If a vendor mistakenly charges another state's sales tax on a purchase used in Virginia, does that satisfy my Virginia use tax obligation?

Plain-English summary

A physician's office with two Virginia locations was audited and assessed tax on untaxed general expense and fixed-asset purchases. On appeal, the taxpayer raised two kinds of issues. First, it argued that for some purchases, it had already paid tax -- just to the wrong state, because a vendor who wasn't registered to collect Virginia sales tax had mistakenly charged that other state's tax. Second, it flagged what it said were errors in the audit itself: a duplicate fixed-asset purchase counted twice, and medication purchases it believed were exempt.

On the wrong-state-tax argument, the Department ruled against the taxpayer. Virginia's credit for taxes paid to another state (23 VAC 10-210-450, 10-210-540) only covers tax that was legitimately owed to that other state -- for example, because the property was put to a taxable use there before being delivered into Virginia. It does not cover tax a vendor charges by mistake on property that was never taxably used anywhere but Virginia. Citing a federal case, United States v. Forst, the Department reiterated that while a seller is obligated to collect the tax, the purchaser remains personally liable for the correct tax as a matter of law -- so paying the wrong state's tax to a vendor doesn't discharge the Virginia tax debt. The taxpayer must remit the correct Virginia tax and separately seek a refund of the erroneously collected tax from the vendor. Two prior rulings applying the same rule, P.D. 99-187 and P.D. 00-24, were cited as consistent precedent.

On the audit-accuracy issues, though, the taxpayer won: the Department's own auditor agreed, after reviewing the taxpayer's appeal documentation, that a fixed-asset purchase had indeed been counted twice and that certain medication purchases were properly exempt. The case was remanded to the audit staff to revise the assessment accordingly, removing the duplicate item and the exempt medications while keeping the wrong-state-tax purchases in the audit. Any remaining balance would be rebilled with accrued interest, with 60 days to pay before further interest would run.

What this means for you

Businesses that discover a vendor charged the wrong state's sales tax

Don't assume paying an incorrect sales tax to a vendor -- even in good faith -- satisfies your Virginia use tax obligation on property delivered and used in Virginia. You'll likely still owe the correct Virginia tax, and you'll need to pursue the vendor directly (not the Department) for a refund of what was erroneously charged.

Anyone appealing a Virginia audit assessment

It pays to review the audit's exceptions line by line against your own records, even where a bigger legal argument doesn't succeed. Here, flagging a genuine duplicate entry and a documented exemption got real relief even though the taxpayer's main theory -- crediting the wrong-state tax -- was rejected.

Common questions

Q: Does Virginia give credit for sales tax mistakenly paid to another state?
A: No -- the credit under 23 VAC 10-210-450 and 10-210-540 applies only to tax legitimately imposed by another state because of a taxable use there before delivery into Virginia, not to tax erroneously charged or collected.

Q: Who is responsible for the Virginia tax if a vendor charges the wrong state's tax?
A: The purchaser remains personally liable for the correct Virginia tax under Va. Code § 58.1-625, regardless of what a vendor mistakenly charged; the purchaser must separately seek a refund from the vendor for the erroneous charge.

Q: Can duplicate or exempt items still be removed from an audit even if other appeal arguments fail?
A: Yes -- as this ruling shows, the Department will correct genuine audit errors, such as a duplicated line item or a documented exemption, identified with supporting documentation, even while upholding the assessment on other disputed points.

Citations and references

• Va. Code § 58.1-625 (purchaser's personal liability for sales and use tax)
• 23 VAC 10-210-450 (credit for tax paid to another state)
• 23 VAC 10-210-540 (credit does not apply to tax erroneously charged or paid)
• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978)
• P.D. 99-187 (7/15/1999) (credit denied where taxpayer paid the wrong state's tax to a vendor)
• P.D. 00-24 (3/28/2000) (erroneously-taxed purchases properly kept in an audit sample)

Subject

Purchases: Tax Paid to Another State - First Use In Virginia; Audit - Duplicate Exceptions

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-17

Original ruling text

February 21, 2023

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 seek correction of the retail sales and use tax assessment issued for the period March 2015 through February 2021.

FACTS

The Taxpayer, a physician’s office with two locations in Virginia, was audited for the period at issue. Following the audit, an assessment was issued for tax and interest due on untaxed general expense and fixed asset purchases. The Taxpayer appeals, seeking the removal of various purchases held as exceptions in the audit. The Taxpayer also claims that tax was properly paid on certain purchase exceptions where the auditor determined that another state’s tax was incorrectly paid on such transactions.

DETERMINATION

Erroneous Tax Paid

During the audit, the auditor reviewed invoices provided by the Taxpayer and noticed that an incorrect sales tax rate was charged by a vendor on certain purchases. This generally signifies that another state’s tax is being collected. The auditor investigated further and determined that * (the “Vendor”) was not registered to collect and remit Virginia sales tax. The Taxpayer seeks the removal of purchases from the Vendor on the basis that it has already fulfilled its responsibility to pay the tax on these transactions.

With regard to taxes paid to another state, Title 23 of the Virginia Administrative Code (VAC) 10-210-450 allows a credit for taxes paid elsewhere. However, such a credit is intended only to apply to taxes owed in the state from which the property was purchased, if legitimately imposed because of a taxable use made in the vendor's state, and prior to the delivery of the property in Virginia. Title 23 VAC 10-210-540 states, in part, that:

This credit does not apply to tax erroneously charged or incorrectly paid to another state. For example, if a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer who incorrectly charges out-of-state tax, no credit is available. The purchaser must apply to the out-of-state seller for refund.

Public Document (P.D.) 99-187 (7/15/1999) and P.D. 00-24 (3/28/2000) are relevant to this case. In P.D. 99-187, the vendor sold and delivered materials to the taxpayer in Virginia and collected a 5% sales tax and remitted it to the vendor's state. The taxpayer contested the assessment of Virginia tax on the purchase and claimed that it met its obligations to pay the sales tax. The Tax Commissioner upheld the assessment and ruled that the taxpayer did not exercise reasonable care and judgment to ensure that it was properly paying a Virginia retail sales or use tax on the purchase. A similar situation was addressed in P.D. 00-24. In that case, the auditor included in the sample two purchases on which the taxpayer paid another state's sales tax in error. The taxpayer claimed that the purchases distorted the sample by assuming that other similar purchases were subjected to another state's tax. The Tax Commissioner upheld the assessment, ruling that the removal of the transactions would nullify the purpose and validity of the sample.

Under long settled principles of sales and use tax law, the Department may seek payment of the tax from either the seller or the purchaser of tangible personal property. The case of United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977) aff'd, 569 F.2d 811 (4th Cir. 1978) held that while "the seller is legally obligated to collect the tax from the purchaser, the statute [ Virginia Code § 58.1-625] makes the tax the legal debt of the purchaser." Thus, the Taxpayer's obligation for payment of the tax does not cease when it pays the wrong state's sales tax to a vendor. In this case, the Taxpayer erroneously paid another state’s sales tax on a purchase in which Virginia sales and use tax was due. Accordingly, the Taxpayer should remit the proper tax to the Department and apply to the vendor for a refund of the tax paid.

Other Issues

Based on documentation provided with the appeal, the Department’s auditor concurs with the Taxpayer that a duplicate fixed asset line item purchase exception was included in the audit report in the amount of * and Abbvie medication purchases were property exempt from the sales and use tax.

CONCLUSION

In accordance with this determination, the audit will be returned to the audit staff to revise the assessment. The assessment will be revised to remove the duplicate fixed asset purchase and the exempt medication purchases. The purchases for which the wrong state’s tax was paid will remain in the audit. If any balance remains after the audit revision, an updated bill, with interest accrued to date, will be sent to the Taxpayer. No further interest will accrue if the bill is paid within 60 days.

The Code of Virginia section, regulation, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4209.G

Related Documents

99-187

00-24