Were wastewater-treatment chemicals exempt as pollution-control property, and did customer direct-payment permits protect prior sales?

Subject

Taxpayer claimed pollution control exemption for chemicals used in its wastewater system.

Plain-English summary

The company won relief on its exempt sales but not on its wastewater chemicals. Chemicals used in uncertified waste-removal equipment were taxable. The company was still pursuing environmental certification and had not proved the equipment met Virginia's certified pollution-control exemption.

Two customer direct-payment permits had later become invalid, but they were valid when the company timely received them, contained the required information, and were accepted in good faith. Those sales were removed from the audit and the company received a refund of the associated tax and interest.

What this means for you

• Pollution-control use alone did not establish the exemption; state certification was required.
• The taxpayer bore the burden of overcoming the assessment's presumed correctness.
• A complete exemption certificate accepted in good faith protected the dealer under these facts.
• Later certification could support a chemical-tax refund only through the applicable refund procedures.

Common questions

Did the pending certification make the chemical purchases exempt?

No. There was no basis for audit relief without evidence of certification.

Why were the customer sales removed?

The permits were timely, signed, facially complete, and valid when accepted in good faith.

Citations and references

• Va. Code §§ 58.1-609.3(9), 58.1-3660, 58.1-205, 58.1-623, and 58.1-1823(iv).
• 23 VAC 10-210-920(C)(2) and 10-210-280(A)-(B).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-262

Original ruling text

December 14, 2010

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

Dear **:

This is in response to your letter in which you seek correction of a retail sales and use tax assessment issued to * (the "Taxpayer") for the period April 2006 through March 2009. It is noted that the assessment has been paid in full. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a workwear and textile services company. As a result of the Department's audit, the Taxpayer was assessed the tax on untaxed sales and purchases. The Taxpayer contests the tax assessed on (i) chemicals for use in the Taxpayer's wastewater system, and (ii) sales for which the Taxpayer had certificates of exemption on file from its customers.

DETERMINATION

Non-Taxed Purchases - Chemicals Used in Wastewater System

Tangible personal property purchased in Virginia is subject to the retail sales and use tax, including tangible personal property used to dispose of plant wastes and pollutants other than equipment designated as certified pollution control equipment. See Title 23 of the Virginia Administrative Code (VAC) 10-210-920 C 2 (under Taxable). Virginia Code § 58.1-609.3 9 provides an exemption for "[c]ertified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section. . ." Virginia Code § 58.1-3660 defines certified pollution control equipment and facilities to mean:

any property, including real or personal property, equipment, facilities, or devices, used primarily for the purpose of abating or preventing pollution of the atmosphere or waters of the Commonwealth and which the state certifying authority having jurisdiction with respect to such property has certified to the Department of Taxation as having been constructed, reconstructed, erected, or acquired in conformity with the state program or requirements for abatement or control of water or atmospheric pollution or contamination.

In this case, the Taxpayer claims the pollution control exemption for chemicals used in its wastewater system. The Taxpayer is currently attempting to secure pollution control certification for the wastewater equipment.

Pursuant to Va. Code § 58.1-205, any tax assessed by the Department is prima facie correct. The Taxpayer has the burden of proving that the tax assessed by the Department is incorrect. Because Title 23 VAC 10-210-920 C 2 specifically taxes equipment used in waste removal that has not been certified to the Department as pollution control equipment, and no evidence has been presented that the wastewater system is certified pollution control equipment, the Taxpayer has not met its burden of proving that an exemption is applicable. Accordingly, there is currently no basis to remove the chemicals from the audit assessment.

Non-Taxed Sales - Certificates of Exemption/Direct Payment Permit

Virginia Code § 58.1-623 A states, "All sales or leases are subject to the 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 he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter."

Additionally, Va. Code § 58.1-623 B provides that "[t]he certificate . . . shall relieve the person who takes such certificate from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable."

Pursuant to Title 23 VAC 10-210-280 A, "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice." Subsection B of the regulation further provides that "[r]easonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates."

The auditor denied the direct payment permits from two customers because they were no longer valid. The direct payment permits at issue were timely received by the Taxpayer and on file at the time of purchase. Additionally, the direct payment permits are signed and bear the information required in Va. Code § 58.1-623. Accordingly, the direct payment permits at issue were accepted by the Taxpayer in good faith. As such, the exempt sales made to these customers will be removed from the audit.

CONCLUSION

In accordance with this determination, the Taxpayer is entitled to a refund of the tax and interest assessed on the contested sales. The refund will be issued shortly and will include refund interest from the date of payment.

If the Taxpayer receives the referenced certification from the Department of Environmental Quality, it should present such certification to the Department of Taxation. Please note that any refund of tax paid on the pollution control chemicals at issue will be subject to the refund requirements under Va. Code § 58.1-1823 (iv).

The Code of Virginia sections and regulations 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 * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-3752725359.T