Document Number
10-106
Tax Type
Retail Sales and Use Tax
Description
Tax on untaxed sales of tangible personal property and use tax on untaxed purchases of tangible personal property used in Virginia jobs.
Topic
Exemptions
Tangible Personal Property
Taxable Transactions
Date Issued
06-18-2010


June 18, 2010




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

Dear *****:

This is in response to your letter submitted on behalf of ***** (the Taxpayer) in which you request correction of the retail sales and use tax assessment issued to the Taxpayer as a result of an audit of the period October 2004 through October 2007. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer is a mechanical contractor located outside Virginia. An audit resulted in the assessment of sales tax on untaxed sales of tangible personal property and use tax on untaxed purchases of tangible personal property used in Virginia jobs.

The Taxpayer contends that some of the purchases assessed in the audit should be exempt of the tax based on the certified pollution control equipment exemption set out in Va. Code § 58.1- 609.3 9. The Taxpayer also contends that certain sales held in the audit are exempt from the tax based on the resale exemption. In addition, the Taxpayer requests a credit for two tax overpayments.

DETERMINATION


Tangible personal property purchased in Virginia is subject to the retail sales and use tax, including tangible personal property used to dispose of plant wastes and pollutants other than equipment designated as certified pollution control equipment. See Title 23 of the Virginia Administrative Code (VAC) 10-210-920 C 2 (under Taxable). Virginia Code § 58.1­609.3 9 provides an exemption for "[c]ertified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section..." Virginia Code § 58.1-3660 defines certified pollution control equipment and facilities to mean "any property, including real or personal property, equipment, facilities, or devices, used primarily for the purpose of abating or preventing pollution of the atmosphere or waters of the Commonwealth and which the state certifying authority having jurisdiction with respect to such property has certified to the Department of Taxation as having been constructed, reconstructed, erected, or acquired in conformity with the state program or requirements for abatement or control of water or atmospheric pollution or contamination." [Emphasis added.]

Virginia Code § 58.1-3660 goes on to state, "Such property shall include, but is not limited to, any equipment used to grind, chip, or mulch trees, tree stumps, underbrush, and other vegetative cover for reuse as mulch, compost, landfill gas, synthetic or natural gas recovered from waste or other fuel, and equipment used in collecting, processing, and distributing, or generating electricity from, landfill gas or synthetic or natural gas recovered from waste, whether or not such property has been certified to the Department of Taxation by a state certifying authority."

In this case, none of the equipment at issue is used to grind, chip, or mulch trees or used to collect, process, distribute or generate electricity from recovered waste. Therefore, in order for the property at issue to qualify for the certified pollution control exemption, the state certifying authority (e.g., the State Air Pollution Control Board) must have certified to the Department of Taxation that the equipment was constructed, reconstructed, erected, or acquired in conformity with the state program or requirements for abatement or control of water or atmospheric pollution or contamination. Without such required certification, the property is taxable.

For Job #04-0340, the Taxpayer furnished and installed a scrubber designed to remove particles that are carried in the air stream to prevent them from entering the atmosphere. For Job #05-0131, the Taxpayer furnished and installed a scrubber system. For Job #05-0246, the Taxpayer furnished and installed high intensity air ductwork to remove process vapors. For each of these jobs, the Taxpayer claims that the property is for qualified pollution abatement based on the purchase orders, federal operating permits and other information presented. However, such documentation is not certification from the state certifying authority to the Department of Taxation certifying that such property is used primarily for the purpose of abating or preventing air or water pollution in Virginia.

Pursuant to Va. Code § 58.1-205 1, any assessment of a tax by the Department of Taxation is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to prove that the tax assessment is not valid. The Taxpayer has not furnished the statutorily required certification to exempt the above items and thus has not met its burden of proof. Therefore, the scrubbers and ductwork claimed as pollution control equipment will remain in the audit.
    • The remaining issues are addressed below.

Job #05-130

The Taxpayer claims the manufacturing exemption for an exhaust fan and ductwork installed to remove fumes from food mixing equipment. The Taxpayer presents an undated exemption certificate, Form ST-11, which was sent by the customer to the Taxpayer in May 2009. Based on this evidence, it appears this certificate was not in the Taxpayer's possession at the time of the transaction, which occurred in April 2005. Accordingly, a good faith reliance 1on the certificate cannot be sustained. In such instances, the transaction is subject to closer scrutiny as to whether an exemption applies or not. 2


In this case, the customer claims the manufacturing exemption to support exemption from the tax. No pollution control exemption is claimed. Because Title 23 VAC 10-210-920 C 2 specifically taxes equipment used in waste removal that has not been certified to the Department as pollution control equipment, and no evidence has been presented that these items are certified pollution control equipment, the Taxpayer has not met its burden of proving that an exemption is applicable. Accordingly, the exhaust fan and ductwork will remain in the audit.

Job #07-218

The Taxpayer claims the research and development exemption for air conditioning used in connection with a clean room. No valid exemption certificate has been presented to establish that the customer certified to the Taxpayer at the time of the transaction that the property was purchased for such specific exempt purpose.

Instead, the Taxpayer furnishes a copy of its cost estimate for all of the labor, materials and related expenses involved in furnishing and installing the clean room. This documentation, however, provides no convincing evidence to establish why and how the air conditioning system actually qualifies for the research and development exemption set out in Va. Code § 58.1-609.3 5, which exempts:
    • Tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.

Absent a valid exemption certificate taken at the time of the job, the transaction is subject to closer scrutiny. The Taxpayer's cost estimate provides no information as to why and how the air conditioning system satisfies the direct use and exclusivity criteria of the exemption and how the customer actually performs basic research or research and development as those terms are defined in Title 23 VAC 10-210-3070. Because of this lack of convincing evidence that an exemption is applicable, the Taxpayer has not met its burden of proof. Accordingly, these items will remain in the audit.

Job #05-0030

The Taxpayer claims it overpaid the tax on two purchases held in the audit and should be given credit for such tax overpayment. While sales tax was paid to the vendor, the Taxpayer also reported use tax on the two same invoices to the Department. According to the auditor, full credit was given in the audit for use tax accrued in error. A review of the purchase exceptions list indicates the credit equals the amount of use tax accrued by the Taxpayer for this job during the months of March 2005 through June 2005 and August 2005. Accordingly, I find no basis to adjust the audit for this issue.

Contested Sales

The Taxpayer claims that three sales held in the audit qualify for the resale exemption based on the resale exemption certificate, Form ST-10, provided. Title 23 VAC 10-210-280 A provides that "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice." The customer's Form ST-10 is not dated. Therefore, absent evidence that this certificate was furnished to the Taxpayer at the time of sale and thus relied upon by the Taxpayer in good faith,3.
it is not sufficiently acceptable for application of the resale exemption to the three sales in question, unless the customer can prove that it actually resold these items and did not use or consume them in its business. Furthermore, based on the information that is available to the Department, it is not possible to determine that the customer resold these items or used them in its business. Because the Taxpayer has not met its burden of proof, these three sales will remain in the audit.

CONCLUSION


Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Attention: *****, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

If the Taxpayer obtains additional documentation to support an adjustment to the audit, it may seek reconsideration of this determination provided such reconsideration request is received by the Department within 45 days of the date of this determination. See Title 23 VAC 10-20-165 F.

The Code of Virginia sections, regulations and public documents cited are available on-line at ww.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,

                • Linda Foster
                  Deputy Tax Commissioner




AR/1-3937621699.R
1. 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. See Title 23 Virginia Administrative Code (VAC) 10-210-280 A.
2. See Public Documents (P.D.) 09-184 (12/11/09) and 98-29 (2/10/98), which explain that exemption certificates obtained after the start of an audit cannot be accepted "in good faith" and are subject to greater scrutiny by the Department. 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 the specific transaction identified during audit. Furthermore, a valid exemption certificate must include, among other things, the month, day and year that the certificate is signed by the purchaser. See P.D. 06-100 (10/5/06).
3. Ibid.

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46