Tax Type
Retail Sales and Use Tax
Description
Exemption certificate obtained after the start of an audit.
Topic
Exemptions
Date Issued
09-22-2005
September 22, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer"), for the period September 2001 through August 2004.
FACTS
The Taxpayer is a direct importer and distributor of marble, granite, limestone, slate, and durango stone. The Taxpayer sells these stones to fabricators, homeowners, architects, builders and designers. The Department's audit disclosed that the Taxpayer made sales to customers and did not collect sales tax. The auditor assessed tax on these sales. The Taxpayer disagrees with the audit results, stating that the identified sales are not taxable because it accepted exemption certificates in good faith. In addition, the Taxpayer contends that the sales to ***** ("Global") were a one time, extraordinary event and should be removed from the audit sample. Accordingly, the Taxpayer seeks abatement of the Department's assessment.
DETERMINATION
Exemption Certificates
Pursuant to Virginia Code § 58.1-623, all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale 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.
The proper use of certificates is set out in Title 23 of the Virginia Administrative Code 10-210-280, which provides:
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- 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 items of tangible personal property not covered by the exact working of the certificate. [Emphasis added.]
Included within this same regulation, it is specifically stated, "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice."
In this case, the auditor noted numerous discrepancies in the exemption certificates that were available for review. The Taxpayer was provided ample opportunity to secure proper and valid certificates of exemption from its customers; however, the updated certificates the Taxpayer provided were not valid for the sales at issue. In one case, a resale exemption certificate provided by one customer is invalid because it is dated more than 17 months prior to the date that business registered with the Department for sales tax. For another customer, the resale exemption certificate is dated nine months prior to the date that business registered with the Department for sales tax. As a proper certificate of exemption was not provided, the auditor was correct in including the sales in the audit calculations.
The Department has previously ruled in Public Document 98-29 (2/20/98) that an exemption certificate obtained after the start of an audit cannot be accepted "in good faith" and is 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 information provided; and for the reasons explained above, the Department cannot confirm the use of the resale certificates is valid for the contested sales. For more information regarding the Department's policy relating to exemption certificates, see Public Documents 97-351 (08/29/97) and 98-72 (04/21/98).
Sampling
Sampling is an audit technique of significant value that is widely used in the public and private sector in all types of audits where a detailed audit would not prove beneficial to either the auditor or the client. When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detail audit. The courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct and the burden is upon the taxpayer to prove otherwise. Chesapeake Hospital Authority v. Commonwealth, 262 Va. 551, 554 S.E.2d 55 (2001).
For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. It may well be that sales to Global are infrequent, but such sales appear to be an integral part of the Taxpayer's normal business.
The purpose of the projection is to account for likely similar transactions on which the Virginia tax was not properly paid. The removal of the transaction at issue would nullify the purpose and validity of the sample in that other such sales not included in the sample period may not have been properly taxed. Based on the foregoing, I do not find sufficient cause to allow for a revision of the audit deficiency.
CONCLUSION
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the updated bill.
The Code of Virginia section, regulation and public documents cited, along with other reference documents, are available on-line in the Department's Tax Policy Library, located at www.policylibrary.tax.virginia.gov. 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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- Sincerely,
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AR/54807.i
Rulings of the Tax Commissioner