Tax Type
Retail Sales and Use Tax
Description
A hardware dealer failed to charge sales tax
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
01-22-2004
January 22, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear **********:
This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to your client, ********** (the "Taxpayer"), for the audit period July 1999 through June 2002. I apologize for the delay in the Department's response.
FACTS
The Taxpayer operates a hardware store. As a result of the Department's audit, the auditor assessed tax on a number of sales for which the Taxpayer failed to charge sales tax. The Taxpayer disputes the assessment and contends that it accepted exemption certificates in good faith for the sales at issue.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-210-280(A) states that:
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- 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 ....
Thus, once a dealer obtains a properly completed and signed certificate of exemption from the purchaser certifying that the purchase qualifies for an exemption under the Virginia retail sales and use tax law, and has used reasonable care in receiving it, the dealer is absolved from collecting the tax on the sale. A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
The regulation further provides that "[R]easonable 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." (Emphasis added.) As such, the seller must use reasonable care and judgment in selling tangible personal property exclusive of the tax, even when an exemption certificate from the purchaser is in his file. Therefore, acceptance "in good faith" must be established by the dealer. The property actually purchased must be of the same class as that identified on the certificate as exempt. Thus, acceptance in good faith requires that the dealer examine the certificate for compliance with 23 VAC 10-210-280 before a tax-free sale takes place.
Keeping the above in mind, I will address the contested sales:
Church Exemption
The exemption certificate available to certain nonprofit churches (Form ST-13A) clearly specifies the types of purchases that may be made exempt from the Virginia retail sales and use tax. In addition, the certificate states that the exemption certificate does not provide exemption for any tangible personal property purchased by a church other than that specified in the certificate.
In this case, the transactions involve the sale of hand tools, pine mulch, oil primer, duct tape, light switches and other accessories to churches for which Form ST-13A, was provided. This certificate does not allow an exemption for building and construction materials or for property used in the maintenance of church grounds.
Because the Taxpayer was responsible for ensuring that the purchases were consistent with the language of the exemption certificate, and because the contested items could not be purchased exempt for the tax, I find that the Taxpayer did not accept these exemption certificates in good faith. Consequently, the Taxpayer is liable for the tax that should have been collected.
Agricultural Exemption
Virginia Code § 58.1-609.2(1) provides an exemption for:
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- Commercial feeds; seeds; plants; fertilizers; liming materials; breeding and other livestock; semen; breeding fees; baby chicks; turkey poults; rabbits; quail; llamas; bees; agricultural chemicals; fuel for drying or curing crops; baler twine; containers for fruit and vegetables; farm machinery; tangible personal property, except for structural construction materials to be affixed to real property owned or leased by a farmer, necessary for use in agricultural production for market and sold to or purchased by a farmer or contractor; and agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production, which also includes beekeeping and fish, quail, rabbit and worm farming for market.
In this case, the particular transactions involve the sale of paint, car wash, furnace pipe, picture hanger set, pliers, and other similar items. The customer provided the Taxpayer with the agricultural exemption certificate, Form ST-18. Based on the above statute, these items do not qualify for the agricultural exemption. Rather, the certificate of exemption specifically states that items purchased by a farmer for personal, family, or home use are taxable. Therefore, I find that the Taxpayer did not exercise reasonable care in accepting such certificates. Accordingly, there is no basis to remove these items from the audit.
Resale Certificates of Exemption
The Taxpayer provided the Department with twelve resale certificates of exemption, Form ST-10. The Taxpayer claims that these sales should be removed from the audit because- the certificates were accepted from its customers in good faith.
An examination of the exemption certificates reveals that four of the certificates are incomplete because the customer either did not specify the exemption claimed or the certificate was not dated. The remaining resale certificates were from several marinas and boat dealers for sales of tangible personal property that was clearly for the customer's own use and not for resale. For example, office supplies, shop towels, nails, and marble chips are not items that a marina would purchase for resale.
I also note that the Department previously addressed the Taxpayer's acceptance of resale exemption certificates in the prior audit. A copy of the Department's May 3, 1990 response is enclosed. In addition, Public Document 01-36 (11/11/01) sets out the same "reasonable care" standard that my response upholds. As such, the Taxpayer had prior knowledge of the law regarding the care that must be exercised in accepting such certificates of exemption from customers. Therefore, I cannot agree that the Taxpayer accepted these resale certificates of exemption in good faith. Accordingly, there is no basis to remove these items from the audit.
Commercial Watermen Exemption
The exemption certificate available to watermen, Form ST-16, clearly specifies the types of purchases that may be made exempt from the Virginia retail sales and use tax. The certificate of exemption provides that the sales and use tax shall not apply to machinery, tools, fishing boats including engines, repair and replacement parts therefor, fuel or supplies for use by watermen in extracting fish, bivalves, or crustaceans from waters for commercial purposes. In addition, the certificate states that the exemption certificate does not provide exemption for any tangible personal property purchased by watermen for personal, family, or home use or consumption.
In this case, the customer purchased mulch, auto body filler, a ladder, painting supplies, and other similar items. The Taxpayer had on file a copy of the customer's certificate of exemption, Form ST-16. These items are not listed under the wording of the certificate, Form ST-16, as property that would qualify for exemption in extracting fish, bivalves, or crustaceans from waters for commercial purposes. Accordingly, I find that the Taxpayer did not exercise reasonable care in making such sales of tangible personal property that are clearly for the customer's own use. Therefore, I find that these sales are properly held taxable.
Ships and Vessels Exemption
In this case, the Taxpayer sold tangible personal property to a customer who provided a certificate of exemption, Form ST-19. The auditor denied the exemption because the certificate was incomplete on its face.
Pursuant to 23 VAC 10-210-280, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice. In this case, the certificate of exemption did not have a valid date. Accordingly, there is no basis to remove these sales from the audit.
Conclusion
Based on the above, the assessment is correct. Therefore, the assessment as shown on the enclosed schedule is due and payable. The Taxpayer should return its payment for the balance of tax and interest totaling ***** to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 1880, Richmond, Virginia 23218-1880. Payment must be received within 30 days from the date of this letter to avoid the accrual of additional interest on the outstanding balance.
The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
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- Tax Commissioner
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- Kenneth W. Thorson
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AR/43707T
Rulings of the Tax Commissioner