When the state sends a Virginia city local sales tax that should have gone to a different locality, does the city owe interest when it pays the money back?

Plain-English summary

Manassas Commissioner of the Revenue Douglas Waldron asked the AG a money question that mattered to a lot of Virginia localities: when a retail business uses the wrong FIPS code on a sales tax return, the state Tax Commissioner routes the local 1% share to the wrong city or county. When the error is caught, the Commonwealth wants its money back, and historically the Tax Department took the position that interest accrued on the locality's repayment under § 58.1-1833. The Manassas situation was textbook: a Prince William County business had filed under the City of Manassas FIPS code for some time, so the City had been receiving local sales tax that should have gone to the County. The City had to pay it back, and Tax was charging interest.

The AG concluded the Tax Commissioner had no authority to assess interest. The reasoning was straightforward statutory construction:

• Section 58.1-605(F) speaks directly to this scenario. It says when "errors are made in any such payment, or adjustments are otherwise necessary," the errors "shall be corrected and adjustments made in the payments for the next two months as follows: one-half of the total adjustment shall be included in [each of] the payments for the next two months." The section says nothing about interest.
• Section 58.1-1833(A) only applies to taxpayer refunds. Its plain language requires interest on refunds to the taxpayer, on overpayments or on monies improperly collected from the taxpayer and refunded under § 58.1-1822. The City paying the Commonwealth back is not a taxpayer being refunded; it's a locality reversing a misallocation.
• "Rules of statutory construction prohibit adding language to or deleting language from a statute." Citing Appalachian Power v. State Corp. Comm'n. The General Assembly chose not to put an interest provision in § 58.1-605(F), and the Tax Department could not graft one in.

So the recovery mechanism was the two-month payment-adjustment process at § 58.1-605(F), with no interest.

Currency note

This opinion was issued in 2019. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Virginia imposes a general state sales tax under § 58.1-603. Section 58.1-605(B) lets cities and counties piggyback with their own 1% local sales tax, administered and collected by the state Tax Commissioner under the same rules (§ 58.1-605(D)). The local share is credited to "the city or county in which the sales were made" (§ 58.1-605(E)), and the Comptroller distributes it monthly to the entitled locality (§ 58.1-605(F)).

When mistakes happen (a dealer uses the wrong FIPS code, an audit reveals misallocation), § 58.1-605(F) lays out the correction mechanism: errors get corrected through adjustments to the next two months of payments, half in each month. The same subsection also addresses refunds the other direction: the payment "shall include a refund of amounts erroneously not paid to the city or county and not previously refunded during the three years preceding the discovery of the error," with a corresponding three-year window for dealer-misallocation corrections.

Section 58.1-1833(A), in a different article entirely, provides general interest authority on tax refunds "permitted or required [for overpayments] under the provisions of this article [Article 2, Chapter 18, Title 58.1], or on monies improperly collected from the taxpayer and refunded pursuant to § 58.1-1822." That statute is plainly aimed at taxpayer overpayments, not at inter-government settlements between the state and a locality.

The dealer's FIPS code is the Federal Information Processing Standards code that identifies the locality on the sales tax return. A wrong FIPS code can route revenue to the wrong locality for months or years until detected, which is what happened in Manassas.

Common questions

Q: How long does the state have to recover misdirected local sales tax?
A: Section 58.1-605(F) gives the Tax Department a three-year window for corrections tied to dealer misallocation: "[a] correction and adjustment in payments described in this subsection due to the misallocation of funds by the dealer shall be made within three years of the date of the payment error."

Q: Does the locality that should have received the money also get interest on the delayed payment?
A: Same logic: § 58.1-605(F) does not require interest. The locality that was undercredited gets the back amount as part of the next two months of payments (within the three-year window), but the statute does not provide for interest in either direction.

Q: Does this affect the dealer that filed the wrong FIPS code?
A: The opinion did not address dealer liability. The Tax Commissioner has separate authority over dealer assessments and refunds; this opinion only addressed the inter-government transfer between Tax and the city.

Q: What if Tax simply withholds the next month's payment to the locality to recoup?
A: That's exactly what § 58.1-605(F) contemplates: adjustments in the payments for the next two months, half each. The opinion does not bar the offset; it only bars charging interest.

Q: Why is this fight worth having for the locality?
A: For a busy city or county, misdirected local sales tax could be in the hundreds of thousands of dollars. Even at modest statutory rates, interest on that amount over the three-year window adds real money. The opinion clarifies that the locality owes the principal back, but not interest on top.

Q: Does § 58.1-1833 ever apply between the state and a locality?
A: Per this opinion, no. Section 58.1-1833(A) is built for taxpayer refunds, and the AG read it strictly. "[I]n most cases, the 'taxpayer' entitled to interest will be the purchaser of the goods."

Q: Can the General Assembly change this by amending the statute?
A: Yes, easily. The opinion turns on plain language. If the legislature wanted localities to pay (or earn) interest on misallocated local sales tax, it could amend § 58.1-605(F) to say so.

Citations

The opinion is built on § 58.1-603, § 58.1-605(B), (D), (E), and (F), § 58.1-1822, and § 58.1-1833(A), along with the Virginia Supreme Court's plain-meaning canon from Appalachian Power v. State Corp. Comm'n, 284 Va. 695 (2012).

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2019/18-065-Waldron-issued.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Mark R. Herring

202 North Ninth Street
Richmond, Virginia 23219
804-786-2071
Fax 804-786-1991
Virginia Relay Services
800-828-1120
7-1-1

Attorney General

Cynthia E. Hudson
Chief Deputy Attorney General

June 21, 2019

The Honorable Douglas Waldron
Commissioner of the Revenue, City of Manassas
9027 Center Street
Post Office Box 125
Manassas, Virginia 20110

Dear Mr. Waldron:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented
You ask whether the Commonwealth of Virginia, through its Department of Taxation, has the authority to require a locality to pay interest on local sales tax revenues erroneously forwarded to the locality by the Commonwealth, when repaid by the locality upon notification of the error.

Background
You relate that for some time a retail business located in Prince William County collected and remitted to the Virginia Tax Commissioner the applicable state and local retail sales tax. Both Prince William County and the City of Manassas impose a local retail sales tax of one percent, as authorized by § 58.1-605 of the Code of Virginia.

You further report that the business used the wrong Federal Information Processing Standards (FIPS) code when remitting sales tax revenues to the Tax Commissioner. This error resulted in the Commonwealth crediting and paying the one percent local share of the retail sales tax to the City of Manassas, rather than to Prince William County where the sales were made.

Upon discovery of the error, the Commonwealth made deductions from sales tax revenues otherwise payable to the City of Manassas from the Commonwealth to recoup the misdirected payments caused by the business's error. The Department of Taxation maintains that under § 58.1-1833, the City must pay interest on these payments; however, you question whether this statute authorizes or requires the assessment of interest on the retail sales tax erroneously distributed to the City.

Applicable Law and Discussion
Section 58.1-603 imposes a general state tax on retail sales within the Commonwealth.[1] Pursuant to § 58.1-605, cities and counties also may impose a retail sales tax, at a rate of one percent, subject to the same rules and regulations applicable to the general state sales tax.[2] The local retail sales tax is "administered and collected by the Tax Commissioner in the same manner and subject to the same penalties as provided for the state sales tax."[3] The local sales tax revenues collected by the Tax Commissioner are paid into the state treasury and credited to the city or county in which the sales were made, that is, the "location of each place of business of every dealer paying the tax to the Commonwealth."[4] The Comptroller of Virginia then distributes the local sales tax funds on a monthly basis to the city or county entitled to them.[5]

Section 58.1-605(F) speaks directly to the issue of incorrect distributions of local sales tax revenues from the Commonwealth to a locality by providing that "[i]f errors are made in any such payment, or adjustments are otherwise necessary ... the errors shall be corrected and adjustments made in the payments for the next two months as follows: one-half of the total adjustment shall be included in [each of] the payments for the next two months."[6] Notably, this section does not mention interest, but refers only to correcting a payment error by adjusting such future payments.

Section 58.1-1833(A) provides general authority for the addition of interest on tax refunds that are "permitted or required [for overpayments] under the provisions of this article [i.e., Article 2, Chapter 18, Title 58.1], or on monies improperly collected from the taxpayer and refunded pursuant to § 58.1-1822."[7] By its plain language, § 58.1-1833(A) requires interest to be paid by the Commonwealth to the taxpayer on refunds resulting from correction of a tax assessment by the Tax Commissioner or by a court of law.[8] It does not apply to a locality's refund to the state of erroneously distributed sales tax revenues. As previously discussed, the repayment of erroneously distributed local sales tax is addressed by § 58.1-605(F), which requires correction through adjustments in the Commonwealth's payments to the locality over the next succeeding two months. Because this section does not require payment of interest on the amount of local sales tax refunded to the Commonwealth, it is my opinion that no such interest may be assessed or collected by the Department of Taxation. The "[r]ules of statutory construction prohibit adding language to or deleting language from a statute."[9]

Based on § 58.1-605(F) and § 58.1-1833(A), I conclude that the General Assembly did not intend, and the law does not provide for, the accrual or assessment of interest on local sales tax revenues collected by the Tax Commissioner and remitted to the wrong locality. Rather, § 58.1-605(F) authorizes and requires only a correction of the error through adjustments made in specified future remittances.

Conclusion

Accordingly, it is my opinion that the Tax Commissioner and Department of Taxation lack authority to assess interest on local sales tax revenues erroneously distributed to a locality by the Commonwealth. Such revenues are repaid to the Commonwealth by the locality, without interest, using the procedures specified in § 58.1-605(F) of the Code of Virginia.

With kindest regards, I am,
Very truly yours,

Mark R. Herring
Attorney General

1. VA. CODE ANN. § 58.1-603 (2017).

2. VA. CODE ANN. § 58.1-605(B) (2017).

3. VA. CODE ANN. § 58.1-605(D).

4. VA. CODE ANN. § 58.1-605(E).

5. VA. CODE ANN. § 58.1-605(F).

6. Id. (providing also that "the payment shall include a refund of amounts erroneously not paid to the city or county and not previously refunded during the three years preceding the discovery of the error. A correction and adjustment in payments described in this subsection due to the misallocation of funds by the dealer shall be made within three years of the date of the payment error").

7. VA. CODE ANN. § 58.1-1833(A) (2017).

8. See id. In most cases, the "taxpayer" entitled to interest will be the purchaser of the goods, as the statute provides that "[n]o interest will be paid on sales taxes refunded to a dealer unless the dealer agrees to pass such interest on to the purchaser." Id.

9. Appalachian Power Co. v. State Corp. Comm'n, 284 Va. 695, 706, 733 S.E.2d 250, 256 (2012) (citing BBF, Inc. v. Alstom Power, Inc., 274 Va. 326, 331, 645 S.E.2d 467, 469 (2007)).