I paid Virginia sales tax by mistake on exempt purchases and later got a use tax audit bill. Can I credit that overpaid tax against the audit, and what if the vendor is gone?

Plain-English summary

A technology-services company was audited for May 2017 through April 2020 and assessed use tax on untaxed purchases of property, software, and taxable services. During the audit, it asked the auditor to credit sales tax it had erroneously paid a vendor on a separate (exempt) software purchase against the audit bill. The auditor said no and told the company to get a refund from the vendor instead. When the company went to do that, it found the vendor had gone out of business. It then filed a refund claim with the Department — which was denied as too late — and appealed, arguing the Department should let it credit the erroneously paid tax against the use tax it owed.

The Department upheld the assessment and denied both the credit and the refund. Two rules explain why:

1. Credit in an audit is narrow. The Department allows an overpayment credit inside an audit only in limited situations — for example, where a dealer failed to charge sales tax but the customer self-assessed and remitted use tax on the same transaction (P.D. 07-68), or a contractor labeled its charge "estimated use tax" — essentially sales tax under the wrong name — but remitted the use tax (P.D. 22-56). It does not allow a credit for sales tax a buyer paid a dealer on purchases that should not have been taxed at all (P.D. 96-358). Granting that kind of credit in an audit could misallocate the local portion of the tax and disregard the dealer's statutory discount. So a buyer who overpaid on exempt purchases must pursue a refund, not an audit credit.

2. The refund path exists — but it has a deadline. Erroneously collected tax is held in trust by the dealer until refunded to the customer (§ 58.1-625; 23 VAC 10-210-340), so a buyer normally seeks the refund from the dealer first. A buyer who failed to give the dealer an exemption certificate at the time of purchase may file a refund claim (§ 58.1-623 E), and if the dealer is unavailable — as here, out of business — the buyer may seek the refund directly from the Department. But the claim must be timely: within three years of the return's due date, within two years of paying an assessment, within three years of the assessment date, or within a period covered by a waiver (§ 58.1-1823, § 58.1-1824; P.D. 03-52). Here the tax was paid on an August 2017 invoice and the refund was filed in August 2022 — well beyond the limit.

Because the credit was properly disallowed and the refund was untimely, the audit assessment stood. (It had already been paid in full, so no further action was needed.)

What this means for you

Businesses being audited

If you spot sales tax you overpaid a vendor on exempt purchases, do not assume it will be netted against what an audit says you owe. Except in a couple of narrow situations, the Department will not credit overpaid sales tax inside a use tax audit — it will assess the use tax in full and send you to pursue a separate refund. Raise overpayments as refund claims on their own track, promptly, rather than expecting an audit offset.

Anyone who paid sales tax by mistake

The recovery route runs through the dealer first: the dealer holds the erroneously collected tax in trust and is the one who refunds it. If the dealer is gone — out of business or unreachable — you can claim the refund directly from the Department, but the clock does not stop for the dealer's disappearance. Watch the three-year window from the transaction, and do not wait until an audit forces the issue; by then the deadline may already have passed, as it did here.

Tax preparers

Two separate questions. First, does an audit credit apply — only in the P.D. 07-68 / P.D. 22-56 fact patterns (customer self-assessed use tax; contractor mislabeled sales tax as estimated use tax), never for tax paid on a purchase that should have been exempt (P.D. 96-358). Second, is a refund still available and timely? Map the payment date against the § 58.1-1823 / § 58.1-1824 limits early, seek the dealer refund, and escalate to a direct Department claim if the dealer cannot pay — all before the window closes.

Common questions

Q: I overpaid sales tax to a vendor. Can I subtract it from a use tax audit bill?
A: Generally no. The Department credits overpaid tax in an audit only in narrow situations — for example, where the customer already self-assessed use tax on the same transaction, or a contractor mislabeled sales tax as "estimated use tax" and remitted it. Tax paid on a purchase that should have been exempt is recovered through a refund, not an audit credit.

Q: Why can't I just get a credit — the money went to Virginia either way?
A: The Department's concern is that crediting a purchaser inside an audit could misallocate the local share of the tax and ignore the dealer's statutory discount. So the refund process, which runs through the dealer, is the proper channel.

Q: What if the vendor that overcharged me is out of business?
A: You may then seek the refund directly from the Department (§ 58.1-623 E), instead of through the now-defunct dealer. But you still have to file within the statute of limitations — the dealer's disappearance does not extend it.

Q: How long do I have to claim the refund?
A: Broadly, within three years of the return's due date, two years of paying an assessment, three years of the assessment date, or a period covered by a waiver (§ 58.1-1823, § 58.1-1824). Here a 2017 payment claimed in 2022 was far too late.

Citations and references

Statutes and regulation:

• Va. Code § 58.1-625 — a dealer holds erroneously collected tax in trust for the state until it refunds the tax to the customer
• Va. Code § 58.1-623 E — a purchaser who did not give the dealer an exemption certificate at the time of purchase may file a refund claim
• Va. Code § 58.1-1823 — refund claim within three years of the return's due date, or within two years of paying an assessment
• Va. Code § 58.1-1824 — a taxpayer who paid an assessment may preserve judicial remedies by filing for refund within three years of the assessment date
• 23 VAC 10-210-340 — dealer's obligation to refund erroneously collected sales tax to the purchaser

Prior Department public documents (described here, not linked): P.D. 07-68 and P.D. 22-56 (the narrow situations where an audit credit is allowed); P.D. 96-358 and P.D. 20-174 (no audit credit for tax paid on exempt purchases; seek a dealer refund); and P.D. 03-52 (a refund is timely if made within a waiver period).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-72

Original ruling text

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

Related Documents

96-358

03-52

07-68

14-178

20-174

22-56