Did incomplete, outdated, or product-mismatched exemption certificates protect a Virginia hardware retailer from sales tax?

Subject

A number of exemption certificates accepted by the Taxpayer were incomplete and outdated

Plain-English summary

Virginia upheld the sales-tax assessments because the retailer accepted incomplete, outdated, and product-mismatched exemption certificates without reasonable care. The Department also upheld its sampling method.

Sampling fell within the Tax Commissioner's broad authority to determine equitable assessments. The auditor chose periods based on average sales, purchases, and expenditures and tried to reach agreement with the taxpayer on representativeness. Virginia found no reason to require a detailed audit.

For certificates, a dealer could rely only on a certificate accepted in good faith and consistent on its face. The retailer had to review completeness and compare the certificate's exact language with the goods on the invoice.

The mismatches were concrete: a manufacturing certificate was used for roll bathroom tissue and orange cleaner, while an agricultural certificate was used for drain opener, a plunger, and a toolbox. Those products were not within the classes described by the certificates.

What this means for you

• Review every certificate for completeness, validity, current information, and the exact exemption claimed.
• Match the certificate's wording to each class of goods sold.
• Sellers need not investigate customers like enforcement officers, but they must exercise reasonable care and judgment.
• A representative audit sample can be upheld without a statute describing every sampling step.

Common questions

Was having a certificate in the file enough? No. A certificate invalid or inconsistent on its face was never acceptable under the cited regulation.

Did Virginia require a transaction-by-transaction audit instead of sampling? No.

Citations and references

• Va. Code §§ 58.1-202(1) and 58.1-623.
• 23 VAC 10-210-280.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-9

Original ruling text

January 11, 2008

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

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessments issued to * (the "Taxpayer") as a result of an audit of four locations for the period November 2002 through October 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a hardware store, an industrial parts store and a rental center at four locations in Virginia. The audit of the Taxpayer's sales and use tax records resulted in the assessment of sales tax on untaxed retail sales of various materials, equipment and supplies for which an exemption certificate was obtained.

The Taxpayer contests all of the sales tax assessed. The Taxpayer maintains that the contested sales should not be included in the audit because it acted properly in accordance with the law and regulations in accepting exemption certificates. In addition, the Taxpayer contends that the use of sampling as an audit methodology is improper and invalid in the absence of statutory or regulatory authority.

DETERMINATION

Sampling

Virginia Code § 58.1-202 1 provides that the Tax Commissioner shall "Supervise the administration of the tax laws of the Commonwealth, insofar as they relate to taxable state subjects and assessments thereon, with a view to ascertaining the best methods of reaching such property, of effecting equitable assessments and of avoiding conflicts and duplication of taxation of the same property." This language gives the Tax Commissioner wide latitude in the methods used to calculate an equitable assessment. Included within these methods is the Department's authority to use sample methodology when auditing.

In this instance, every effort was made to objectively select the sample periods that were representative of the entire audit period, and to reach a consensus with the Taxpayer concerning the validity of the sample. The auditor selected average periods that were based on the Taxpayer's sales, purchase and expenditure activities for the audit period. Based on the cited statute and the procedures followed by the auditor, the use of the sampling technique is valid, and I do not find cause to conduct a detailed audit or use another audit methodology to review the Taxpayer's records.

Certificates of Exemption

Virginia Code § 58.1-623 states that all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale or lease of tangible personal property is not taxable is upon 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. This requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-280, which provides that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable.

The regulation further states, "Reasonable care and judgment must be exercised by all concerned to prevent the giving and 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." Reasonable care and judgment requires that the Taxpayer review the exemption certificate presented and compare the language of such certificates to the items sold on the invoices. The Taxpayer is not expected to "police" its customers' use of exemption certificates. However, the Taxpayer is expected to review the certificates for completeness, and to have an understanding that the class of items being sold falls within the scope of the wording of the exemption certificate.

In this instance, a number of exemption certificates accepted by the Taxpayer were incomplete and outdated. In addition, in many instances the property sold was not of the same class as that identified on the certificates. For example, a Manufacturing Exemption Certificate (Form ST-11) was accepted by the Taxpayer for the exempt sale of roll bath tissues and orange cleaner. Further, the Agricultural Exemption Certificate (Form ST-18) was accepted for the exempt sale of drainer opener, a plunger and a toolbox. None of these items are of the same class of items exempted by the language of the certificates accepted. In accordance with the cited authorities, the Taxpayer did not accept the exemption certificates at issue in good faith or exercise reasonable care and judgment. Therefore, I find no basis to remove these transactions from the audit.

CONCLUSION

Based on the above, the assessments are correct. Updated bills, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the bills are paid within 30 days from the date on the bills. Please remit payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *.

The Code of Virginia sections and regulation 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 website. If you have any questions about this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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