04-99 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Department's treatment of the exemption credits results in double taxation

Topic

Credits

Exemptions

Date Issued

09-08-2004

September 8, 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 assessment issued to ***** (the "Taxpayer") for the period November 1997 through August 2000. I apologize for the unusual delay in responding to your letter.

FACTS

The Taxpayer is an out-of-state manufacturer of specialty chemicals. The Taxpayer is registered to collect Virginia use tax on its Virginia sales. An audit of the Taxpayer resulted in an assessment of use tax on untaxed sales to customers. Many of the customers did not have valid exemption certificates on file with the Taxpayer. The Taxpayer is taking exception to the inclusion in the audit of sales to ***** (the "Customer"). The Customer is a manufacturer and had provided the Taxpayer with an exemption certificate prior to the start of the audit. The auditor determined that the Customer was using some of the products purchased from the Taxpayer in a taxable manner. For this reason, the auditor included all untaxed sales to the Customer in the audit sample.

The Taxpayer maintains that it held a valid exemption certificate that was accepted in good faith from the Customer, and the Department cannot hold the Taxpayer liable for the untaxed sales to the Customer. The Taxpayer does not believe that it is responsible for evaluating exempt sales made to customers to determine if a customer's exemption applies to a specific transaction.

In addition, the Taxpayer contacted those customers to whom untaxed sales were made for exemption certificates or to collect the tax from those customers that could not provide a valid exemption certificate. Some customers provided the Taxpayer with documentation that they had reported and paid use tax to the Department of Taxation on their untaxed purchases. The auditor credited the taxes paid by the customers for the months they occurred in the sample period. The Taxpayer maintains that the credits should be included in the computation of the error factor for the sales sample and extrapolated over the audit period. The Taxpayer suggests that the Department's treatment of the credits results in double taxation.

DETERMINATION

Exemption Certificates

Title 23 of the Virginia Administrative Code (VAC) 10-210-280(A) states 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.

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.

Based on the fact that the Taxpayer held a valid exemption certificate from the Customer prior to the audit, I agree that the good faith protection discussed in Title 23 VAC 10-210-280 applies in this case. The sales exceptions for the Customer will be removed from the sales sample and the Taxpayer's audit liability will be recalculated.

Sample Method

The Taxpayer questions the validity of the Department's audit sample with respect to the exclusion of credits in the calculation of the sample error factor. As the Taxpayer indicates, the Department has previously addressed the issue of credits included in sample calculations. In those prior cases, sales held taxable in audits in which customers self-assessed the use tax were contested. The Department upheld the sales audit techniques while finding no basis for recalculating the sales error factors. As in the Taxpayer's case, credits for the taxes paid by the customers were allowed against assessments.

The Taxpayer maintains that the Department's sampling technique is not representative of the population sampled and results in double taxation. The use of the sampling technique to examine sales provides a snapshot of the Taxpayer's compliance with its sales tax collection and reporting responsibilities. The Taxpayer's argument is based on the fact that the Taxpayer's customers paid use tax directly to the Department on the transactions found in the audit sample. The Department's sales sample determines the error rate at which the Taxpayer failed to charge sales and use tax on untaxed sales without a valid, supporting exemption certificate. The sample is not intended to determine the combined compliance of the Taxpayer and its customers.

The Taxpayer made a number of untaxed sales during the sample period that were not supported by exemption certificates. Although some of the Taxpayer's customers reported and paid use tax to the Department, this is not a reflection of the Taxpayer's sales tax collection compliance. The inclusion of customers' self-assessed use tax payments in the sales sample distorts the Taxpayer's sales and use tax compliance. The Taxpayer'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. Accordingly, I find no basis to change the Department's policy with respect to our audit sampling techniques.

Conclusion

Based on this determination, the audit liability has been revised to remove sales to the Customer. The Department's records indicate that the Taxpayer has made a payment of ***** against the audit assessment. A balance of ***** which represents the unpaid interest on this account, remains after recalculating the sales sample. The Taxpayer's check for this amount should be remitted to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 1880, Richmond, Virginia 23218-1880, Attention: *****. Payment should be made within 30 days to avoid the accrual of additional interest. If payment is not received timely, an updated notice of assessment reflecting accrued interest to date will be issued to the Taxpayer.

The regulation and public document cited, along with other reference documents, 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 concerning this determination, please contact ***** at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        
        Tax Commissioner

AR/35249S

Rulings of the Tax Commissioner