The Tobacco Unit rejected updated exemption certificates I submitted with my appeal, and I never got to discuss the audit findings directly with the auditor -- what happens now?

Plain-English summary

A cigarette dealer was audited by the Department's Tobacco Unit, and the auditor rejected certain exemption certificates the dealer had relied on to sell cigarettes tax-free to its customers. The dealer appealed, raising two kinds of complaints: it hadn't been given the chance to discuss the audit findings directly with the auditor or to submit updated exemption certificates through that channel, and it had questions about internal Tobacco Unit emails discussing the audit. With its appeal, the dealer submitted documentation -- exemption certificates -- meant to support that its sales to particular customers were properly tax-exempt.

Virginia law puts the burden on a DEALER to prove a sale wasn't taxable, unless the dealer holds a valid exemption certificate from the purchaser at the time of sale (Va. Code § 58.1-623(A)); dealers and customers alike must exercise reasonable care to avoid giving or accepting false or bad-faith certificates. But the Department also recognizes that once a certificate is challenged (for example, because it wasn't obtained at the time of sale), simply accepting or rejecting the paper isn't the end of the analysis -- because a dealer typically has NO ACCESS to its customer's own state tax registration and filing history, the Department's own audit procedure is to independently check the CUSTOMER's registration status and sales/use tax filing history in its own databases before concluding whether the disputed sales were, in fact, exempt (for resale or otherwise). If that check confirms the customer's exempt status, the sales get removed from the audit exceptions -- this is described as the Department's "good faith acceptance" policy, designed to avoid taxing transactions that genuinely weren't taxable, given that dealers can't reasonably be expected to police their customers' own compliance.

Because it appeared the dealer hadn't been given the opportunity to go through this verification process with the auditor before the appeal, the Tax Commissioner didn't rule on whether the specific sales were exempt. Instead, the case was sent back to the Tobacco Unit audit staff to review the newly-submitted certificate documentation using this standard procedure, meet with the dealer to discuss the results and answer outstanding questions, and issue a revised audit report and assessment. If issues remain after that, the dealer gets a fresh 90-day window to file a further appeal.

What this means for you

Cigarette/tobacco wholesalers and dealers whose exemption certificates get challenged in an audit

If your original exemption certificate is rejected (for example, because it wasn't obtained at the time of sale), you can still submit updated or additional documentation -- but the real question the Department will investigate is whether YOUR CUSTOMER's own registration and filing history shows they'd genuinely qualify for the exemption, not just whether your paperwork looks right on its face.

Dealers concerned they can't verify a customer's tax status themselves

You're not expected to. The Department's stated policy recognizes dealers don't have access to a customer's registration or filing history, which is why the auditor is supposed to independently check the Department's own databases before finally excluding (or keeping) a disputed sale from an audit's exceptions.

Anyone who feels an audit process cut them off from discussing findings with the auditor before appealing

Raise that specific procedural concern in your appeal, as this taxpayer did -- here, it resulted in the matter being sent back for the standard review-and-meet-with-taxpayer process rather than a final ruling against the taxpayer on an incomplete record.

Common questions

Q: If a dealer's exemption certificate is challenged during an audit, is submitting an updated certificate enough to fix the problem?
A: Not necessarily by itself. The Department's standard procedure is to independently check the CUSTOMER's own registration and tax-filing history to confirm the customer would actually qualify for the claimed exemption, before removing the sale from the audit's exceptions.

Q: Why does the Department check a customer's filing history instead of just relying on the dealer's certificate?
A: Because dealers generally don't have access to their customers' registration or filing records and can't reasonably be expected to police that information themselves -- this is the basis for the Department's "good faith acceptance" policy toward exemption certificates given and received between dealers and customers.

Q: What happens if I submit new exemption certificate documentation with my appeal that the original auditor never reviewed?
A: As happened here, the Department may send the case back to the relevant audit unit to actually review the new documentation under its standard verification procedure, meet with you to discuss the results, and issue a revised audit report -- rather than ruling on incomplete information.

Citations and references

• P.D. 16-104 (5/25/2016) (describes the Department's standard practice of verifying a disputed customer's registration and filing history before excluding a transaction from audit exceptions)

Subject

Tobacco : Purchases/Sales of Cigarettes

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-113

Original ruling text

August 24, 2021

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

Dear *:

The Department previously acknowledged receipt of your appeal submitted on behalf of * (“the Taxpayer”). The main contentions in the appeal are the auditor’s rejection of exemption certificates and the audit process, itself. The Taxpayer also poses questions to the audit staff regarding emails exchanged between the Tobacco Unit about the audit.

It is my understanding the Taxpayer was not provided the opportunity to discuss the findings with the auditor, nor to provide the updated ST-10s that were denied. With its appeal, the Taxpayer has provided documentation that consists of exemption certificates to support exempt sales made by the Taxpayer to its customers.

Pursuant to Virginia Code § 58.1-623 A, “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 B addresses the cited statute and 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.

When transactions relying on an exemption certificate are afforded greater scrutiny because the dealer failed to receive a valid certificate at the time of sale, the Department’s policy is to determine whether the transaction is exempt in order to avoid collecting the tax when and where it is not due. In order to accomplish this, the Department utilizes a number of inquiry steps. The auditor begins by investigating the tax compliance of the customer by performing a search of the Department’s registration and accounting databases for the customer’s registration status and filing and payment history of sales tax and use tax returns. Once the auditor confirms the customer’s registration and filing history (or lack thereof), the auditor can reasonably conclude whether the purchases made by the customer would be exempt sales for resale (or another exemption), and if warranted will remove the sales transactions corresponding to the customer from the audit exceptions list. See Public Document 16-104 (5/25/2016).

The Department takes these additional steps due to the fact that 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. This is the basis for the good faith acceptance policy applied to the giving and receiving of exemption certificates between dealers and their customers. The Department’s audit staff follows these procedures for contested transactions where additional or updated exemption certificate documentation has been provided by the dealer and/or their customers.

Accordingly, the Taxpayer’s exemption certificate documentation will be returned to the Tobacco Unit audit staff for further review. After the review, the audit staff will meet with the Taxpayer to discuss the results of the review and answer any further questions regarding the audit. The audit staff will make adjustments, as warranted, and issue a revised audit report and revised assessment to the Taxpayer. If there are remaining contested issues at that time, the Taxpayer will have 90 days from the date of the revised assessment to submit an appeal in accordance with Virginia Code § 58.1-1821 and Title 23 VAC 10-20-165.

If you have any questions regarding the review of documentation, you should contact * in the Department’s Tobacco Tax Unit at . If you have any questions about the appeals process, please contact in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1342L

Related Documents

16-104