We bought a veterinary practice and didn't know we had to charge sales tax on retail items like flea powder and pet food -- can we just remit the difference between what we paid vendors and what we charged customers, instead of the full amount?

Plain-English summary

A Virginia veterinary office changed ownership in November 2013. The new owner relied on the guidance previously used by the prior owner's accountants and, as a result, wasn't aware it needed to collect sales tax on items sold to customers SEPARATELY from professional veterinary services -- things like flea powder, pet food, medicine, and similar retail goods. Instead, the new owner paid sales tax to its own suppliers when it bought this inventory, then marked the items up and sold them to customers without charging any sales tax at all. An audit for November 2013-March 2017 assessed the resulting shortfall.

Two arguments, both rejected. First, the new owner argued it shouldn't be responsible for practices carried over from BEFORE the ownership change. Virginia law, however, makes a successor/purchaser of a business responsible for the prior owner's unpaid tax liabilities -- the statute even requires a buyer to withhold enough of the purchase price to cover any taxes the seller might still owe until the seller produces proof from the Tax Commissioner that everything's been paid. Relying on someone else's (even a predecessor's) advice doesn't change this; Virginia's system expects every registered dealer to independently know and keep up with the applicable tax law.

Second, and more specifically, the new owner asked to only remit tax on the MARKUP (the difference between what it paid vendors and what it charged customers), since tax had technically already been paid once, at purchase. Here's where the veterinary-specific rules matter: Virginia treats veterinarians as the "users or consumers" of medicines, supplies, and equipment used in TREATING patients -- meaning the vet pays sales tax on those purchases and doesn't need to charge clients tax for treatment-related use. But a SEPARATE rule applies to items a vet holds in inventory to sell AT RETAIL (medicine, flea powder, soap, pet food, collars, and similar items) -- for those, the vet must register as a dealer and collect and remit tax on the FULL retail sales price, the same as any other retailer.

The practice had done this backwards: it paid tax to its VENDORS on inventory meant for retail resale (when it should have purchased that inventory tax-exempt using a proper resale certificate, Form ST-10), and then failed to collect tax from its own CUSTOMERS on the full marked-up price. Once tax was actually collected (or should have been) on the full retail price, that's what had to be remitted -- there's no netting against tax mistakenly paid earlier in the supply chain. Virginia's long-standing policy is that tax erroneously paid to a vendor isn't creditable against a taxpayer's own separate sales tax liability, because doing so would disrupt the correct allocation of local sales tax revenue and any dealer discount the vendor may have already claimed. The practice's actual remedy for the double payment was to seek a refund directly from its VENDORS for the tax it erroneously paid on items intended for resale -- not a reduction of this assessment.

What this means for you

Veterinary practices selling retail items alongside professional services

Keep a clear line between (1) medicine, supplies, and equipment you use directly in TREATING patients (you pay sales tax on those as the end consumer, and don't charge clients tax) and (2) inventory you hold for RETAIL sale to customers (flea powder, pet food, over-the-counter medicine, collars, and similar) -- for the second category, register as a retail dealer, buy that inventory tax-exempt with a resale certificate, and collect/remit tax on the full price you charge customers.

Anyone buying an existing business in Virginia

You can inherit the prior owner's unpaid tax liabilities under Virginia's successor-liability rules -- protect yourself by withholding enough of the purchase price to cover potential tax exposure until the seller produces a clearance certificate or receipt from the Tax Commissioner showing nothing is owed.

Businesses that mistakenly paid sales tax to a vendor on items meant for resale

Don't expect to net that mistaken payment against a separate sales tax assessment on your own sales -- Virginia's policy is that erroneously paid vendor tax isn't creditable that way; your remedy is to pursue your OWN refund claim directly against the vendor who collected it.

Common questions

Q: If we already paid sales tax when we bought retail inventory, can we just remit tax on our markup instead of the full sale price?
A: No -- once you sell an item at retail, you owe (and must collect) tax on the FULL sales price to your customer; you can't reduce that by tax you separately (and, for resale inventory, mistakenly) paid to your own vendor at purchase.

Q: Does relying on the previous owner's accountant protect a new business owner from tax liability for the change-of-ownership period?
A: No -- Virginia's successor-liability statute makes the new owner responsible for the prior owner's unpaid tax obligations, and every registered dealer is independently expected to know and stay current on the applicable tax law regardless of who's advising them.

Q: How do we get back sales tax we mistakenly paid to a vendor on inventory we intended to resell?
A: Seek a refund directly from that vendor for the erroneously collected tax -- Virginia's policy doesn't allow crediting that mistaken vendor payment against a separate assessment on your own retail sales.

Citations and references

• Public Document 97-354 (8/29/1997) -- cited for the Department's policy that tax erroneously paid to a vendor is not creditable against a taxpayer's own separate sales tax liability
• Public Document 96-358 (12/6/1996) -- cited alongside P.D. 97-354 on the same erroneous-vendor-payment refund policy

Subject

Sales : Dealer; Veterinarians Use : Purchases : Successor Liability, Resale Exemption Refunds

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-63

Original ruling text

May 18, 2021

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

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessments issued for the period November 2013 through March 2017. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a veterinary office in Virginia, changed ownership in November 2013. As a result of the Department’s audit, the Taxpayer was assessed sales tax on sales made to customers independent of the provision of professional services on which the tax was not collected or remitted to the Department.

The Taxpayer contends they relied on the advice of the former owner’s accountants and were not made aware they should be collecting sales tax on their sales to customers. The Taxpayer would like a portion of the audit abated, holding that they paid the sales tax to vendors at the time of purchase. Because it paid taxes at the time of purchase, the Taxpayer believes it should only have to remit the tax on the difference between the purchase price and the marked up price it charged to customers.

DETERMINATION

Taxpayer Responsibility

Though the Taxpayer was operating under the guidance utilized by the previous business owner, Virginia Code § 58.1-629 explains that the liability for any previous operation errors after the acquisition of a business rests with the purchaser. Stating, “[the] successors or assigns, if any, shall withhold sufficient or the purchase money to cover the amount of such taxes, penalties, and interest due and unpaid until such former owner produces a receipt from the Tax Commissioner showing that they have been paid or a certificate stating that no taxes, penalties, or interest is due.”

Pursuant to Virginia Code § 58.1-204, the Department is required to publish regulations and written rulings or interpretations of Virginia law that are of interest to taxpayers and the general public. The Department employs various methods to disseminate information concerning the sales and use tax and other taxes it administers which are available to the public. It is the responsibility of every registered dealer to be aware of the law and to keep informed about changes in the law.

Veterinary Retail Sales

Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-6050, “Veterinarians are engaged in rendering professional services and are the users or consumers of medicines, drugs, medical supplies, equipment and all other tangible personal property purchased for use in their operation. They must pay the tax to their suppliers on purchases of this property.”

The Taxpayer was compliant with this section of the regulation with regard to their business operation, but erred in the treatment of tangible personal property that was purchased, marked up, and sold at retail for purposes unrelated to the treatment of patients.

Title 23 VAC 10-210-6050 B goes on to explain “veterinarians who maintain an inventory for the purpose of making sales of medicines, drugs, flea powder, soap, pet food, dog collars and similar items at retail must register with the Department of Taxation and collect and pay the tax on such sales.”

The Taxpayer agreed the tangible personal property held as taxable in the audit was sold to customers unrelated to the provision of professional services. While the Taxpayer has provided invoices demonstrating the tax was paid at the time of purchase from vendors, the Taxpayer has also indicated they subsequently marked up the costs and sold the items at retail to customers without charging sales tax. As the Taxpayer was a retailer with respect to such sales, the Taxpayer should have purchased the items exempt of the tax using a properly executed resale exemption certificate (Form ST-10), and collected and remitted the tax on the full sales price of the items.

Sales Tax Paid To Vendors

The Taxpayer contends that remitting the tax as assessed to the Department would be double taxation as part of the tax was paid to vendors prior to markup. In order to ensure the Taxpayer is not unduly burdened, the Taxpayer should seek its refund from vendors for erroneously paid tax on purchases intended for resale.

It is the longstanding policy of the Department that taxes incorrectly paid to vendors are not eligible for credit. To do so jeopardizes the proper allocation of the local sales tax and would disregard any dealer discount claimed by the vendor in reporting taxable sales. Public Documents (P.D.) 97-354 (8/29/1997) and 96-358 (12/6/1996) discuss the Department’s policy with respect to such refunds.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within sixty days of the date of the bill. If you have any questions concerning payment of the assessment, you may contact the Delinquent Collections Unit at (804) 367-8045.

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 response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1440.A

Related Documents

97-354

96-358