Did resale certificates obtained after a Virginia sales-tax audit began protect a seller when the account numbers were invalid?

Subject

Exemption certificates obtained after the start of an audit are not acceptable

Plain-English summary

A seller made untaxed sales without valid exemption certificates on file. After Virginia began its audit, the seller obtained resale certificates from the customer and argued that it had accepted them in good faith.

Virginia denied the requested refund. A certificate obtained after an audit begins does not receive the ordinary good-faith protection available when a valid certificate is taken at the time of sale. A late certificate may be accepted only if the Department can confirm that the customer's use was valid and proper for the specific audited transaction. Here, the account numbers were invalid and no proper certificate was furnished, so the assessment remained unchanged.

What this means for you

• Obtain and review exemption certificates when the sale occurs, not after an audit starts.
• A late certificate faces greater scrutiny but is not categorically rejected if Virginia can verify its valid use for the transaction.
• Check registration and account numbers and retain transaction-specific support for every exempt sale.

Citations and references

• Va. Code § 58.1-623, presumption that sales are taxable until the contrary is established.
• 23 VAC 10-210-280(A), dealer's burden and good-faith acceptance of exemption certificates.
• P.D. 98-29, treatment of exemption certificates obtained after an audit begins.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-87

Original ruling text

May 25, 2007

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

Dear *:

This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period September 2002 through August 2005. I note that the assessment has been paid in full.

FACTS

The Department's audit disclosed that the Taxpayer made exempt sales of tangible personal property that were not supported by valid Certificates of Exemption. The Taxpayer subsequently obtained an exemption certificate from the customer; however, the auditor disallowed the certificate stating that it was invalid. The Taxpayer maintains that it could not know that the certificate provided by its customer was invalid and that it accepted the certificate in good faith. The Taxpayer asserts that the sale at issue should be exempt and removed from the audit based on the provisions of Va. Code § 58.1-623.

DETERMINATION

Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are presumed to be subject to tax until the contrary is established. Title 23 of the Virginia Administrative Code 10-210-280 A interprets Va. Code § 58.1-623 and 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 Certificates of Exemption indicating that the property is exempt under the law.

The Department has previously ruled in Public Document 98-29 (2/20/98) that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was never accepted in good faith. Thus, exemption certificates obtained after the start of an audit cannot be accepted "in good faith" and are 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.

The Taxpayer obtained resale exemption certificates from its customer with account numbers that the auditor determined were not valid. The Taxpayer has not provided a valid certificate to support the tax-exempt sales to its customer. For the reasons discussed above, the Taxpayer does not enjoy the good faith protection afforded to dealers that obtain valid exemption certificates at the time of sale. Based on all of the information presented and the fact that a proper, valid Certificates of Exemption has not been furnished for the sale at issue, there is no basis to adjust the audit. Accordingly, the assessment is correct as issued and the Taxpayer's request for refund cannot be granted.

The Code of Virginia section, regulation and public document cited 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 regarding this determination, please contact * of the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-600790909Q