Document Number
10-160
Tax Type
Retail Sales and Use Tax
Description
Exemption certificates. Sales transaction details not available for review
Topic
Exemptions
Records/Returns/Payments
Date Issued
08-06-2010

August 6, 2010



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 tax assessment issued to ***** (the "Taxpayer"), for the audit period September 2005 through August 2008. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer is a retailer of home furnishings and accessories. The Department's audit disclosed that exempt sales were made to certain organizations that provided the Taxpayer with valid and complete exemption certificates. The sales transaction details, however, were not made available for review to determine if the purchases were made using funds of the exempt organizations. The Taxpayer contends that such documentation is unnecessary and all that is required is the acceptance of a valid exemption certificate.

The Department's audit also assessed the tax on cardboard roof protectors that are provided to customers when transporting their purchases from the Taxpayer's store to their homes. The Taxpayer contends that the roof protectors, which are provided to customers as a convenience, are similar to shopping bags and should be considered as packaging materials because they become the property of the customer after the sale.

The Taxpayer requests that the assessment be revised to exclude the foregoing items at issue. The Taxpayer has paid the assessments in full.

DETERMINATION


Certificates of Exemption and Records

Virginia Code § 58.1-623 states that all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale or lease 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 the law. This requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-280, which further states that:
    • Reasonable care and judgment must be exercised by all concerned to prevent the giving and 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.

Reasonable care and judgment requires that the Taxpayer review the exemption certificate presented and compare the language of such certificate to the items sold on the invoices. In this case while the Taxpayer has shown that it received properly completed certificates of exemption from its customers, the Taxpayer has not provided information about the transactions to verify that an exemption applies to the sales.

Virginia Code § 58.1-102 provides that every taxpayer has a duty to retain suitable records and documents that substantiate the filing of any return required by the Code of Virginia, including any other pertinent records or documents as the Tax Commissioner may require by regulation. Virginia Code § 58.1-103 supports the foregoing by providing that:
    • All records and documents required by this subtitle or by rule or regulation shall be available during regular business hours for inspection by the Tax Commissioner or his duly authorized agents. Persons violating the provisions of this section shall be guilty of a Class 2 misdemeanor.

In a prior audit, the Department's auditor was provided the documentation to ascertain and verify that a nonprofit entity's funds were used for the exempt purchase of tangible personal property. That audit also found that for some of the exempt sales, personal funds were accepted from the purchaser and that the exemption was erroneously allowed. In the current audit, the Taxpayer has refused to provide copies of the sales transactions at issue to make the determination that the sales are exempt of the tax. While a properly completed exemption certificate may be accepted in good faith, the Department must be able to review the entire transaction. Absent adequate records to establish that an exemption is properly applicable to the sales at issue, I find no basis for any adjustment to the audit assessment.

Packaging

Title 23 VAC 10-210-400 addresses the application of the retail sales and use tax to packaging materials. This regulation distinguishes exempt packaging materials (such as containers, labels, sacks, cans, and boxes) from taxable transportation devices (such as pallets, strapping, and similar materials). This same section further states that transportation devices are not packaging materials and may not be purchased tax exempt unless purchased for resale.

The Virginia Supreme Court, in Webster Brick Company v. Department of Taxation, 219 Va. 81, 245 S.E.2nd 252 (1978), held that the packaging exemption above was limited to items actually used in "packaging" products. The Court defined "packaging" as "putting into a protective wrapper or container for shipment or storage."

In this instance, the roof protectors are considered taxable transportation materials. While shopping bags are distinguishable as packaging materials that may be purchased for resale, the Taxpayer's records indicate that the roof protectors were expensed to the Taxpayer's office and administrative expense general ledger account rather than an inventory resale account. Clearly, the roof protectors are not containers or sacks and do not package the product purchased by customers. The roof protectors are provided to customers to protect the customers' vehicle from possible damage during the transportation of the item purchased from the Taxpayer. This represents a purchase of consumables and is taxable to the Taxpayer. I find no basis for the removal of the roof protectors from the Department's audit.

Based on the foregoing, the assessment is correct, and no refund is due on any portion of the amount that has been paid.

The Code of Virginia sections and regulations cited are available on-line in the Tax Policy Library section of the Department's website located at www.tax.Virginia.gov. If you have any questions regarding this matter, please contact ***** of the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,

                • Linda Foster
                  Deputy Tax Commissioner



AR/1-3464606649.Q

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46