When did Virginia accept or reject exemption-certificate support for a technology seller's audited sales?

Plain-English summary

Virginia gave the technology seller partial audit relief but did not accept every claimed exemption. A resale certificate from Customer A was complete and valid on its face, and the seller had no way to know the customer was not yet registered when the certificate was presented. Sales after the certificate date—line items 10 through 26—were removed from the audit, while earlier sales remained.

The seller's separate federal-government argument failed. The later Form ST-12 did not identify a specific federal agency, was not shown to have been presented when the transactions occurred, and did not establish that Customer A was an authorized government purchasing agent or that the sales arose from government real-property contracts.

For another group of sales, an incomplete certificate from Customer C was accepted because a Department letter authorized Customer C to buy for resale. Line items 50 through 59 were removed, but the Department told the seller to keep a complete certificate for future Customer C purchases. Customer B's sales remained because the seller did not document that Customer B and Customer C were related or the same entity.

The audit was returned for adjustment. Because the bill had been paid, the seller was to receive a refund of the removed tax and interest, plus refund interest.

What this means for you

• Obtain the correct exemption certificate when the sale occurs and check that it is complete on its face.
• A valid certificate generally protects only transactions on or after its effective presentation date.
• A customer's or related entity's paperwork does not automatically cover another named buyer.
• Government-contractor purchases need evidence that the purchaser is an authorized agent and that the statutory conditions are met.

Common questions

Q: Did Virginia accept Customer A's resale certificate?
A: Yes, for line items 10 through 26 occurring after the certificate date; earlier sales remained in the audit.

Q: Did the federal-government certificate remove the other Customer A sales?
A: No. The certificate and purchasing-agent claim lacked the required supporting details.

Q: Why were Customer C sales removed despite a missing address?
A: A Department letter independently authorized Customer C to make resale purchases, but a complete certificate was required for future sales.

Citations and references

• Va. Code §§ 58.1-623 and 58.1-609.1 4.
• 23 VAC 10-210-280, 10-210-410 J, and 10-210-690 A.
• Virginia Public Document 01-36.

Subject

Taxpayer must have complete exemption certificate on file.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-101

Original ruling text

June 12, 2013

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period August 2007 through July 2010. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides technology products and related services and solutions to small and mid-sized businesses. The Taxpayer contests the disallowance of exemption certificates related to sales to two customers that were held taxable in the audit.

DETERMINATION

Generally

Virginia Code § 58.1-623 A provides, "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."

Virginia Code § 58.1-623 B states:

Such certificate shall be signed by and bear the name and address of the taxpayer; shall indicate the number of the certificate of registration, if any, issued to the taxpayer; shall indicate the general character of the tangible personal property sold, distributed, leased, or stored, or to be sold, distributed; leased, or stored under a blanket exemption certificate; and shall be substantially in such a form as the Tax Commissioner may prescribe. Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A provides, in pertinent part:

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 certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

Title 23 VAC 10-210-280 B provides:

Reasonable care and judgment must be exercised by all concerned to prevent the giving or 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.

In light of the above authorities, I will address the contested transactions.

* (Customer A)

The Taxpayer states that the exemption certificate from Customer A was incorrectly disallowed in the audit because Customer A registered for the tax in Virginia after the purchases were made. The Taxpayer maintains that Customer A is a government contractor and a purchasing agent authorized to make exempt purchases for the government pursuant to the government exemption.

Virginia Code § 58.1-609.1 4 provides that the retail sales and use tax does not apply to "Tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States." Title 23 VAC 10-210-690 A states, in pertinent part, "Sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable...."

In the audit, the Taxpayer presented Customer A's resale exemption certificate (Form ST-10). The exemption certificate was disallowed in the audit because Customer A registered for the Virginia retail sales and use tax after some of the transactions in the audit period occurred. Based upon the aforementioned authorities, the exemption certificate is complete and valid on its face. The Taxpayer would have no way of knowing that the customer was not registered for the tax at the time the exemption certificate was presented to make the exempt sales. Pursuant to Va. Code § 58.1-623, the exemption certificate was accepted in good faith by the Taxpayer. Accordingly, line items 10-26, which occurred after the date of the exemption certificate, will be removed from the audit. For the reasons stated above, line items 1-9 are not covered under the resale exemption certificate and will remain in the audit.

In the appeal, the Taxpayer presented Form ST-12 for review. The exemption certificate indicates that it is between Customer A and the U.S. Government. There is no indication that this exemption certificate was presented to the Taxpayer by Customer A at the time the transactions took place. Pursuant to the Department's long-standing policy, this exemption certificate is subject to closer evaluation 1 . The validity of the exemption certificate is in question because it does not list the name of a specific agency of the federal government. Additionally, the Taxpayer has not presented any evidence to support its contention that Customer A has been designated an official purchasing agent of a federal government agency. The statement referenced by the Taxpayer in its letter, 2. which appears on the invoices, does not prove that Customer A is a purchasing agent with respect to the transactions at issue. Customer A is prohibited from using the exemption certificate of a federal government agency to make exempt purchases. Accordingly, no change to the assessment is warranted based upon this argument.

The Taxpayer further relies upon Title 23 VAC 10-210-410 to support its contention that sales made to Customer A are exempt. This regulation provides guidance for contractors with respect to real property contracts. Section J provides specific guidance for real property contractors engaged in contracts with government entities. In this instance, the Taxpayer has not provided any evidence demonstrating that the sales at issue were made pursuant to real property contracts. Accordingly, no change to the assessment is warranted based upon this argument.

* (Customer B)

The Taxpayer states that the exemption certificate at issue was disallowed during the audit because; the customer's registration number was not valid. The Taxpayer maintains that it accepted the exemption certificate in good faith and that

* (Customer C) provided a letter from the Department stating that it was authorized to

purchase tangible personal property for resale exempt of the tax and pursuant to a resale exemption certificate.

During the audit, the Taxpayer presented an exemption certificate from Customer C and a business card from Customer B to support its contention that the sales to these entities were exempt for resale. The Taxpayer also presented a letter from the Department, which was issued to Customer C, authorizing Customer C to make purchases for resale exempt of the tax. The exemption certificate does not list an address for Customer C. Additionally, the Taxpayer has not provided documentation to demonstrate that Customer B and Customer C are related entities or even the same entity. While the exemption certificate from Customer C does not contain an address, I will allow its acceptance based upon the Department letter issued to Customer C. As such, line items 50-59 will be removed from the audit. The Taxpayer should note that it must have a complete exemption certificate on file for Customer C for future purchases. With respect to Customer B, no documentation has been presented to support removing the related sales from the audit.

The audit will be returned to the appropriate field audit staff to make the adjustments required by this determination letter. The bill at issue has been paid in full. Once the adjustments have been made, the Taxpayer will receive a refund of tax and interest paid, plus refund interest accrued to date.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this determination, you may contact * in the Department's, Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5212987534.P

1. . See, Public Document 01-36 (4/11/01).

2. "This is a purchase under US Government contract #XXXX--XXX. Title to this property transfers to the US Government prior to any use of the purchaser."