Did customers' direct payment of use tax excuse a registered dealer's failure to collect tax on sales lacking exemption certificates?

Subject

Taxpayer was obligated to collect use tax on sales without exemption certificates

Plain-English summary

An out-of-state dealer registered to collect Virginia use tax made untaxed sales without obtaining exemption certificates. Some customers later stated that they had self-assessed and paid use tax directly to Virginia. The dealer argued that those sales should be removed from the audit sample or, alternatively, that it should receive credit throughout the audit period for the customers' payments.

Virginia refused to recalculate the sample. The sales sample measured the dealer's own failure to collect tax on sales lacking valid exemption certificates; it did not measure the dealer's and customers' combined compliance. Under 23 VAC 10-210-280, the dealer's collection duty did not depend on whether customers separately accrued and paid use tax.

The Commissioner left a narrower path for credit to prevent unverified duplicate collection. Customer statements and the dealer's sales listing were not enough because they did not prove the proper amount was paid on every actual transaction. The Department would allow credits only if the dealer supplied detailed transaction-level documentation within 60 days showing the customers' payment of use tax to Virginia. Otherwise, the assessment would become due.

What this means for you

• A customer's direct use-tax payment did not cure a dealer's failure to collect tax or support exemption at the time of sale.
• Seller audit sampling measured the seller's compliance, so those sales remained exceptions even if customers later paid tax.
• A dealer could seek transaction-specific credit, but only with records allowing the Department to verify the actual purchases and tax paid.

Citations and references

• 23 VAC 10-210-280, dealer collection obligation for sales without valid exemption certificates.
• P.D. 04-99, customer-accrued use tax does not invalidate the seller's sales-audit sample.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-68

Original ruling text

May 10, 2007

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

Dear *:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to * (the "Taxpayer") for the period January 2001 through December 2003. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is an out-of-state dealer registered with the Department to collect use tax on its Virginia sales. The Taxpayer was audited and assessed use tax on untaxed sales made to Virginia customers. The Taxpayer did not have exemption certificates from these customers to support the exempt sales. Several customers provided statements to the Taxpayer that they had self-assessed and paid use tax on the transactions directly to the Department.

The Taxpayer takes exception to the inclusion in the audit sample of untaxed sales to these customers. The auditor allowed credits in the audit for the taxes self-assessed and paid by the customers in the sample months only. The Taxpayer was not given credit for the taxes paid by the customers in the other months of the audit period. The Taxpayer maintains that the sample is invalid because the Department has already received the tax from these customers. The Taxpayer suggests that the sales should be removed from the audit sample. Alternatively, the Taxpayer requests a credit in the audit for the use tax its customers self-assessed and paid on purchases made from the Taxpayer during the other months of the audit period.

DETERMINATION

Sample Method

The Taxpayer maintains that the Department should recalculate the error rate determined by the Department's sample by removing sales to those customers that self­assessed and paid use tax to the Department. Public Document 04-99 (9/8/04) is directly on point with this issue. This document states that the accrual and payment of use tax directly to the Department by a seller's customers does not invalidate the audit sample of the seller's sales. The Department's sales sample determines the error rate at which the Taxpayer failed to charge sales and use tax on untaxed sales without a valid, supporting exemption certificate. The sample is not intended to determine the combined compliance of the Taxpayer and its customers.

Pursuant to Title 23 of the Virginia Administrative Code 10-210-280, the Taxpayer was required by law to collect sales and use tax on sales made to those customers that did not provide it with a valid certificate of exemption. The Taxpayer made untaxed sales to customers during the sample period that were not supported by exemption certificates. The inclusion of customers' self-assessed use tax payments in the sales sample distorts the Taxpayer's sales and use tax compliance. The Taxpayer's obligation to collect sales tax on all Virginia sales without valid exemption certificates is not dependent on whether customers self-assess and pay use tax directly to the Department. As such, there is no basis for removing the sales exceptions for these customers from the audit sample.

Credit For Tax Paid by Customers

As an alternative, the Taxpayer suggests that the Department allow a credit in the audit for the tax paid by those customers that self-assessed and paid use tax directly to the Department during the entire audit period. The Taxpayer has provided a listing of sales made to these customers during the audit period. The customers have provided the Taxpayer with written statements that the tax on these sales was accrued and paid to the Department. The Taxpayer asks for a credit equal to the use tax paid on its total sales made to these customers.

The Taxpayer's claim for this credit is based on its own sales information for each customer and the customers' written statements that the tax was paid to the Department. The Department cannot verify if these customers paid the proper amount of use tax on the transactions or if the tax was paid on all of the transactions that occurred during the audit period. I cannot agree to allow a credit in the audit based on the current information provided without reviewing the customers' records to verify that the tax was properly paid to the Department.

As previously discussed, the Taxpayer was legally obligated to collect Virginia use tax on the sales at issue because it was not provided exemption certificates from its customers. I will only agree to provide the requested credits in the audit for use tax self­ assessed by the Taxpayer's customers if detailed documentation is provided that shows the payment of use tax to the Department on the actual transactions between the Taxpayer and its customers. This information should be provided within 60 days from the date of this letter to * Office of Policy and Administration, P.O. Box 27203, Richmond, Virginia, 23261-7203. If this information is not received within the allotted time, the assessment as issued will become immediately due and payable. In that event, the Taxpayer will receive an updated bill with interest accrued to date.

The regulation and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions concerning this determination, please contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/55925S

Related Documents

04-99