Document Number
08-54
Tax Type
Retail Sales and Use Tax
Description
Assessment of sales tax on untaxed retail sales of paint, thinner and other refinishing materials, equipment, and shop supplies
Topic
Collection of Tax
Exemptions
Property Subject to Tax
Date Issued
04-30-2008



April 30, 2008




Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to your letter requesting correction of the retail sales and use tax assessments issued to ***** (the "Taxpayer"), as a result of an audit of two locations for the period June 2002 through September 2005. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer sells auto body shop materials, supplies and equipment from two locations in Virginia. The audit of the Taxpayer resulted in the assessment of sales tax on untaxed retail sales of paint, thinner and other refinishing materials, equipment, and shop supplies for which exemption certificates were obtained.

The Taxpayer contests all of the sales tax assessed. The Taxpayer maintains that the contested sales should not be included in its audit because it acted properly in accordance with the law and regulations in accepting resale exemption certificates in good faith. Further, the Taxpayer asserts if there is any improper use of exemption certificates, the Department should look to the purchasers for any tax deficiencies.

DETERMINATION


Certificates of Exemption

Subsection A of Va. Code § 58.1-612 requires all dealers to collect and remit the retail sales and use tax on all sales or leases of tangible personal property. Subsection A of Va. Code § 58.1-623 provides the following:
    • All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage 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 under this chapter.

In addition to the above, Va. Code § 58.1-623 B states, "The certificate . . . shall relieve the person who takes such certificate from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable."

The above statutory language is interpreted in part by Title 23 of the Virginia Administrative Code ("VAC") 10-210-280, which provides, in part::
    • 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 certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
    • Subsection B of the regulation states the following:
    • 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 item of tangible personal property not covered by the exact wording of the certificate.

Subsection C of the regulation includes several examples of how exemption certificates are misused. Example C (2) of the regulation states:
    • Purchases under Form ST-10 (resale exemption certificate) by a registered automobile dealer, garage or service station operator, of items such as jacks or hand tools for use in the business. Such items are subject to the tax. No exemption certificate offered in making such a purchase is acceptable. [Emphasis added.]

In regard to the Department's current resale exemption certificate (Form ST-10), each purchaser certifies that all tangible personal property purchased from the seller on and after the date shown on the certificate would be purchased for resale purposes only, unless otherwise specified on a purchase order. As such, each resale exemption certificate serves to exempt all sales made by the seller, provided the resale certificate fully complies with subsection A of Title 23 VAC 10-21 10-280 for completeness, signature and date.

Notwithstanding, the seller must exercise reasonable care and judgment in applying the resale exemption on all sales made to any customer.

Motor Vehicle Refinishers and Body Shops

The Taxpayer sells paint, thinner, and auto body filler to motor vehicle refinishers and body shops. Several customers have claimed the resale exemption for their purchases from the Taxpayer. The Taxpayer maintains that it acted in good faith and took reasonable care to ensure that the resale exemption certificates were valid.

Title 23 VAC 10-210-1020 illustrates the application of the tax to motor vehicle refinishers under the law in effect prior to July 1, 2005:
    • Motor vehicle refinishers and painters are engaged primarily in rendering personal services, and their gross receipts are not subject to the tax. However, they are the consumers of the materials used in their business and are required to pay tax on their purchases. When refinishers and painters go beyond the rendition of services and sell tangible personal property such as accessories, parts, seatcovers, etc., they are required to register and collect and pay the tax on those retail sales. This section also applies to car washers.

The above regulation is also applicable to body, shops. Prior to July 1, 2005, the Department held that motor vehicle refinishers and body shops are the consumers of any paints and other materials applied to motor vehicles, whether for a repair or replacement. However, effective on and after July 1, 2005, the statutory term 'retail sale' as set out in Va. Code § 58.1-602 was expanded to specifically include "the separately stated charge made for automotive refinish repair materials that are permanently applied to or affixed to a motor vehicle during its repair." Thus, beginning July 1, 2005, a motor vehicle refinisher is generally a retailer of paint, thinner (when used to mix with paint) and auto body filler when it applies such items to motor vehicles and separately states the charges for such items on the sales invoice. In such instances, the motor vehicle refinisher must charge and collect the sales tax on the total amount charged for paint, thinner and filler but it may buy such items exempt of the tax under a resale exemption certificate, Form ST-10.

For the period of the audit prior to the law change, the Taxpayer obtained resale exemption certificates (Form ST-10) from customers for sales of automotive refinish repair materials, equipment and supplies. There is no indication in the facts presented that such resale certification was otherwise specified on any purchase order.

For these reasons and in those instances in which the contested exemption certificates comply with the above regulatory provision at the time of sale, I find basis for concluding that the Taxpayer accepted such exemption certificates in good faith. Accordingly, all such sales supported by valid resale exemption certificates will be removed from the audit.


Other Transactions

In regard to the two sales made to ***** ("Customer") that were included in the audit sample, it appears that the Taxpayer did not obtain a resale exemption
certificate from the Customer until after the audit commenced. It is the long-standing policy of the Department that a certificate obtained after the fact, especially under audit, is subject to closer scrutiny by the seller and is acceptable only if the sale truly qualifies for the exemption. See Public Document 93-161 (7/23/93). In this case, the certificate was obtained more than a year after the sales were made and, thus, does not enjoy good faith protection. Accordingly, 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 transactions in question. The Taxpayer, however, has, not proven that the two contested sales made to this Customer qualify for the resale exemption. Under the Department's policy in effect at the time of these sales, the tax generally applies to purchases of automobile paint, equipment and supplies made by body shops. Absent proof that the Customer actually resold these items or that the Taxpayer had obtained a valid resale exemption certificate from this Customer at the time of or prior to these sales, I find no basis for the removal of these two sales from the audit sample.
CONCLUSION

The audit will be revised in accordance with this determination. Updated bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balances should be paid within 30 days of the bill dates to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230. Attn: *****. If you have any questions concerning payment of the assessments, you may contact ***** at *****.
    • The Code of Virginia sections, regulations and the public document cited 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 about this determination, you may
contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,

                • Janie E. Bowen
                  Tax Commissioner


AR/1-840602501.R

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46