Rulings of the Tax Commissioner

April 12, 2023

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 assessment issued for the period November 2015 through September 2018. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a producer of corrugated packaging with several locations in Virginia, was audited for the period at issue. The Taxpayer appeals the assessment, contending that sales made to certain customers are exempt because it had valid exemption certificates on file at the time of the sales. In addition, the Taxpayer contests a portion of the untaxed purchase exceptions, noting that it has invoices available to show that sales taxes were paid on certain purchases and claiming that tax was not due on other purchases. Finally, the Taxpayer requests an abatement of assessed penalty and interest because it made a good faith effort to file and pay its tax liability. 

DETERMINATION

Exemption Certificates

Virginia Code § 58.1-623(A) provides that “[a]ll 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, that:

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.

Public Document (P.D.) 11-8 (1/20/2011) sets forth the Department’s good faith requirement and its application to the acceptance of exemption certificates. As outlined in P.D. 11-8 and Title 23 VAC 10-210-280 A, dealers cannot accept incomplete exemption certificates in good faith. In cases where a taxpayer accepts an exemption certificate that is incomplete, the claim for exemption is subject to greater scrutiny by the Department. Under these circumstances, the exemption certificate will only be accepted if the Department can confirm the customer’s use of the certificate was valid and proper for the specific sales transaction as reviewed in the audit. 

During the audit, the Taxpayer provided incomplete exemption certificates for sales made to ***** (“Customer 1”), ***** (“Customer 2”), and ***** (“Customer 3”). The certificates provided by the Taxpayer for the untaxed sales at issue were deemed invalid by the auditor because a box was not checked to determine the exemptions claimed by the customers. The certificate provided for Customer 3 was also undated. The Taxpayer’s claims for exemption for the sales made to these customers are subject to greater scrutiny due to the absence of a valid exemption certificate for these customers at the time of the transaction or sale. Upon appeal, the Taxpayer submits exemption certificates for review. 

Customer 1:  The exemption certificate provided during the original audit was not complete. Upon review of the exemption certificate provided with the appeal, the Department cannot locate the customer in its records using the provided registration number. Therefore, the Department cannot confirm that the customer’s use of the certificate was proper for these transactions. Accordingly, the contested sales exceptions for Customer 1 will remain in the audit. 

Customer 2:  The exemption certificate provided during the original audit was not complete because the box indicating the exemption claimed by the customer was not checked. Upon review of the exemption certificate provided with the appeal, the Department was able to locate the customer in its records and confirm that the customer had an active sales account at the time of the sale. Accordingly, the contested sales exceptions for Customer 2 will be removed from the audit. 

Customer 3:  The exemption certificate provided with the appeal is incomplete. The certificate is undated and there is no box checked to indicate the exemption claimed by the customer. Based on the aforementioned authorities, an incomplete certificate is not valid and cannot be used to confirm that the customer’s use of the certificate was proper for these transactions. Accordingly, the contested sales exception for Customer 3 will remain in the audit. 

Purchases

In its appeal, the Taxpayer claims that certain purchases are either exempt repair services or taxes have been properly paid to the vendor. The Taxpayer has provided the supporting documentation. This information will be forwarded to the audit staff for review and revision, if appropriate. 

Compliance Penalty

This was a fifth generation audit for this Taxpayer. Title 23 VAC 10-210-2032 B 1 provides that “[t]he application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio.”  Further, section B 5 of this regulation provides that for third and subsequent generation audits, “[p]enalty will generally be applied unless the taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax, as computed by the auditor or under the alternative method.”

Based upon the compliance ratio computations in the audit, the Taxpayer’s use tax compliance ratio is 0% for the audit period at issue. In accordance with Title 23 VAC 10-210-2032, the penalty is properly applied in the audit to the use tax liability because the Taxpayer’s use tax compliance ratio did not meet or exceed 85%. Accordingly, the Taxpayer’s request for abatement of the penalty assessed in the audit cannot be granted.

Amnesty Penalty

The 2017 General Assembly enacted legislation establishing a Tax Amnesty program, spanning a 60-75 day period that was administered by the Department. The Guidelines for the Virginia Tax Amnesty Program are addressed in Public Document 17-156 (9/5/2017). Taxpayers with delinquent returns for amnesty-eligible periods qualified for amnesty benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties. This post-amnesty penalty can be waived under certain circumstances; however, none of the conditions set forth in P.D. 17-156 exist in this case. Accordingly, I do not find cause to waive amnesty penalty in this instance.

Interest

Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. Interest cannot be waived unless the associated tax is waived. Accordingly, the assessed interest will remain in the audit. 

CONCLUSION

Virginia Code § 58.1-205 1 provides that, in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” This means that the burden of proving an error in the assessment is upon the Taxpayer. Convincing evidence must be provided to the Department in support of any exemption claim. In this case, the Taxpayer has not met its burden of proving all of the sales at issue are exempt. However, I find cause to remove line items 8, 9, and 10 from the audit because the Taxpayer provided an updated exemption certificate and the Department was able to verify that the customer has an active sales tax registration. Accordingly, the audit will be returned to the audit staff to revise the assessment and issue a refund as soon as practicable. In addition, the audit staff will review the supporting documentation associated with the contested purchases and make adjustments, as warranted. 

The Code of Virginia sections, regulation and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. 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/4003.G