Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letters in which you seek the correction of retail sales and use tax assessments issued to two registered accounts of ***** (collectively, the "Taxpayers") for the period July 2009 through May 2012. I apologize for the delay in responding to your letters.
The Taxpayers make commercial retail sales of paper products, cleaning supplies and equipment and packaging supplies and equipment. One of the Taxpayers' accounts is registered to collect Virginia retail sales tax for sales made from multiple Virginia retail locations ("Taxpayer A"). The other account is registered to collect Virginia use tax on sales made to Virginia customers from an out-of-state retail location ("Taxpayer B"). The Department conducted separate audits of Taxpayer A and Taxpayer B. The Taxpayers are contesting both audit assessments.
Taxpayer A disputes the use tax assessed on fixed asset purchases from a vendor that billed sales and use tax at a tax rate that was different from the Virginia rate. The auditor assumed that the tax billed was not remitted to the Department. The auditor performed a reconciliation of the Taxpayers' sales records with the sales and use tax information reported on Virginia sales and use tax returns. Taxpayer A and Taxpayer B were assessed sales and use taxes, respectively, on underreported sales and use taxes identified by the reconciliation. Taxpayer B contests the assessment of use tax on two Virginia sales for which a tax rate of 6% was billed to its customers. As the Virginia sales and use tax rate was 5% at the time of the sales, the tax amounts collected by Taxpayer B were assumed to have been remitted to another state in error.
In each audit, the auditor disallowed certain exempt sales on the basis that the customers' exemption certificates were not valid for the types of products sold. The Taxpayers maintain that the exemption certificates were accepted in good faith and the sales should be removed from both audits. The Taxpayers have provided documentation to support adjustments to both audit assessments for the issues raised in each appeal.
Fixed Assets
Taxpayer A was assessed consumer use tax on two fixed asset purchase transactions with one vendor. The items purchased were shipped to Taxpayer A in Virginia. The out-of-state vendor billed sales tax on the transactions at a 4.8% rate. A Virginia sales and use tax rate of 5% was in effect at the time of the purchases. The auditor assessed consumer use tax on the purchases because it was not clear that the tax amounts invoiced were Virginia taxes or if the seller remitted the taxes to the Department. Taxpayer A maintains that the amounts billed are Virginia sales and use taxes and that the amounts were paid by the seller to the Department. According to Taxpayer A, the tax amounts were invoiced at a lower tax rate due to rebates and discounts applied by the seller to the taxable sales price of the products.
Based on a review of the information submitted by the Taxpayers, it cannot be determined whether the seller charged and remitted Virginia sales or use taxes to the Department. The invoices show Virginia delivery addresses for the locations that made the purchases but do not state that the tax amounts billed are Virginia sales and use tax. The fact that the tax rate billed was different from the Virginia rate of tax creates doubt that the tax amounts billed were Virginia taxes that were remitted to this state.
Further, neither invoice provides any information regarding discounts, rebates or reductions in the sales price charged by the seller that would reduce the amount of sales and use tax due on the transactions. There is no information on the invoices that allows the Department to verify that the tax was billed at the 5% Virginia tax rate. In addition, a Virginia sales and use tax registration for the vendor at issue cannot be located in the Department's records.
Virginia Code § 58.1-205 provides that an assessment of tax by the Department is deemed prima facie correct. This means that the burden is on the Taxpayers to prove the assessment is erroneous. The Taxpayers have not met the burden of proving that the seller charged the proper amount of tax on the purchases at issue or that the tax was remitted to the Department by the seller. Without additional information to prove otherwise, the transactions were properly held taxable in the audit.
Notwithstanding the above, I will allow the Taxpayers 45 days to submit information regarding the seller that allows the Department to confirm that the seller is registered for and collects Virginia sales or use taxes. Such information may include the exact name of the seller as registered with the Department, a signed letter or statement from the seller that provides a Virginia sales and use tax registration number or a copy of the seller's Virginia Certificate of Registration. A calculation of the sales price upon which the tax amounts shown on the invoices were computed should also be provided.
Reconciliation Adjustments
Taxpayer A and Taxpayer B were assessed sales and use taxes for the periods of May 2010 and January 2010, respectively. The auditor identified discrepancies between total Virginia sales or use taxes billed as recorded in the Taxpayers' sales detail reports and the taxes reported on the Virginia tax returns filed for these periods. The Taxpayers contend that the discrepancies are due to several factors.
The Taxpayers state that there is a calculation error in the sales tax discrepancy computed for Taxpayer A. Some sales values are included in error in the sales tax column of the audit spreadsheet, which overstates the amount of sales tax due on the May 2010 return. In addition, the Taxpayers state that there is another discrepancy due to tax adjustments taken on the May 2010 return that are not reflected in the sales reports reviewed by the auditor. The adjustments consist of deductions for tax amounts credited to various customers during the reporting period. The Taxpayers have submitted documentation and calculation schedules to reconcile the total tax amount reported on the May 2010 return with the total tax amount in the sales report. The proposed adjustments eliminate the audit liability for Taxpayer A with respect to this issue.
The Taxpayers have also provided documentation to reconcile the use tax discrepancy between the Virginia return filed by Taxpayer B for January 2010 with the sales report for the same period. As was the case with Taxpayer A, part of the difference between the total use tax amount reported on the Virginia return and in the sales records of Taxpayer B is due to use tax credits allowed for various customers during the January 2010 reporting period. The Taxpayers state that the remaining discrepancy is due to the carry forward of unused credits from tax returns filed for prior periods. Some of the carry forward credit amounts were claimed on the January 2010 return but the credit balances that are carried forward are not reflected in the sales tax reports reviewed by the auditor. The Taxpayers assert that these return adjustments reconcile the total use tax amounts billed per the sales report with the total tax amount reported on the January 2010 Virginia return. Based on the proposed adjustments, the audit liability for Taxpayer B should also be reduced to zero with respect to this issue.
Based on a review of the reconciliation information provided by the Taxpayers, it appears that adjustments to the audits of Taxpayer A and Taxpayer B are warranted. An auditor from the Department will review the documentation and reconciliation calculations in more detail and revise both audits accordingly.
6% Tax Rate Charged
Taxpayer B charged a 6% use tax rate on two sales transactions with Virginia customers. The billing of the tax at the 6% rate by Taxpayer B created doubt that the taxes were remitted to Virginia. As the auditor was unable to verify if the taxes were remitted to the Department, Virginia use taxes were assessed on these sales based on the assumption that the taxes were remitted to another state. The Taxpayers have provided documentation that they contend demonstrates the taxes billed to and collected from these customers were remitted to the Department. The information submitted will be reviewed and the audit liability for Taxpayer B adjusted accordingly.
Exemption Certificates
Taxpayer A and Taxpayer B were assessed sales and use taxes, respectively, on untaxed sales made to various customers. Prior to the audits, the customers had provided the Taxpayers exemption certificates claiming resale, manufacturing and shipbuilding exemptions from the tax. The Taxpayers set up exemptions for customers based on product line categories that they sell. Customers may purchase products in one transaction from more than one type of product line. The product lines in any given transaction may consist of a mixture of exempt and taxable products. The auditor concluded that some products sold exempt of the tax were not in the class of products that qualified for the exempt purposes claimed on the exemption certificates. Untaxed sales to these customers were included in the sales sample for each audit.
The Taxpayers have submitted copies of the exemption certificates provided by the customers that claimed the exemptions for the untaxed sales at issue. The Taxpayers contend that the certificates at issue are valid on their face and were accepted in good faith. The Taxpayers assert that the exemption certificates, along with other customer documentation provided, support the removal of the contested sales exceptions from the audit sample.
Virginia Code § 58.1-623 A provides that:
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.
Virginia Code § 58.1-623 B then states, in part:
The certificate mentioned in this section 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. Such certificate shall be signed by and bear the name and address of the taxpayer; shall indicate the number of the certificate of registration, if any, issued to the taxpayer; shall indicate the general character of the tangible personal property sold, distributed, leased, or stored, or to be sold, distributed, leased, or stored under a blanket exemption certificate; and shall be substantially in such form as the Tax Commissioner may prescribe.
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A interprets Va. Code § 58.1-623 and states that "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 then states that "[r]easonable 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 items of tangible personal property not covered by the exact wording of the certificate."
Public Document (P.D.) 13-35 (3/18/13) addresses the use by dealers of reasonable care and judgment with respect to exemption certificates. Dealers are expected to review certificates for completeness and to verify that the class of items being sold falls within the scope of the wording of the exemption certificate. Keeping this in mind in addition to the cited authorities, the exemption certificates furnished by the Taxpayers have been reviewed and the use of the certificates for the sales in question evaluated.
Based on the Department's policy, the additional customer documentation provided and customer information in the Department's registration database, the sales exceptions for the following customers will be removed from the sales sample of the audit for Taxpayer A: *****, *****, *****, *****, *****, *****, *****, ***** and *****. For these customers, it has been determined that a dealer could reasonably conclude that the items sold were used for the purposes indicated on the exemption certificates tendered by the customers. In addition, the sales to ***** of packaging and shipping supplies, production supplies, adhesives and tapes will be removed from the sales sample.
I do not agree that reasonable care was exercised with respect to the sales exceptions for *****. These sales transactions will remain in the sales sample. Likewise, the sales to ***** of products in the Taxpayers' facility supplies product category will remain in the audit sample.
Taxpayer B contests the sales exceptions in its audit for one customer. Based on a review of the exemption certificate, sales invoices and other customer information, the sales to ***** will be removed from the sales sample in the audit for Taxpayer B.
Customers Self-Assessed and Paid the Tax
The Taxpayers have provided documentation that some of its customers paid consumer use taxes directly to the Department on the untaxed sales that were included in the sales samples of the audits. The Taxpayers seek the removal of these sales exceptions from the audit sample because the customers paid the Department the tax due on these sales. I have previously agreed to remove the sales exceptions for some of these customers as set out in the exemption certificates section of this determination.
The Department has previously addressed this issue in P.D. 04-99 (9/8/04) and other public documents. The Department's consistent policy has been to allow credits against the seller's audit liability for use taxes paid directly to the Department by the seller's customers. However, the sales exceptions are not removed from the audit sample calculation. These documents explain that the sales sample used in audits 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 credits for customers' self-assessed use tax payments in the sample or the removal of the corresponding untaxed sales from the sample distorts the error factor determined by the sales sample. The sales sample is not intended to determine the combined compliance of the Taxpayers and their customers. Although customers reported and paid use tax to the Department on their purchases from the Taxpayers, this is not a reflection of the Taxpayers' sales tax collection compliance. The Taxpayers' 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, there is no basis to remove such sales exceptions from the calculation of the error factor that is determined by the audit's sales sample.
There are contested transactions for two remaining customers in which use taxes were paid directly to the Department on certain untaxed sales made by Taxpayer A. In both cases, the customers' exemption certificates were not acceptable for the class of goods sold by Taxpayer A. In accordance with the Department's established policy, credits for the use taxes paid by these customers to the Department will be allowed against the audit liability for Taxpayer A. The credit amounts will be allowed based on a review of the information furnished by the Taxpayers. The audit and liability for Taxpayer A will be revised and adjusted to reflect these credits. Based on the Department's policy, the sales transactions for which the credits are allowed will remain in the sales sample of the audit for purposes of calculating the sample error factor.
This case will be referred to the appropriate field audit staff for review of the Taxpayers' documentation and to make the necessary adjustments to the audits of Taxpayer A and Taxpayer B. If necessary, a member of the audit staff will contact the Taxpayers to facilitate this review. The audits and corresponding assessments will be revised in accordance with this determination and the Department's review of the documentation provided by the Taxpayers. The Department's records indicate that both assessments are paid in full. After the Department's review is completed, the Taxpayers will be issued a refund of the tax and interest overpayments for both audits, plus applicable interest.
The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line atwww.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5535965470.S