Could a retailer use exemption certificates obtained after an audit and unsupported bag claims to remove sales and purchases from the assessment?

Subject

Documentation to support exemption certificates received after the performance of an audit

Plain-English summary

An office-supply and business-services retailer paid a sales/use-tax audit and filed a protective refund claim. It submitted customer exemption certificates after the audit and argued that bags it purchased qualified as exempt packaging materials.

Virginia closely scrutinized certificates obtained after the transactions because the retailer could not have relied on them in good faith when making the original untaxed sales. Certificates dated after the audit, missing a registration number, or claiming nonprofit status without the Department's nonprofit exemption letter were rejected.

One group of sales was removed because the customer was a political subdivision independently entitled to exemption. The bags remained taxable because the retailer did not show what bags were bought, how they were used, or that they passed to customers with sold products. Audit staff were directed to review separate documentation for two specific bag line items and issue any warranted refund.

What this means for you

• Obtain complete exemption certificates before or at the time of sale.
• Post-audit certificates receive greater scrutiny and may not establish original good-faith reliance.
• Nonprofit customers need the required Department-issued exemption documentation.
• Packaging materials must be documented as passing to the purchaser with the sold product.

Citations and references

• Va. Code §§ 58.1-1824, 58.1-603, and 58.1-623 A and B.
• 23 VAC 10-210-280 A and B.
• Va. Code §§ 58.1-609.11, 58.1-609.1 4, and 58.1-609.3 2 iv.
• 23 VAC 10-210-400.
• P.D. 01-36.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-114

Original ruling text

June 29, 2017

Re: § 58.1-1824 Application: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which you submit a protective claim for refund of overpaid sales and use taxes on behalf of * (the “Taxpayer”) for the audit period May 2009 through April 2012. In accordance with Va. Code § 58.1-1824, the assessments at issue have been paid in full. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is in the business of providing office supplies and paper, print and document services, technology products and solutions, and furniture to its customers. Sales transactions were held taxable by the auditor because the Taxpayer did not have valid exemption certificates or non-profit exemption letters on file to support the tax exempt sales made by the Taxpayer during the audit period. The Taxpayer contests the inclusion of these sales in the audit and provides exemption certificates for the disputed sales.

In addition, purchases of bags by the Taxpayer were held taxable by the auditor because the Taxpayer did not provide documentation during the performance of the audit to support its contention that the packaging exemption applies to the purchases at issue. The Taxpayer contests the assessment of use tax on these purchases, maintaining that the bags are exempt packaging materials, in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-400.

DETERMINATION

Exemption Certificates

Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia. 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.

Title 23 VAC 10-210-280 A further explains that 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. A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice. [Emphasis added.]

Pursuant to Virginia Code § 58.1-623 B, an exemption certificate must be signed by and bear the name and address of the taxpayer; indicate the number of the certificate of registration, if any, issued to the taxpayer; and indicate the general character of the tangible personal property sold, distributed, leased, or stored, or to be sold, distributed, leased, or stored in Virginia. Title 23 VAC 10-210-280 B requires that 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 accordance with Public Document 01-36 (4/11/01), when a dealer is afforded the opportunity to secure exemption certificates to support untaxed sales after the performance of an audit, the Department's longstanding policy is to more closely evaluate the validity of the certificate because the taxpayer did not originally rely on the certificate to make the exempt sale.

The exemption certificates provided by the Taxpayer for the following entities have been reviewed in accordance with the aforementioned authorities and are addressed below. Going forward, the Taxpayer is reminded that it has a duty to ensure that exemption certificates received from its customers are taken in good faith. The Taxpayer must exercise reasonable care and judgment when taking exemption certificates in accordance with Title 23 VAC 10-210-280 B. Exemption certificates must be complete and adhere to the requirements set out in the applicable authorities referenced in this determination. With respect to customers that seek an exemption based upon being a nonprofit organization, the Taxpayer should be certain to obtain a nonprofit exemption letter issued by the Department to the customer seeking the exemption in accordance with Va. Code § 58.1-609.11.

With its protective claim, the Taxpayer provides the customer's Form ST-11 for review, dated for September 17, 2014. In accordance with P.D. 01-36, the exemption certificate at issue is subject to greater scrutiny because it was received after the transaction took place. I note that the exemption certificate is dated after the audit period; therefore, the exemption certificate cannot be deemed to have been accepted in good faith at the time the transaction took place. Further, the Taxpayer has not provided any additional information to support its contention that the exemption applies to the transaction at issue. Accordingly, the transaction was properly held taxable in the audit and will not be removed from the exceptions list.

The Taxpayer provides the customer's Form ST-10 for review, dated August 1, 2014. In accordance with P.D. 01-36, the exemption certificate is subject to greater scrutiny because it was received after the transactions took place. The exemption certificate is dated after the audit period and it does not include a certificate of registration number. Further, the Taxpayer has not provided any additional documentation to support a finding that the customer listed on the Form ST-10 is a dealer eligible to make purchases of tangible personal property exempt of the Virginia sales tax. As such, the exemption certificate cannot be deemed to have been accepted in good faith at the time the transactions took place. Accordingly, the transactions were properly held taxable in the audit and will not be removed from the exceptions list.

The Taxpayer provides the customer's Form ST-13, dated April 19, 2012. The customer claims the nonprofit organization exemption on the Form ST-13. In accordance with Va. Code § 58.1-609.11, the customer should have provided the Taxpayer with a nonprofit exemption letter issued by the Department in order to make the purchases at issue exempt of the tax. As such, the exemption certificate cannot be deemed to have been accepted in good faith at the time the transactions took place. Accordingly, the transactions were properly held taxable in the audit and will not be removed from the exceptions list.

The transactions at issue were made to a middle school located in this school system. With its protective claim, the Taxpayer provided the customer's Form ST-12, dated for September 11, 2014. While the exemption certificate is dated after the audit period, the customer is a political subdivision that enjoys the exemption pursuant to Va. Code § 58.1-609.1 4. Accordingly, for the purpose of this audit only, the transactions at issue will be removed from the exceptions list.

Based upon a review of the audits at issue, there are no transactions included in the exceptions lists that relate to these entities. Accordingly, no action is required.

Bags

Virginia Code § 58.1-609.3 2 iv provides that the retail sales and use tax does not apply to “materials, containers, labels, sacks, cans, boxes, drums or bags for further use for packaging tangible personal property for shipment or sale.” Title 23 VAC 10­210-400 A defines packaging materials as “items which are used to package products for sale and which become the property of the purchaser subsequent to the sale.”

Title 23 VAC 10-210-400 B provides that “packaging materials may be purchased tax exempt if the items are marketed with the product being sold and become the property of the purchaser. Packaging materials which do not become the property of the purchaser are subject to the tax.”

During the performance of the audit, the auditor asked the Taxpayer to provide documentation to support its contention that the bags were used by the Taxpayer when purchases were made by its customers. However, the Taxpayer did not provide such documentation, and the auditor was unable to determine what types of bags were purchased and how the bags were used by the Taxpayer. Likewise, the Taxpayer has not provided any documentation to support its contention that the exemption provided in Title 23 VAC 10-210-400 applies to the bags at issue. As such, I am unable to determine if the bags qualify for the exemption. Accordingly, the transactions at issue were properly held taxable in the audit, and removal of the transactions from the audit is not warranted.

In its supplemental letter, the Taxpayer maintains that it paid tax on purchases of bags that are represented by line items 50 and 52 in the Purchases exceptions list. The documentation provided will be reviewed by the appropriate field audit staff to determine whether these transactions should be included in the audit.

CONCLUSION

Based upon this determination, the audits will be returned to the appropriate field audit staff to remove the transactions for sales made to *. The audit staff will also review the documentation provided regarding the purchases of bags represented by line items 50 and 52 as stated above. Once the review and any necessary revisions are complete, the Taxpayer will receive a refund as warranted.

The Code of Virginia sections, regulations and public document 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 determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/587.P