Tax Type
Retail Sales and Use Tax
Description
Exempt sales not supported by a certificate of exemption
Topic
Exemptions
Sale for Resale
Date Issued
12-11-2009
December 11, 2009
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 August 2005 through July 2008. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer sells medical systems and equipment. An audit by the Department disclosed that the Taxpayer made an exempt sale of a parts and labor maintenance agreement that was not supported by a certificate of exemption. The charge for the maintenance agreement was billed through a third party vendor. The maintenance agreement was for equipment located at a hospital. The Taxpayer contests the tax assessed on the contract on the basis the sale was an exempt sale for resale and that the sale qualifies for the nonprofit exemption. The Taxpayer subsequently obtained a resale certificate of exemption from the third party vendor; however, the auditor disallowed the certificate because it appeared invalid on its face and because there was not sufficient information available to determine if this specific sales transaction qualified for the resale exemption.
DETERMINATION
Virginia Code § 58.1-623 states, “AII 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."
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- 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.... A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
- Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A states:
The Department has previously ruled in Public Document (P.D.) 98-29 (2/20/98) that the absence of an exemption certificate at the time of a sales transaction indicates 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.
In this instance, the Taxpayer provided a resale exemption certificate for the contested sale of the maintenance agreement after the audit was in progress. The auditor denied the exemption certificate because it alone was insufficient to determine if the use of the resale exemption was valid for the transaction. Because the third party vendor is a provider of clinical equipment maintenance services, the auditor needed to review an agreement or contract between the third party vendor and the hospital to determine if the certificate of exemption was valid for the transaction. This information was not provided. The exemption certificate obtained by the Taxpayer was also not valid on its face. The third party vendor listed both itself and the hospital as the purchasers despite the fact that each is a separate legal entity.
The Taxpayer also maintains that the maintenance agreement is an exempt sale between the Taxpayer and a nonprofit hospital, and the third party is only providing billing services. The Taxpayer has provided copies of a purchase order, field service reports and a “Customer Support Agreement” to the Department to support its contention.
A review of the documentation provided shows the Taxpayer provides repair parts and maintenance services for the products described in the contract. However, the third party vendor is listed in the purchase order as the purchaser of the maintenance agreement. In addition, it is clear that the Taxpayer billed the third party vendor the annual fee for the maintenance agreement. The fact that the Taxpayer is providing maintenance services on equipment owned by the hospital does not provide conclusive evidence that the maintenance agreement is a sale to the nonprofit hospital. Based on this information, I cannot agree with the Taxpayer's claim that the sale of the service and supplies contract qualifies as an exempt sale to the nonprofit hospital.
The Department’s position is further supported by Public Document (P.D.) 09-74 (5/26/09), which is directly on point with this issue. This determination relies on the Department’s policy with respect to exemption certificates, which P.D. 98-29 discusses. Accordingly, the Tax Commissioner ruled in P.D. 09-74 that a resale exemption certificate obtained from a third party vendor after the start of the audit was not sufficient to allow the resale exemption for a contested sale. The Department’s auditor in that case was correct to require additional information about the relationship between the parties involved in the transaction to support the seller’s claim that the transaction was an exempt sale for resale. Pursuant to Va. Code § 58.1-623, Title 23 VAC 10-210-280 A, P.D. 98-29 and P.D. 09-74, the Taxpayer has not met its burden of proving that the sale of the maintenance agreement is exempt.
Based on the foregoing, there is no basis to adjust the Department's audit assessment. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of the bill.
I understand that the Taxpayer has expressed concerns about the conduct of the Department’s auditor during the audit. I apologize if the Taxpayer finds the actions of the Department’s audit staff inappropriate. It is certainly not the Department’s intent for the audit staff to intimidate or be disrespectful to taxpayers during audits.
The Code of Virginia section, regulation and public documents 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 Office of Tax Policy, Appeals and Rulings, at **********.
Sincerely,
Janie E. Bowen
Tax Commissioner
AR/1-3152847317S
Rulings of the Tax Commissioner