Tax Type
Retail Sales and Use Tax
Description
Business of selling electrical materials both on the retail and wholesale level
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Exemptions
Date Issued
08-16-2004
August 16, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ********:
This will reply to your letter in which you seek correction of a retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period December 1998 through September 2001. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is in the business of selling electrical materials both on the retail and wholesale level. During the audit period, the Taxpayer made sales of tangible personal property exempt from the tax to customers that provided certificates of exemption. The Department's auditor determined that the certificates were not valid and included the sales in the audit sample. The Taxpayer contends that it accepted the exemption certificates in good faith; therefore, it should not be liable for the tax.
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 .... 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 "[a]n 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." Therefore, a seller must use reasonable care and judgment in selling tangible personal property exempt of the tax, even when an exemption certificate from the purchaser is in his file.
Certificates of Exemption Obtained after Audit Commenced
Certificates secured by a taxpayer at the conclusion of an audit are more closely evaluated because a taxpayer did not rely on such certificate at the time of sale. Once an exemption certificate is presented to the auditor, the certificate is acceptable only if the Department is able to confirm that the customer's use of the certificate was valid and proper for the specific transaction. The absence of such certificate at the moment of the transaction indicates that such certificate was never accepted "in good faith." Public Document (P. D.) 98-29 (2/20/98) sets out the Department's policy with regard to this issue.
In this case, the Taxpayer did not have on file a certificate of exemption from its customer for sales of small tools, fluorescent lights and tubes, globes, and lamps. The Taxpayer later obtained a certificate of exemption, ST-11, after the audit commenced. Upon further review, the auditor determined that the items purchased were not entitled to the exemption under the ST-11 certificate. Therefore, the auditor held taxable the sales to this customer in the sample. Because the certificate was not accepted in good faith at the time of purchase, I find no basis to remove the sales to this customer from the audit.
Certificate of Exemption Not on File
As provided in Title 23 VAC 10-210-280(A) above, when a purchaser does not present a valid exemption certificate, the seller is required to charge and collect the sales tax on the sale of tangible personal property.
In this case, the Taxpayer made untaxed sales to purchasers who failed to submit an exemption certificate. The Taxpayer is required by Virginia law and regulation to collect the sales tax on all sales for which no exemption certificate is furnished by the purchaser. The Taxpayer has provided no proof that the contested sales are exempt from the sales tax. Accordingly, the auditor properly held these sales in the sample.
Invalid Certificates of Exemption
Incomplete Certificate: As provided in Title 23 VAC 10-210-280(A) above, a certificate that is incomplete on its face is never acceptable.
In this case, the Taxpayer had a resale exemption of certificate, Form ST-10, on file from its customer for the contested sales. Although the certificate was on file at the time of sale, the certificate of registration number was incomplete on the exemption certificate for this customer. Consequently, this certificate was not valid at the time of acceptance. Accordingly, sales to this customer were appropriately held taxable in the sample.
Substitute Forms: Generally, the Department will not permit a substitute form for a resale exemption certificate unless it satisfies all of the criteria set out on the Virginia resale certificate, Form ST-10, and is approved by the Tax Commissioner. The Department addresses the minimum information needed for exemption certificates in P. D. 97-95 (2/21/97).
The documentation provided by the purchaser in this case did not satisfy all of the information requirements prescribed by the Department as specified in P. D. 97-95. Thus, the auditor denied the exemption for sales to this customer. Based on the invalid certificate provided, the auditor correctly held taxable the sales to this customer.
Government Exemption Certificate: Title 23 VAC 10-210-690 provides that "sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable. Sales to government employees for their own consumption or use in carrying out official government business are taxable."
In this case, the Taxpayer sold items to a community college. The Taxpayer had on file a certificate of exemption, Form ST-12, from the community college and maintains that the sales are exempt.
According to the auditor, the documentation provided for sales to this customer does not clearly establish whether the purchased property is for use by the purchaser or the government. For example, payment was made with a personal credit card and the purchaser did not provide the Taxpayer with an official purchase order for the items purchased. Consequently, the Taxpayer has provided no evidence that the sales were made to the exempt agency or if the payment was made from public funds. Accordingly, I find no basis to remove these items from the sample.
Church Exemption: The exemption available to certain churches (Form ST-13A) clearly specifies the types of purchases that may be made exempt from the retail sales and use tax. In addition, the exemption certificate states that it does not provide an exemption for any tangible personal property purchased by a church other than that specified in the certificate.
In this case, the Taxpayer sold electrical supplies to churches exempt of the tax. The items purchased are building and construction materials and are not covered by the wording in the exemption certificate. As such, the sales do not qualify for the exemption. Accordingly, I find no basis to remove these sales from the sample.
Certificate on File
It is my understanding that the Taxpayer had on file at the time of sale a certificate of exemption, Form ST-11, for items 5 and 6 of the exceptions. I agree that the good faith protection discussed in 23 VAC 10-210-280 applies in this case. Therefore, invoices 10581500 and 10526600 will be removed from the sample.
Conclusion
The Department's audit will be revised as noted above. A bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid in full within 30 days from the date of the updated bill.
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 letter, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
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AR/39412T
Rulings of the Tax Commissioner