Is a resale exemption certificate valid when it names a related but different entity than the actual buyer, and can I raise a new audit-sample challenge on reconsideration?

Plain-English summary

This is a reconsideration of an earlier determination (P.D. 19-85). The Department had assessed a dealer that sold network and telecommunications equipment and treated some sales as exempt for resale. The resale exemption certificate listed the purchaser as "Company A trading as Company B," and the dealer argued Company B was really its customer. The Department had rejected the certificate because it was in the name of a related but different taxpayer and the dealer's records were insufficient to verify the tax. The dealer asked the Commissioner to reconsider.

The Commissioner denied the request:

• Certificate in the wrong name. Under Va. Code § 58.1-623 A, sales are taxable until the contrary is established; a certificate can shift that burden, but a certificate that is inconsistent on its face is never acceptable (23 VAC 10-210-280). The dealer offered no evidence that Company B was in fact the customer, and the Department could not independently verify it. The "slight variation" between the name on the purchase orders and the name on the certificate was an inconsistency serious enough to raise doubt about the buyer's identity, so the certificate failed.
• Greater scrutiny. When a dealer lacks a valid certificate at the time of sale, the "good faith acceptance" privilege is lost and the Department applies greater scrutiny, searching its own records to see whether the customer was registered and entitled to the exemption. It could not confirm the exemption here. The dealer's cited authority (P.D. 10-201) was distinguishable — there the Department could independently identify the customer as an entitled manufacturer.
• New audit-sample argument barred. On reconsideration a taxpayer may present newly discovered evidence on a previously contested issue, but may not raise an issue it never raised in its original appeal (23 VAC 10-20-165 F 1 d; P.D. 17-106). Because the dealer had not challenged the audit sample in its first appeal, that argument would not be considered.

Under Va. Code § 58.1-205, the assessment is prima facie correct and the dealer did not carry its burden, so the assessment stood. The letter was the Department's final determination.

What this means for you

A resale certificate protects you only if it clearly identifies the actual buyer. If the name on the certificate differs from the name on your purchase orders — even as a "trading as" variation between related entities — expect the Department to treat it as an inconsistency and tax the sale unless you can independently prove the two are the same customer. Collect a clean, matching certificate at the time of the sale; certificates the Department has to reconcile after the fact face greater scrutiny. And raise every argument in your first appeal: on reconsideration you can add new evidence on issues you already contested, but you cannot open a brand-new issue like the validity of the audit sample.

Common questions

Q: My certificate named a related company, not the exact buyer. Is that okay?
A: Not without proof they are the same customer. A name inconsistency between the certificate and the purchase orders invalidates the certificate unless the Department can independently verify the buyer's identity and entitlement.

Q: What is "greater scrutiny"?
A: When a dealer didn't hold a valid certificate at the time of sale, the Department examines the claimed exemption more closely — including searching its own registration and filing records — before allowing it.

Q: Can I challenge the audit sample on reconsideration?
A: No, if you didn't raise it in your original appeal. Reconsideration is limited to new evidence on issues you already contested (23 VAC 10-20-165 F 1 d).

Citations and references

• Va. Code § 58.1-623 A — all sales are taxable until the contrary is established; a certificate shifts the burden, but one inconsistent on its face is never acceptable
• Va. Code § 58.1-205 — an assessment is prima facie correct; the burden of proving it erroneous is on the taxpayer
• 23 VAC 10-210-280 — good-faith acceptance and reasonable care in taking exemption certificates
• 23 VAC 10-20-165 F 1 d — reconsideration allows new evidence on a contested issue, not a new issue
• P.D. 19-85 (original determination), P.D. 10-201 (distinguished), P.D. 17-106 (no new issues on reconsideration)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-135

Original ruling text

August 11, 2020

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

Dear *:

This will reply to your letter in which you request reconsideration of the Department's prior determination letter regarding the retail sales and use tax assessment issued to * (the “Taxpayer”) for the period of September 2006 through September 2009. I apologize for the delay in responding to your request.

FACTS

In Public Document (P.D.) 19-85 (8/12/2019) issued to the Taxpayer, the Department determined that a resale exemption certificate provided by a customer was not acceptable because it was in the name of a related taxpayer. In addition, the Department held that the Taxpayer’s documentation was insufficient to verify whether the correct amount of tax had been remitted.

The Taxpayer seeks a redetermination, contending that the Department should accept the exemption certificate based on prior documents in which the Department allowed exemption certificates with erroneous information. The Taxpayer also asserts that the sample used by the auditor to estimate its tax liability was not reflective of the actual sales made during the audit period.

DETERMINATION

* (The “Customer”)

Virginia Code § 58.1-623 A sets out that “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 of the Virginia Administrative Code (VAC) 10-210-280 A states, in 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 ... 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 requires legitimate use of an exemption certificate and provides 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.

The Taxpayer sold network and telecommunications equipment to the Customer. The resale exemption certificate listed * (Company A) as the purchaser trading as *** (Company B). The Taxpayer contends that Company B is the Customer.

The Taxpayer asserts that in P.D. 10-201 (8/31/2010), the Department ruled that incorrect exemption certificates are accepted even after a customer sent additional incorrect information after the fact to the dealer, provided a valid certificate is issued after the audit period. In P.D. 10-201, the legal entity name was listed as the purchaser, but the trading-as name was the customer’s name. The Department accepted the exemption certificate for the audit period because the Department was able to independently identify the customer as a manufacturer that was entitled to claim a manufacturer’s exemption.

When a dealer fails to receive a valid certificate at the time of sale, the “good faith acceptance” privilege is invalidated and the dealer becomes subject to the tax that was not applied to the transaction. While the dealer has the responsibility to prove the transaction is exempt, the Department also applies “greater scrutiny” to determine whether the transaction is exempt in order to avoid collecting tax when it is not due. In doing so, the Department may perform a search of its records to determine if the customer has a registration, as well as, a sales and use tax return filing history. Once this search is performed, the Department can reasonably conclude whether the purchase made by the customer would qualify for an exemption, in this case a resale exemption. The Department takes these additional steps because dealers do not have access to the registration and filing histories of their customers and, therefore, cannot reasonably be expected to provide such scrutiny regarding the acceptance of exemption certificates. See P.D. 97-95 (2/21/1997), 98-29 (2/20/1998), 04-75 (8/25/2004), 11-8 (1/20/2011) and 16-104 (5/25/2016).

In this instance, there is no evidence presented by the Taxpayer showing that Company B is in fact the Customer. In addition, the Department is unable to independently verify that Company B is the customer entitled to the resale exemption regarding the sales at issue.

The Taxpayer further asserts that it used reasonable care in accepting the exemption certificate although there is a slight variation between the customer on the purchase orders and certificate. I disagree. The slight variation referenced by the Taxpayer is an inconsistency sufficient to raise doubt that the entity stated on the face of the certificate is in fact the entity stated on the purchase orders supporting the sales.

Estimated Assessment

The Taxpayer contends that an estimated assessment should not be issued because it filed its returns in good faith, did not provide false or fraudulent documentation and allowed a full examination of its books and records. This issue was addressed in P.D. 19-85 under the “Estimated Assessment” section of the determination. As such, there is no need to readdress this issue in this redetermination.

Audit Sample

Title 23 VAC 10-20-165 F 1 d provides that a taxpayer may request a reconsideration if additional evidence or documentation relative to the original contested issue(s) is discovered. This section does not allow for the presentation of an issue that was not previously raised by a taxpayer's original appeal. See P.D. 17-106 (6/21/2017). The Taxpayer did not address the validity of the audit sample in its initial appeal. Accordingly, the Taxpayer’s argument that the audit sample was not representative of the audit period will not be addressed.

CONCLUSION

Virginia Code § 58.1-205 states that an assessment of tax by the Department is deemed to be prima facie correct. The burden of proving that a tax assessment is erroneous is on the Taxpayer. Based on the evidence and information provided, the Taxpayer has not met that burden. As such, the Taxpayer’s request for the abatement, or in the alternative the adjustment, of the sales tax assessment issued for the period of September 2006 through September 2009 is not granted. While I recognize a continued disagreement about the validity of this assessment, this letter constitutes the Department’s final determination regarding the exemption certificate issue.

The Taxpayer will receive an updated bill to include accrued interest to date. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of the bill. Please remit payment to Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact Ms. Patterson at ***.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2189.B

Related Documents

97-95

98-29

04-75

10-201

11-8

16-104

17-106

19-85