of the research and development exemption. The auditor concluded that the exemption did not apply because neither the Taxpayer nor the Purchaser are engaged in research activities. The Taxpayer contends that it qualifies for the exemption because the prototype system was built in a test environment with the goal of developing a new automation process.
In this case, the Taxpayer is requesting a refund of sales tax paid by the Purchaser. The Taxpayer did not pay sales tax because it purchased the relevant parts, equipment, and supplies using a resale exemption certificate. The Taxpayer then sold the parts, equipment, and supplies at issue to the Purchaser. It is therefore irrelevant whether the Taxpayer qualifies for the research and development exemption.
According to the Taxpayer, the Purchaser provided a research and development exemption certificate. To qualify for the exemption, the entity that conducts the research and development must also be the entity that purchases the qualifying tangible personal property. The facts of the case indicate that the Taxpayer built and tested the prototype system instead of the Purchaser. As such, the Purchaser was not entitled to the exemption in this case.
DETERMINATION
As indicated above, the Taxpayer has failed to fulfill the requirements of the Procedures for requesting a refund. Accordingly, a valid refund request was not filed within the statue of limitations and the Taxpayer’s request for a refund is denied.
Further, the Department declines to make a determination as to the applicability of the research and development exemption absent of a valid refund request.
Finally, the exemption applies to the purchase of tangible personal property. If the Taxpayer did not pay tax on items purchased to conduct research and development, it cannot then receive a refund of tax on such purchases. As a dealer under Virginia Code § 58.1-612, the Taxpayer appropriately collected and remitted sales and use tax on the sale of tangible personal property because the Purchaser did not qualify for the exemption.
The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public document 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 Adjudications and Resolution Division, at ***** or *****.
Sincerely,
Kristin L. Collins
Deputy Tax Commissioner
Commonwealth of Virginia
AR/3598.B