Could a Virginia dealer remove audited sales by producing customer exemption certificates?

Subject

Good-faith exemption certificate removed audited sales

Plain-English summary

Virginia granted relief for sales to one customer but denied it for another because the exemption certificates differed in timing, completeness, and reliability.

For Customer A, the dealer had accepted a completed exemption certificate in good faith. The listed sales were removed from the paid assessment, and the Department ordered a refund of tax and interest, with refund interest. But the audit later showed that Customer A was a contractor and therefore the user and consumer of property used in real-property or service contracts. Prospectively, the dealer was told to charge tax on sales to that customer.

Customer B's claimed resale certificate did not work. It was obtained after the audit began, could not be confirmed for the contested transactions, and left the “Trading as” and business-kind lines blank. Virginia treated an incomplete or facially invalid certificate as unacceptable.

What this means for you

• A complete certificate accepted in good faith can protect a dealer for past transactions.
• Protection can change prospectively after the dealer learns facts inconsistent with the claimed exemption.
• Certificates obtained after an audit begins receive greater scrutiny and must be validated for specific transactions.
• Blank or inconsistent certificate fields can defeat exemption treatment.
• Dealers should document when certificates were received and why they reasonably covered the property sold.

Common questions

Why were Customer A's audited sales removed?

The dealer had accepted a completed certificate in good faith before the dispute.

Why did Virginia require tax on future sales to Customer A?

The audit established that Customer A was a contractor, which Virginia treated as the taxable user and consumer of property used in its contracts.

Why was Customer B's certificate rejected?

It was incomplete, obtained after the audit began, and not verified as valid for the specific sales.

Did the dealer receive money back?

Yes. Virginia ordered a refund of the tax and interest attributable to Customer A's transactions, plus applicable refund interest.

Citations and references

• Va. Code § 58.1-1833.
• 23 VAC 10-210-280(A) and (B); 23 VAC 10-210-410(A).
• P.D. 97-351 (Aug. 29, 1997); P.D. 98-29 (Feb. 20, 1998); P.D. 98-72 (Apr. 21, 1998).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-180

Original ruling text

November 21, 2007

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period January 2002 through December 2004. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a wholesaler and retailer of welding and safety supplies and gases for commercial and residential heating. The Taxpayer was audited by the Department and assessed tax and interest on untaxed sales. The Taxpayer provides a variety of documentation to substantiate its position that certain sales in the audit are exempt from the retail sales and use tax.

DETERMINATION

Generally

Title 23 of the Virginia Administrative Code (VAC) 10-210-280(A) states:

All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law . . . However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

* ("Taxpayer A")

In this case, the Taxpayer accepted a completed exemption certificate in good faith from Taxpayer A. Therefore, sales to Taxpayer A pursuant to the exemption certificate are not taxable. The following items will be removed from the assessment:

Account Number * Items 148 through 175

Notwithstanding the above, the Department's investigation during the audit showed that Taxpayer A is a contractor. Pursuant to Title 23 VAC 10-210-410 A, contractors are the users and consumers of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contractors. As the taxable user and consumer of tangible personal property furnished under real property or service contracts, Taxpayer A is required to pay sales tax or accrue use tax on any materials purchased or imported into Virginia for use or consumption in this state. Therefore, on a prospective basis, the Taxpayer should charge tax on sales to Taxpayer A.

* ("Taxpayer B")

The proper use of certificates is set out in Title 23 of the Virginia Administrative Code 10-210-280 B, which provides:

Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving, of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate. [Emphasis added.]

The regulation also states in paragraph A that, "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice."

The Department has previously ruled in Public Document (P.D.) 98-29 (2/20/98) that an exemption certificate obtained after the start of an audit cannot be accepted "in good faith" and is subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during audit. Based on the information provided, and for the reasons explained above, the Department cannot confirm that the use of the resale certificate is valid for the contested sales to Taxpayer B. Furthermore, the exemption certificate was not complete as the "Trading as" and "Kind of business engaged in by dealer" lines were not completed by the purchaser. For more information regarding the Department's policy relating to exemption certificates, see P.D. 97-351 (8/29/97) and P.D. 98-72 (4/21/98).

Based on the foregoing, the sales to Taxpayer A will be removed from the audit assessment. According to the Department's records, the assessments have been paid in full; therefore, a refund of the retail sales tax and interest attributable to the transactions involving Taxpayer A will be issued as soon as practical. Refund interest on the overpayment amount will apply in accordance with Va. Code § 58.1-1833.

The Code of Virginia and regulation sections cited, along with the public documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/57066.i