Tax Type
Retail Sales and Use Tax
Description
Out-of-state business that accepted invalid exemption certificates
Topic
Exemptions
Date Issued
08-25-2004
August 25, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you offer to pay ******** plus applicable interest as full settlement of a retail sales and-use tax assessment issued to ******** (the "Taxpayer") for the period January 1996 through July 2000. Based on your letter, I am treating your request as an application for correction of an erroneous assessment under Va. Code § 58.1-1821. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an out-of-state business that sells office and computer graphic supplies. The Department audited the Taxpayer and assessed sales tax on untaxed sales for which the Taxpayer had not obtained valid exemption certificates from its customers. The auditor conducted a one-month sample of the Taxpayer's sales. An error factor was computed for the sample month and sales tax was assessed on the extrapolated untaxed sales measure. The Taxpayer maintains that the sample method used is erroneous. The Taxpayer suggests that the sample should be based on exempt sales. The Department uses gross sales when conducting sales samples in audits. The Taxpayer has recalculated the sales sample using exempt sales made during the audit period and proposes to pay the revised amount of tax plus interest.
The auditor refused to accept exemption certificates from two customers to whom the Taxpayer made untaxed sales. The auditor denied one of the exemption certificates because it did not contain a valid Virginia registration number and denied the other because it did not contain a valid Virginia registration date. The Taxpayer maintains that the certificates were accepted in good faith and should be allowed in the audit based on the provisions of Va. Code § 58.1-623.
The Taxpayer also requests the removal from the audit sample of sales exceptions for two other customers that self-assessed and paid Virginia use tax on the transactions. The customers provided the Taxpayer with documentation showing that the tax had been self-assessed and paid directly to the Department. The Taxpayer has recomputed the tax due for the audit based on the removal of these sales exceptions from the sample.
DETERMINATION
Audit Sample
Sampling is an audit technique of significant value that is widely used in both the public and private sectors. The Department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. The findings that result from the use of an audit sample are intended to estimate the taxable sales measure for the entire population of sales transactions. The final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
Every effort is made to select objectively sample periods that are representative of the entire audit period and to reach a consensus with the taxpayer concerning the validity of the sample period. The auditor performed a one-month block sample to determine if the Taxpayer was properly collecting sales tax on its sales. The audit report indicates that the Taxpayer chose the month to be sampled.
The Taxpayer has suggested that the error factor computed by the Department should be applied to the Taxpayer's exempt sales rather than gross sales. The use of the Taxpayer's methodology would understate the taxable sales amount for the audit period. An error factor computed based on gross sales must be extrapolated against the same population for the audit period, i.e., gross sales. The use of exempt sales as the sample population for the audit period skews the results of the sample because the population for the sample month is not consistent with the population used for the entire audit period.
The Department's policy with respect to sampling requires taxpayers to demonstrate that the results of the audit sample are not representative of the Taxpayer's audit period. Virginia Code § 58.1-205(1) provides that assessments by the Department are considered prima facie correct. The burden is on the Taxpayer to prove that an assessment issued by the Department is erroneous. The Taxpayer has not met the burden of showing that the audit sample used by the Department resulted in an erroneous assessment. The assessment is correct with respect to this issue.
Exemption Certificates
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- 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.
The Department has previously ruled in Public Document 98-29 (2/20/98) that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was never accepted in good faith. Thus, exemption certificates obtained after the start of an audit cannot be accepted "in good faith" and are subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during audit.
One of the Taxpayer's customers provided a resale exemption certificate with an account number that the auditor determined was not valid. Further research conducted by my staff has confirmed that the customer's account number is not valid for a resale exemption certificate. The customer must have a valid Virginia sales and use tax registration number to make exempt purchases for resale. This was not the case for this particular customer. The certificate was obtained after the audit was started and was not filled out completely. For the reasons discussed above, the Taxpayer does not enjoy the good faith protection afforded to dealers that obtain valid exemption certificates at the time of sale. The sales exception for this customer was properly held taxable in the audit.
Another exemption certificate was not accepted because of an invalid registration date. Further research of this account indicates that ownership of the customer changed during the audit period. The customer, a commercial printer, was registered under another account number at the time the sale was made by the Taxpayer. Based on a review of this customer's account information, the exempt sale in question is consistent with the exemption claimed on the exemption certificate provided to the Taxpayer. The sale to this customer will be removed from the audit sample.
Credit for Use Tax Paid by Customers
The Taxpayer made untaxed sales to two customers that were not supported by exemption certificates. The customers responded to the Taxpayer's request for exemption certificates by providing evidence that they had self-assessed and paid use tax on the transactions directly to the Department. The Taxpayer requests the recalculation of the sample to reflect the removal of the sales to these customers.
The Department has previously addressed the issue of credits for use tax paid by customers in sales sample calculations. In those cases, sales held taxable in audits in which the customers self-assessed the use tax were contested. The Department upheld the sales sample techniques and found no basis to recalculate the sales error factors. Credits were allowed against the assessments for the taxes self-assessed and paid by the customers. Public Documents 97-51 (2/10/97) and 95-93 (4/28/95) have previously been issued by the Department to address this issue.
Based on the above, a credit for the tax paid by these customers totaling will be applied against the audit assessment. The Taxpayer should note that a dealer's obligation to collect sales tax on all Virginia sales without valid exemption certificates is not dependent on whether customers self-assess and pay use tax directly to the Department. For this reason, the sales exceptions listed in the audit for these customers will not be removed from the sales sample.
Conclusion
A revised bill reflecting the adjustments noted in this letter will be issued to the Taxpayer. The balance due should be paid within 30 days of the date of the bill to avoid the accrual of additional interest and penalties.
The public documents, regulations and Code of Virginia sections cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/48578S
Rulings of the Tax Commissioner