Can a Virginia dealer offset an audit assessment by claiming its customers paid use tax on the same untaxed sales?

Subject

Untaxed Sales; Credit for Customer paid taxes

Plain-English summary

The furniture manufacturer did not qualify for an immediate credit based on its customers' claimed use-tax payments. Its untaxed sales were unsupported by exemption certificates or direct-payment permits, so Virginia law made the dealer responsible for the sales tax unless it proved an adjustment was warranted.

The invoices and listings supplied were not enough. Neither customer certified that the records covered all relevant sales, that all consumer use tax was correctly reported and paid, or that the tax was computed on the proper sales price. The Department said a credit might be possible only if the customers provided detailed accrual records directly to the auditor or allowed an on-site review.

Any verified credit would be strictly limited. It would not produce a refund, could offset only the sales tax assessed on the same customers' matching untaxed sales, and would be prorated if a customer paid use tax on only part of those sales.

What this means for you

• A dealer should obtain a valid exemption certificate or direct-payment permit when making an untaxed sale.
• A customer's statement that it self-accrued use tax does not by itself eliminate the dealer's audit liability.
• The Department may require customer-level records to verify the exact sales and use tax paid.
• A customer-paid-tax credit is an offset, not a refundable amount or a credit against unrelated audit items.

Common questions

Why was the dealer still liable if customers said they paid use tax?

The dealer lacked the normal exemption documentation, and the evidence did not prove that the customers correctly paid tax on every assessed sale.

Could the dealer still obtain a credit later?

Possibly. The ruling allowed the customers to provide detailed use-tax records directly to the auditor for verification.

Could verified customer payments create a refund for the dealer?

No. The ruling says the credit is nonrefundable because the customers' use-tax payments do not belong to the dealer.

Citations and references

• Va. Code §§ 58.1-623, 58.1-624, 58.1-625, and 58.1-205(1).
• 23 VAC 10-210-280 and 23 VAC 10-210-510.
• P.D. 08-99, P.D. 07-68, and P.D. 06-23, cited by the taxpayer and discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-248

Original ruling text

November 4, 2010

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period October 2004 through September 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a furniture manufacturer. An audit resulted in the assessment of sales tax on untaxed sales. The Taxpayer contests the tax assessed on sales made to two customers because it claims that these customers self-assessed the use tax owed on the untaxed sales made by the Taxpayer during the audit period. The Taxpayer asks for a credit * equal to the use tax claimed to be paid by the two customers on the untaxed sales for the entire audit period. This requested credit would exceed the amount of the sales tax liability applicable only to the untaxed sales of the two customers in question. The contested assessment is for sales tax assessed in connection with untaxed sales made to ("Customer A") and *** ("Customer B").

DETERMINATION

Untaxed Sales

Pursuant to Va. Code § 58.1-623, all sales or leases by a dealer are subject to tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless the dealer takes, in good faith from the customer, a valid certificate of exemption certifying that the property purchased is exempt under the law. See Title 23 Virginia Administrative Code (VAC) 10-210-280. In lieu of an exemption certificate, an eligible manufacturer, mine operator or public service corporation may notify a retailer of its direct payment permit number and pay the tax directly to the Department. See Va. Code § 58.1-624 and Title 23 VAC 10-210-510. Neglecting or failing to collect the sales tax upon every taxable sale or lease of tangible personal property makes the Taxpayer directly responsible and liable for the tax. See Va. Code § 58.1-625. It is my understanding that none of the sales assessed in this audit were supported by a valid exemption certificate or a direct payment permit. As such, I must conclude that such sales were correctly held in the audit.

Pursuant to Va. Code § 58.1-205 1, any assessment of tax by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to show that an adjustment to the assessment is warranted.

Credit for Tax Paid by Customers

The Taxpayer cites three public documents [i.e., P.D. 08-99 (6/18/08), 07-68 (5/10/07) and 06-23 (2/28/06)] as the authorities for allowing a credit in the audit for a customer's use tax payment to be applied against the sales tax assessed in this case. The Taxpayer has provided listings 1 of untaxed sales made by the Taxpayer to the two customers during the audit period, as well as copies of many of the invoices for these sales. The Taxpayer claims that the customers provided this information as evidence that these customers reported and paid the use tax to the Department, but they refuse to provide complete accounts payable detail supporting the total use tax reported on their state sales tax returns because such information is confidential.

A review of the information provided shows that it is not certified by either customer. For instance, the Taxpayer has not provided a signed and dated statement from either customer certifying that (i) the listings provided show all of the untaxed sales made by the Taxpayer during the Taxpayer's audit period, (ii) such customer correctly reported and remitted all of the consumer use tax owed to the Department of Taxation on such untaxed sales for the audit period in question, and (iii) such remitted use tax was correctly computed based on the taxable sales price of all such untaxed sales of tangible personal property made by the Taxpayer to such customer during the audit period in question. Absent such certification, there is no assurance from the customers that they have actually and correctly remitted all the use tax owed on the untaxed sales at issue. Moreover, even if such certification had been received, no evidence has been provided that these two customers actually and correctly accrued all of the use tax owed with respect to the Taxpayer's untaxed sales for the audit period.

Accordingly, I cannot agree to allow a credit in the audit based on the current information without reviewing the customers' records to verify that the tax was properly paid to the Department. In the event that such customers are agreeable to furnishing detailed use tax accrual records directly to the auditor or agree to an on-site review of such records by the auditor, then it may be possible to compute a credit for tax paid by the two customers. In computing such a credit, certain limitations apply as noted below.

Limitations on Credit for Tax Paid by Customers

A credit for tax paid by customers is nonrefundable and the amount to be credited is subject to certain limitations. This credit is nonrefundable because (i) the sole purpose of the credit is to provide a limited offset to a dealer's sales tax audit liability, and (ii) the use tax monies paid by a dealer's customer directly to the Department do not belong to the dealer. To allow a refund of such credit would erroneously and unjustifiably enrich a dealer. This credit is not refundable under any circumstance.

Furthermore, the maximum credit for tax paid by customers is the total amount of the sales tax assessed with respect only to the untaxed sales of those customers for which the credit is based. As such, the credit cannot be applied to sales tax deficiencies for untaxed sales of customers for which no use tax credit is computed.

In addition, the credit for tax paid by customers may be further reduced if it is found that the customer has not paid all of the use tax owed on the untaxed sales. If use tax has not been remitted by the customer on all untaxed sales made by the Taxpayer over the course of the Taxpayer's audit period, the use tax credit may only be computed based on the portion of use tax actually reported and paid by the customer. Accordingly, the use tax credit must be prorated between the use tax reported and paid by the customer and the use tax that was not reported and paid by the customer.

For example, a credit would not be allowed for use tax remitted by two customers against the Taxpayer's entire tax assessment when the entire tax deficiency is based on more than the two contested untaxed sales. In this case, the maximum credit that could potentially be allowed in this case is the contested tax assessed in the amount of * not the total tax paid of *** by the customers because such tax amount would unfairly benefit the Taxpayer. Even if only one assessment had been issued in this case for the contested and non-contested tax liabilities, the credit would still be limited to the contested tax amount.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Appeals and Rulings, P. O. Box 27203, Richmond, Virginia 23261-7203, Attention: *.

Alternatively, if the customers agree to furnish or make available their detailed use tax remittance records ( e.g. , the backup records needed for verifying that the use tax was reported and paid on their filed returns) directly to the auditor, you may furnish customer contact information to the auditor, * at , within 30 days of the date of this letter. After reviewing such customer records, ** will notify the Taxpayer of his decision as to whether any audit adjustment is warranted in accordance with this determination. Absent such documentation from the customers, the Taxpayer remains fully liable for the sales tax assessed in this case.

The Code of Virginia sections, regulations and public documents cited 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 about this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Acting Tax Commissioner

AR/1-3447032923.R

1. The listing provided in connection with untaxed sales to Customer A includes columns for the invoice numbers, invoice dates, nontaxable charges, taxable charges, total invoice charges, tax supposedly accrued, store number, city, state and zip code. The listing provided for Customer B provides similar information except it lacks the use tax accrued by Customer B. Furthermore, these listings as shown by Taxpayer's Attachment A and C appear to be produced by the Taxpayer, not the customers. The Taxpayer's Attachment B (a tax accrual listing of purchases from Taxpayer for 2004-2007) appears to be produced by Customer A but is not accompanied by any certification from Customer A. Attachment B also appears to list items purchased outside of the audit period .