Can a university get a refund for sales tax it mistakenly paid on exempt textbook sales to students, and what must it prove to get that refund?

Plain-English summary

A Virginia university filed amended sales tax returns and asked the Department of Taxation for a refund of sales tax it had paid on textbooks sold to students from August 2010 through February 2013. Under Virginia Code § 58.1-609.10 8, school textbooks are exempt from sales and use tax when they are sold to students by the institution of learning itself, or by any other dealer, as long as the books have been certified by a department or instructor as required textbooks for a course. The university argued that this exemption had been in place for years, and that it had simply made an error on its original tax returns by calculating and submitting tax on textbook sales that should never have been taxed.

The Department initially denied the refund. The reported returns showed that sales tax had been collected on the textbook sales, and Virginia Code § 58.1-625 requires that if a dealer collects sales or use tax on a transaction that is actually exempt, that money must still be sent to the Tax Commissioner unless the dealer can affirmatively show the tax was refunded to the purchaser (here, the students). In other words, the Department's position was that even if the sale should not have been taxed, the university could not get the money back unless it could prove the students themselves got their money back -- otherwise the state, not the university, would end up holding funds that rightfully belonged to the students.

The university asked for a chance to gather documentation showing that, despite what the returns said, it had not actually collected tax from the students on these exempt sales. It later submitted spreadsheets covering every textbook sale in the refund period along with a sample of invoices and receipts. The Tax Commissioner reviewed the sample and found that, at least for the transactions checked, tax had not been collected from students.

Because only a sample had been reviewed, the Tax Commissioner did not grant the refund outright. Instead, the university was given 60 days from the date of the ruling to provide the invoices and receipts needed to verify every transaction listed in the spreadsheets. If the university met that burden, the documentation would be used to decide whether the refund should be granted; if it failed to provide the documentation in time, the original refund denial would stand.

What this means for you

Colleges, universities, and their bookstores

If your institution certifies textbooks as required course materials and sells them to students, those sales are exempt from Virginia sales and use tax under Va. Code § 58.1-609.10 8 -- whether the institution itself makes the sale or another dealer does. If your institution mistakenly charges and remits sales tax on exempt textbook sales, you can seek a refund, but expect the Department to require proof that the tax was not (or has since been) returned to the students who paid it. A sample of invoices may support your case, but be prepared to produce documentation for every transaction in the refund period, not just a sample, before a refund is actually granted.

Students who bought certified textbooks

Certified textbooks required for your courses should not be taxed when purchased from your school or a dealer, if the books have been properly certified as required by an instructor or department. If tax was charged on such a purchase, Virginia law treats that money as belonging to you, the purchaser, until it is either refunded to you or sent on to the state -- the seller cannot simply keep tax collected in error.

Other dealers selling textbooks

Any dealer -- not just the institution itself -- can sell certified textbooks tax-free to students under this exemption, so long as the required certification from the school is in place. If a dealer collects tax on a sale that turns out to be exempt, Va. Code § 58.1-625 requires that money to be remitted to the Tax Commissioner unless the dealer can show it was refunded to the purchaser.

Common questions

Q: Are all textbooks sold to college students exempt from Virginia sales tax?
A: No. Only textbooks certified by a department or instructor of the institution as required textbooks for a course are exempt under Va. Code § 58.1-609.10 8. The exemption applies whether the sale is made by the institution of learning itself or by any other dealer.

Q: If a seller mistakenly collects sales tax on an exempt sale, does the buyer automatically get it back?
A: Not automatically. Under Va. Code § 58.1-625, a dealer that collects tax on an exempt transaction must send that tax to the Tax Commissioner unless the dealer can affirmatively prove the tax was refunded to the purchaser. So the money goes to the state unless the seller documents that it went back to the buyer.

Q: Why didn't the Tax Commissioner just grant the university's refund after reviewing the sample documentation?
A: The sample the university provided showed no tax was collected on those particular transactions, but the refund covered every textbook sale during a multi-year period. The Commissioner needed invoices and receipts for the entire refund period -- not just a sample -- before determining whether a full refund was warranted.

Q: What happens if the university does not provide the full documentation in time?
A: The ruling gave the university 60 days from the date of the letter to submit the required records. If the documentation is not provided within that time, the original denial of the refund request would be upheld.

Citations and references

• Va. Code § 58.1-1821 (basis for the administrative appeal)
• Va. Code § 58.1-609.10 8 (sales and use tax exemption for certified school textbooks)
• Va. Code § 58.1-625 (dealer's duty to remit erroneously or illegally collected tax unless refunded to the purchaser)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-141

Original ruling text

August 18, 2020

Re: § 58.1-1821 Appeal: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek reconsideration of the refund denial issued as a result of amended tax returns submitted for the period August 2010 through February 2013.

FACTS

The Taxpayer is a university that submitted amended returns to the Department and requested a refund of sales tax paid on sales of textbooks to students. The Department denied the request on the basis that it appeared the tax had been collected from students. As such, it was determined that the Taxpayer was not due a refund unless the Taxpayer could demonstrate that the tax had been refunded to the students.

The returns filed by the Taxpayer indicated that the sales tax was collected on the sale of textbooks to students. The Taxpayer contends that it did not collect sales tax on the sales, as legislation extending an exemption had been passed years earlier. Rather, the Taxpayer contends that it erroneously calculated and submitted the tax on its sales of exempt textbooks. The Taxpayer requests the opportunity to gather documentation to demonstrate that the sales tax was not collected from its students.

DETERMINATION

Virginia Code § 58.1-609.10 8 provides an exemption from the retail sales and use tax for:

School textbooks sold for use by students attending a college or other institution of learning, when sold (i) by such institution of learning or (ii) by any other dealer, when such textbooks have been certified by a department or instructor of such institution of learning as required textbooks for students attending courses at such institution.

Virginia Code § 58.1-625 provides that “any dealer collecting sales or use tax on transactions exempt or not taxable under this chapter shall transmit to the Tax Commissioner such erroneously or illegally collected tax unless or until he can affirmatively show that the tax has since been refunded to the purchaser or credited to his account.”

The issue of the appeal is whether the Taxpayer collected and remitted the sales tax as reported on the amended returns. The Taxpayer contends it did not collect the tax from students and an error was made on the tax returns due to oversight.

The Taxpayer has subsequently provided excel spreadsheets documenting every textbook sale during the refund period, along with a sample of the corresponding invoices and receipts. After reviewing a sample of the documentation, it is noted that tax was not collected on the sales transactions. In order to properly determine that the sales tax was not collected for all textbook sales within the refund period, the Department will need to review the invoices and receipts corresponding to every transaction in the excel spreadsheets.

The Taxpayer is granted 60 days from the date of this letter to provide the Department the required documentation described above. The documentation will be reviewed to determine if it is sufficient to warrant granting the refund. If the documentation is not provided within the allotted time, the denial of the refund request will be upheld.

The Code of Virginia sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1434L