Statute of Limitations: Refunds
June 4, 2025
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to *****. (the “Taxpayer”) for the taxable period May 2017 through April 2020.
FACTS
An audit was conducted on the books and records of the Taxpayer, a service delivery partner and architect of government technology solutions, for the period at issue. During the audit, the Taxpayer requested a credit for erroneously paid sales tax against the audit liability. The auditor informed the Taxpayer that a credit could not be given, and that the Taxpayer should contact the vendor for a refund. As a result, the Taxpayer was assessed tax and interest on untaxed purchases of tangible personal property, software, and taxable services.
When the Taxpayer attempted to request a refund, it discovered the vendor was no longer in business. After the close of the audit, the Taxpayer filed a refund claim for erroneously paid taxes on the purchase of software made in August 2017. The Department denied the request because it was filed beyond the statute of limitations. Although it has not alleged any error with the audit assessment, the Taxpayer filed an application for correction contending that the Department should permit a credit for the erroneously paid taxes against the use tax audit liability.
ANALYSIS
Overpayment Credits in Audits
The Department’s current policy only permits a credit in limited circumstances. The Department has allowed credit in a case involving a dealer that incorrectly failed to charge sales tax but the customer remitted use tax for the transaction. See Public Document (P.D.) 07-68 (5/10/2007). Similarly, in P.D. 22-56 (3/30/2022), the Department allowed credit where a contractor included “estimated use tax” on its invoice, essentially charging sales tax under the wrong name, but remitted the use tax for the property consumed in the transactions on its returns. No credit, however, is allowed for sales tax remitted to a dealer for purchases on which no tax should have been charged. In P.D. 96-358 (12/6/1996), the Department opined that granting a credit to a purchaser in an audit could result in misallocations of the local sales tax and would disregard any statutory discount claimed by the dealer in reporting taxable sales. Thus, if a consumer has erroneously paid Virginia tax on exempt purchases, it must request a refund of the tax from the dealer. See also P.D. 20-174 (9/29/2020). During an audit, therefore, erroneously paid taxes will not be included as a credit and any refund request would be handled separately.
Claim for Refund
In accordance with Virginia Code § 58.1-625 and Title 23 of the Virginia Administrative Code (VAC) 10-210-340, all erroneously collected sums by a dealer are held in trust for the state until any erroneously collected tax has been refunded to the customer by such dealer.
While this statute and regulation limit retail sales and use tax refunds to dealers, Virginia Code § 58.1-623 E provides that a taxpayer which fails to give a dealer an exemption certificate issued to such taxpayer by the Department at the time of purchase is permitted to file a claim for refund. In order to administer this provision, the Department issued the Retail Sales and Use Tax Refund Claim Procedures (the “Procedures”). Pursuant to the Procedures, there are two procedures in which a taxpayer may request a refund of retail sales and use tax erroneously remitted to the Commonwealth. The first procedure details the refund process for or from a dealer. The second procedure details the refund process from the Department. In order to apply for a refund from the Department, a consumer or purchaser must first seek a refund through the dealer procedure.
In this case, the Taxpayer followed the Procedures, but the dealer was no longer in business. Accordingly, the Taxpayer was eligible to seek a refund directly from the Department.
Virginia Code § 58.1-1824 provides that “any person who has paid an assessment of taxes administered by the Department of Taxation may preserve his judicial remedies by filing for refund with the Tax Commissioner ...within three years of the date such tax was assessed.” Pursuant to Virginia Code § 58.1-1823, a refund request must be made by a taxpayer within “three years from the last day prescribed by law for the timely filing of a return ... or (iv) two years from the payment of an assessment ...” In P.D. 03-52 (7/3/2003), the Department concluded that a refund request would be timely if the request is made within the time covered by a waiver of the statute agreed to by the dealer and the Department.
Based on these authorities, the Taxpayer’s refund request would have been considered to be timely filed if the request was made within (1) the general three-year statute of limitations from the due date of the original return payment; (2) two years from the payment of an assessment; (3) three years from the date of assessment; or (4) the time covered by a waiver of the statute agreed to by the Taxpayer and the Department. In this case, the tax was paid on an invoice dated in August 2017 and the request for refund was filed in August 2022, well beyond the statute of limitations period.
DETERMINATION
In accordance with the evidence provided and authorities cited, the Department has determined that the claim for credit or refund must be denied. The auditor appropriately disallowed a credit in the audit and advised the Taxpayer to pursue recovery with its vendor. In addition, after seeking a refund from the out-of-business vendor, theTaxpayer failed to timely file a claim with the Department.
Accordingly, the audit assessment is upheld. Because the assessment has been paid in full, no further action is required.
The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited is 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 *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4315.F