Document Number
05-160
Tax Type
Retail Sales and Use Tax
Description
Taxpayer did not have valid exemption certificates on file from its customers
Topic
Exemptions
Date Issued
10-07-2005


October 7, 2005


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 assessment issued to ***** (the "Taxpayer") for the period December 1995 through December 2002. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer was audited and assessed sales tax on various untaxed sales for which the Taxpayer did not have valid exemption certificates on file from its customers. The Taxpayer has obtained exemption certificates or other documentation from some of the customers to whom the untaxed sales were made. Based on this information, the Taxpayer seeks the removal of these sales from the audit.

DETERMINATION

Prior to addressing the issues raised in the Taxpayer's letter, it is necessary to explain the Department's policy with respect to certificates of exemption. Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A states:
    • 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 .... However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

Title 23 VAC 10-210-280 B 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." I note that the Taxpayer was allowed to obtain copies of exemption certificates from its customers during and after the audit for consideration by the Department. Public Document (P.D.) 98-29 (2/20/98) explains that certificates of exemption obtained during or after an audit will be accepted only if the Department can confirm that the customer's use of the certificate was valid and proper for the specific transaction. Dealers that fail to obtain a valid exemption certificate at the time an exempt sale is made do not enjoy the good faith protection discussed in Title 23 VAC 10-210-280 A. Thus, certificates of exemption are subject to greater scrutiny by the Department when obtained by a taxpayer during or after an audit and the Department is not obligated to accept certificates that are not valid.

Virginia Code § 58.1-205 1 states, "Any assessment of a tax by the Department shall be deemed prima facie correct." The burden of proving that a tax assessment issued by the Department is erroneous is on the taxpayer. Keeping this point in mind with the Department's policy on exemption certificates, I will address each of the customers included in the Taxpayer's appeal.

**********

The Department previously agreed to remove sales to this customer from the audit based on documentation provided by the Taxpayer. A review of the audit indicates that these sales were not included in the final computation of the audit liability.

**********

This customer provided the Taxpayer with information that use tax was paid directly to the Department on purchases made from the Taxpayer. For this reason, the Taxpayer requests the removal of sales to this customer from the audit sample. The Department has previously addressed this issue in P.D. 04-99 (9/8/04) and other public documents. Although this customer reported and paid use tax to the Department on purchases made from the Taxpayer, this is not a reflection of the Taxpayer's sales tax collection compliance. The Department's sales sample determines the error rate at which taxpayers fail to charge sales and use tax on untaxed sales made without a valid, supporting exemption certificate. The inclusion of customers' self-assessed use tax payments in the sales sample distorts the Taxpayer's sales and use tax compliance. The sample is not intended to determine the combined compliance of the Taxpayer and its customers.

The Department's consistent policy in cases where taxpayers have contested the inclusion in their audit samples of sales to customers that have self-assessed Virginia use tax has been to allow credits against the audit liability for the use tax paid by the customers. The Department has no basis, however, for recalculating the sales error factors determined in the audit sample for the reasons set forth above. 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 recalculate the error factor determined in the audit sample. The audit liability will be adjusted to reflect a credit for the use tax paid to the Department by the Taxpayer's customer.

**********

The Taxpayer has presented the Department a blanket, multijurisdictional exemption certificate from this customer. In P.D. 97-39 (02/04/97), the Department ruled that the use of generic exemption certificates is allowed in limited situations if the certificate contains all of the information found on the Department's Form ST-10, resale exemption certificate. The use of a blanket certificate of exemption is limited to resale transactions. The Department must examine the generic certificate and will grant permission for the certificate's use if the criteria discussed in P.D. 97-39 are met.

In reviewing this particular transaction, it is questionable whether the transaction is a sale for resale. A member of my staff allowed the Taxpayer time to provide further details of this transaction. To date, the Taxpayer has not provided any information. As previously noted, there is no good faith protection for dealers that receive exemption certificates after an audit has started. Any exemption certificates that are received after the start of an audit are subject to greater scrutiny by the Department.

There is also a question whether the blanket exemption certificate provided to the Taxpayer was approved by the Department prior to its use, as required in P.D. 97-39. Based on the information provided by the Taxpayer, there is no evidence that the sale to this customer was a resale transaction. I find no basis to remove the sale to this customer from the audit.

**********

This customer has provided the Taxpayer with a Form ST-13 indicating that sales to this customer are exempt under the exemption for nonprofit hospitals. The Department's review of this exemption certificate and the entity that issued it indicates that the certificate is not valid. The entity named on the certificate is not a nonprofit hospital and is not eligible for the nonprofit hospital exemption. The Taxpayer did not accept this certificate in good faith as it was obtained after the start of the audit. Sales to this customer will remain in the audit.

**********

The Taxpayer has presented a Form ST-13 from this customer, who is claiming the sales tax exemption for purchases of tangible personal property made by nonprofit hospitals; however, these particular sales were made not to the customer, but to entities related to this customer. The Taxpayer has not established that these sales qualify for the nonprofit hospital exemption. The Form ST-13 provided by this customer cannot be used to make exempt purchases for other entities. The Taxpayer should have obtained valid exemption certificates from each of the entities to which it made the sales. Based on the fact that the Taxpayer obtained this certificate after the audit, the certificate was not accepted in good faith. The sales were properly held taxable in the audit.

*************

This customer has provided the Taxpayer with a Form ST-11 that indicates the customer is exempt under the research and development exemption. Other documentation provided to the Taxpayer confirms that the property sold on invoice number 539339 was used for research and development purposes. This customer indicates that invoice numbers 541483 and 541482 were shipped to the customer's mailroom in Virginia and then shipped to Germany. Title 23 VAC 10-210-780 discusses the exemption for sales in interstate and foreign commerce. This regulation states:
    • The tax does not apply to sales of tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.

In this case, the Taxpayer shipped the products to the customer's mailroom in Virginia. The customer then shipped the products to overseas locations. The exemption for sales in foreign commerce does not apply to these transactions because possession of the property transferred to the customer in Virginia. In addition, use of the property was made in Virginia. Virginia Code § 58.1-602 defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof . . . ." The customer exercised control over the property when the property was received in its Virginia warehouse and prepared for shipment overseas. The customer does not indicate in the information provided how the property was used overseas. Based on the evidence provided, invoice number 539339 will be removed from the audit sample. The remaining sales to this customer were properly included in the audit.

**********

The Taxpayer has presented the Department a blanket, multijurisdictional exemption certificate from this customer. The Taxpayer was also asked to provide additional documentation to the Department supporting its claim that sales to this customer qualify for the resale exemption. The Taxpayer maintains that this customer is a lessor that purchased the property for lease and that sales to this customer qualify for the resale exemption. The Taxpayer also offers the alternate argument that sales to this customer did not occur in Virginia. The Taxpayer states that the property sold was drop-shipped to a third party (the lessee) in Virginia. The Taxpayer asserts that title, possession and risk of loss associated with the property transferred from the Taxpayer to the customer outside Virginia. For this reason, the Taxpayer believes the transactions are not taxable in Virginia.

The multijurisdictional exemption certificate from this customer does not contain a valid Virginia registration number. In addition, the Taxpayer has not provided the requested supporting documentation to show that the tangible personal property sold to this customer was leased and would qualify for the resale exemption. As I noted in the discussion of the Standard Forms transaction, there is no good faith protection afforded the Taxpayer for exemption certificates provided to the Department after an audit has started. The Taxpayer was asked to provide additional information with respect to these transactions to establish that they are sales for resale. To date, the Taxpayer has not furnished this information and has not met its burden of proving that the sales qualify for exemption.

In addition, I am not persuaded by the Taxpayer's contention that sales to this customer were not taxable in Virginia because the transactions took place in another state. This customer is the owner of the property purchased from the Taxpayer. The customer took delivery and possession of the property in Virginia. This is a "sale" as the term is defined in Va. Code § 58.1-602, and the Taxpayer was required to charge sales tax on the sales unless the customer provided the Taxpayer with a valid exemption certificate. The Taxpayer has not provided documentation to support its claim that these transactions are exempt under the resale exemption.

CONCLUSION

Based on the determination above, the Taxpayer's audit will be revised and a corrected notice of assessment issued that reflects the new balance due. The corrected notice of assessment should be paid within 30 days to avoid the accrual of additional interest.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions concerning this determination, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,

                    • Kenneth W. Thorson
                      Tax Commissioner




AR/51776S


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46