Were a retailer's sales to diplomats exempt when its transaction records lacked exemption-card numbers, and could a diplomat pay with another person's card?

Subject

Diplomatic sales exemption and third-party payment records

Plain-English summary

Virginia removed the disputed diplomatic sales from the retailer's audit because evidence submitted on appeal showed that the purchasers were eligible diplomats. The original transaction records had not listed the diplomatic tax exemption card numbers, and photocopied customer information did not satisfy the normal documentation rule.

For future audits, the retailer had to record the numbered exemption card with the transaction and ensure that the purchaser was the eligible diplomat or family member identified and pictured on the card. Without that documentation, the sales would be taxable.

The Department also corrected the auditor's instruction about payment. The eligible cardholder could pay with cash, a check, or a credit card, including a third party's payment instrument. The key requirement was the identity of the purchaser using the nontransferable exemption card, not whether the payment name matched.

Result: the proven diplomatic sales were removed and the audit returned for revision; future transactions required proper card records, but third-party payment was allowed.

What this means for you

• Verify that the purchaser is the person identified and pictured on the diplomatic exemption card.
• Record the exemption-card number with the invoice or internal transaction record.
• Check the card itself for the scope and limits of the exemption.
• Do not reject an otherwise valid purchase solely because someone else's check or credit card is used.
• Do not treat photocopied customer information as a substitute for transaction-level card documentation.

Common questions

Q: Did missing card numbers make the appealed sales taxable?

A: Not in this audit, because additional evidence proved the sales were made to diplomats. The Department required proper records going forward.

Q: Must the payment card name match the diplomat's exemption card?

A: No. The eligible purchaser may use any form of payment, including a third party's card.

Citations and references

• 23 VAC 10-210-694.
• Vienna Convention on Diplomatic Relations.
• Vienna Convention on Consular Relations.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-155

Original ruling text

July 20, 2015

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

Dear *:

This replies to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period May 2010 through April 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates retail stores throughout the United States. An audit by the Department disclosed that the Taxpayer made sales in which the tax was not charged and purchases in which the tax was not paid to vendors or accrued and remitted to the Department. The Taxpayer disagrees with that portion of the audit assessment pertaining to sales to diplomats. The Taxpayer states that the documentation provided with its appeal demonstrates that the purchasers were diplomats and were exempt of the tax. The Taxpayer seeks an abatement of the sales tax assessed on sales to diplomats.

DETERMINATION

Sales to Diplomats

Title 23 of the Virginia Administrative Code 10-210-694 is the Department's regulation on the diplomatic exemption and sets out the following:

Pursuant to the provisions of the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations, no sales or use tax is applicable to sales to or purchases by certain foreign diplomats or missions. Exemption cards are issued by the United States Department of State and bear a photograph and name of the diplomat eligible for exemption in the case of individual diplomat cards, and, in the case of mission cards, the person entitled to make official purchases for the mission. The extent to which an individual or mission is exempt from the tax is illustrated on the face of the card. In order to qualify for exemption, the purchase must be made by the person to whom the card is issued. No exemption certificate is required: however, the record of the sale must indicate the exemption card number of the purchase. [Emphasis added.]

Based on the above cited, regulation, a dealer is instructed that in order to qualify for the exemption, a purchase must be made by the person to whom the tax exemption card is issued. Further, that a dealer must record the exemption card number of the purchaser on the record of the transaction, such as a copy of the invoice that it retains or on an internal record for listing both the invoice number and the personal exemption card number of the diplomat. In this instance, the Taxpayer's records did not indicate tax exemption card numbers for the sales transactions at issue. The provision of photocopies of diplomatic customer information is not acceptable and is not in accordance with the foregoing regulation or the Department of State's requirements.

Notwithstanding the above, the additional information provided with the Taxpayer's appeal supports a finding that the sales at issue were made to diplomats. In accordance with Title 23 VAC 10-210-694, the sales at issue will be removed from the Department's audit. For all future audits, diplomatic sales will need to have proper documentation to ensure exemption from the retail sales tax. Without such documentation, such sales will be subject to the tax.

Please also note that the cited regulation regarding the extent to which an individual is exempt from the tax was changed pursuant to communications received from the United States Department of State. The Department issued Public Document (P.D.) 09-179 (11/19/09), in which the Tax Commissioner advised that the Department of State had changed diplomatic exemption cards such that the tax exempt information appears on the reverse side of tax exemption cards rather than on the front.

Third Party Payments by Diplomats,

This issue was not listed in the Taxpayer's appeal but was addressed by the auditor during the audit. The Department will provide additional comment here. The auditor discovered that there were a number of transactions where diplomatic tax exemption cards were presented by the purchasing diplomat; however, the diplomat paid for the transaction using another individual's credit card. Because this was a new issue that was not previously addressed by the Department, the auditor advised the Taxpayer that for the future, the name on the check or credit card must match the name of the purchaser presenting the diplomatic exemption card. These transactions were not listed as exceptions and were not taxed in the audit.

The U.S. Department of State issues Diplomatic Tax Exemption Cards to eligible foreign diplomatic and consular missions and in most cases to their personnel and eligible family members located in the United States and its territories. The Department of State has posted information regarding Diplomatic Sales Tax Exemption Cards at one of their websites http://www.state.gov/ofm/tax/sales/index.htm which states:

Diplomatic Tax Exemption Cards that are labeled as "Personal Tax Exemption" are used by eligible foreign mission members and their dependents to obtain exemption from sales and other similarly imposed taxes imposed on personal purchases in the United States. The card must be used solely for the benefit of the individual identified and pictured on the card. The card is not transferable and cannot be loaned to any other person, regardless of that person's eligibility for exemption from taxation. There is no restriction on the form of payment that can be used with the card.

Accordingly, when using a personal Diplomatic Tax Exemption Card, the diplomat or eligible family member may use any form of payment at his or her disposal. Form of payment may involve cash, check or credit card. The foregoing reference does not appear to restrict the diplomat from using a third party form of payment, which may include a check or credit card. Based on the foregoing authority, and for any future audit, the only requirement regarding such transactions is that the diplomat or eligible family member is the individual identified and pictured on the numbered diplomatic tax exemption card.

CONCLUSION

The Department's audit will be returned to the appropriate field audit staff for revision. A revised audit will be forwarded to the Taxpayer.

The regulation and public document cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov . If you have any questions regarding this matter, please contact * of the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5732360650.Q