Did resale certificates obtained years after an audited sale prove that an IT provider's data-warehouse appliance sale was exempt?

Subject

Assessments of sales tax on untaxed sales of tangible personal property and use tax on untaxed purchases of tangible personal property.

Plain-English summary

An IT products and services provider claimed that a 2011 sale of a data-warehouse appliance and maintenance support was exempt for resale to the federal government. It supplied two Form ST-10 resale certificates after the transaction.

Virginia rejected the certificates. The seller had no resale certificate on file when it made the sale, and the later certificates were dated more than three years and almost four years afterward. Certificates obtained after an audit begins are not treated as accepted in good faith and receive greater scrutiny.

The buyer also was registered for consumer use tax rather than sales-tax collection and therefore was not shown to be a dealer entitled to use the resale certificate. Department records showed no sales-or-use registration at the transaction date, and certificate names and addresses did not match the invoice.

Because Virginia could not validate the buyer's resale claim and the seller did not rely on the certificates when making the sale, the transaction remained taxable. The taxpayer did not overcome the assessments' presumption of correctness.

What this means for you

Obtain and review resale certificates at the time of sale. A complete form secured years later may fail if the purchaser's registration, identity, or use of the property cannot be validated.

Citations and references

• Va. Code §§ 58.1-623 B, 58.1-612, 58.1-613, and 58.1-205 1.
• 23 VAC 10-210-280 A.
• P.D. 98-29, P.D. 04-75, and P.D. 06-100.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-190

Original ruling text

September 20, 2016

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

Dear *:

This is in response to the letter submitted on behalf of * (the “Taxpayer”), appealing two of the four retail sales and use tax assessments issued to the Taxpayer as a result of an audit for the periods January 2011 through December 2013. The Department's records indicate that the two non-contested audit bills have been paid.

FACTS

The Taxpayer provides information technology products and services to government and commercial customers. An audit resulted in the assessments of sales tax on untaxed sales of tangible personal property and use tax on untaxed purchases of tangible personal property.

The Taxpayer contests the sales tax assessed with respect to the untaxed sale made in July 2011 for a data warehouse appliance and maintenance support. The Taxpayer maintains that the customer resold the appliance to the federal government. In addition, the Taxpayer has furnished copies of the customer's resale exemption certificates (using Form ST-10) as support for not applying the sales tax to the transaction. For these reasons, the Taxpayer maintains that it is not liable for the collection of the sales tax under the transaction.

DETERMINATION

Resale Exemption Certificate

The Taxpayer cites the applicable law, Va. Code § 58.1-623 B, and the applicable regulation, Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A, to support its claim for not collecting the sales tax. Based on the certificates provided, the Taxpayer maintains that it accepted the exemption certificates in good faith and thus was not responsible for collecting the sales tax.

I understand that the Taxpayer did not have a resale certificate of exemption on file for the sale at issue. The Taxpayer was given the opportunity to obtain one from its customer in the event that the sale qualified as an exempt sale for resale. The Department has previously ruled in Public Document (P.D.) 98-29 (2/20/98) that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was not accepted in good faith. [1] Thus, it is the Department's longstanding policy that exemption certificates obtained after the start of an audit cannot be accepted “in good faith” and are subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that the customers use of the certificate is valid and proper for a specific transaction identified during the audit.

A review of the resale exemption certificates provided indicates that the first certificate is dated December 31, 2014 and the second one is dated October 21, 2015. Thus, the first certificate was received more than three years after the date of the sale in question. The second certificate was received almost four years after the date of the sale in question. Although these resale certificates are complete in all respects, they clearly were not accepted at the time of sale or at a reasonable time after the sale. Thus, these resale exemption certificates were not accepted in good faith at the moment of the transaction in question.

Furthermore, the resale exemption certificate is specifically designed for use by those persons who engage in or conduct business as a dealer as defined in Va. Code § 58.1-612. Such dealers are required to register for the collection and remittance of the retail sales tax. See Va. Code § 58.1-613. They must also maintain such registration even if all of their retail sales are made to exempt customers. Although the customer shown on the certificates is registered for reporting consumer use tax, it is not registered for sales tax collection. Thus, it cannot be considered a dealer for purposes of the resale exemption certificate.

Moreover, based on the certificate of registration number found on the exemption certificates provided, the Department's records indicate that such customer was not registered for any sales or use tax purpose at the time of the contested sale. Further still, while the names and addresses on the resale exemption certificates presented are the same, they do not match the name and address shown on the Taxpayer's invoice. In addition, the Department's records do not indicate any type of registration under the specific customer name shown on the contested invoice.

Because the Department cannot validate the customer's use of the resale exemption and the fact that the Taxpayer did not rely upon either resale certificate for not collecting the sales tax, I find that the resale exemption certificates presented have no validity for the sale in question. Thus, these certificates were never acceptable before or after notice by the Department. [2] As such, the contested sales transaction must remain in the audit, and the Taxpayer is required to collect the sales tax on all other retail sales of tangible personal property made to such customer.

A tax assessment by the Department is deemed prima facie correct. See Va. Code § 58.1-205 1. This means that the burden of proof is upon the Taxpayer to demonstrate how an assessment may be incorrect. Contrary to what the Taxpayer may believe, the burden of proof does rest with the Taxpayer who has failed to establish that the sale in question qualifies for the resale exemption.

CONCLUSION

Based on this determination, the contested assessments are correct. Updated bills, 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, 600 East Main Street, 15 th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessments, please contact at **.

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

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6264970443.R

[1] Also see P.D. 04-75 (8/25/04) and 06-100 (10/5/06).

[2] A certificate of exemption remains in effect except upon notice from the Department 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. See Title 23 VAC 10-210-280 A.