January 31, 2019
Re: § 58.1-1 821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment for the period January 2014 through December 2014. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is wholesale dealer. The Department utilizes a compliance program that verifies retail sales and use tax compliance regarding cigarettes purchased for resale and sales of cigarettes by a retail or wholesale dealer. As a result of this compliance program, the Taxpayer was issued an assessment for tax, penalty and interest on untaxed cigarettes purchased from *****, and ***** (the "“Distributors"). The assessment is based on sales information provided by the Distributors identifying the Taxpayer’s purchases of cigarettes exempt of the tax for resale.
It is the Department’s position that the cigarettes purchased by the Taxpayer for resale would have been sold to the Taxpayer’s customers and, therefore, the sales tax should have been collected and remitted to the Department on such sales. Based on the sales information provided by the Distributors, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributors for resale, when compared to cigarette sales provided by the Taxpayer. The auditor issued an assessment for the tax, penalty and interest totaling $***** under bill #***** and the Taxpayer paid the assessment in full. Subsequently, the auditor received additional sales information from the Distributor for the 2014 year being examined. The auditor discharged the assessment issued under bill #***** and on *****, 2015, the Department sent the Taxpayer a revised summary of the findings and the proposed tax liability for the period January 2014 through December 2014 and gave credit for the sales tax paid on bill #*****. A comparison of the cigarette sales provided by the Distributors to the sales documentation provided by the Taxpayer shows that the Taxpayer made cigarette purchases totaling $***** exempt of the tax that are not supported by any sales documentation. The Taxpayer was allowed 14 days to provide documentation to substantiate that the Taxpayer’s purchases from the Distributor qualified for the resale exemption or that the Taxpayer collected and remitted the sales tax on the sale of those purchases.
The Department’s auditor met with the Taxpayer and obtained sales invoices. The auditor reviewed the documentation and denied the invoices because the cash sales invoices were not signed by the purchaser, and the Taxpayer provided no supporting information to verify the sales.
The Taxpayer contests the assessment and claims that the auditor assessed the tax on purchases of cigarettes for resale to customers with complete, valid, and properly executed certificates of exemption. The Taxpayer argues that the required resale certificate of exemption relieves the Taxpayer from any liability for its failure to collect sales tax on any of the contested sales. The Taxpayer requests that the Department abate the sales tax assessments.
DETERMINATION
Purchases/Sales
The resale exemption provided under the Virginia retail sales and use tax is found in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of "retail sale," which is defined as a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter.
Virginia Code § 58.1-633 B states that:
all wholesalers and jobbers in this Commonwealth shall keep a record of all sales of tangible personal property, whether such sales be for cash or on terms of credit. Such records shall include the name and address of the purchaser, the number of the certificate of registration issued to the purchaser, the date of the purchase, the article purchased, and the price at which the article is sold to the purchaser. Any wholesaler or jobber failing to keep such records shall be guilty of a Class 1 misdemeanor. Any person who is both a retailer and a wholesaler or jobber and who fails to keep proper records showing wholesale sales and retail sales separately shall pay the tax as a retailer on both classes of his business.
The record keeping requirement for wholesalers and jobbers is further explained in Title 23 VAC 10-210-6080 as follows:
Every wholesaler is required to keep a record of all sales of tangible personal property, whether such sales be for cash or credit. These records must include the name and address of the purchaser, the number of the Certificate of Registration issued to the purchaser, the date of the purchase, the article purchased and the price at which the article is sold to the purchaser. Records must be kept for three years.
When a dealer fails to maintain adequate records, the Department is authorized by Virginia Code § 58.1-618 to use the best information available to reconstruct a dealer’s sales or purchases to determine whether a tax liability exists.
It is my understanding that the ***** Police Department conducted a two year investigation of the owners of the Taxpayer. In *****, the owners were arrested and faced charges of money laundering, racketeering, and possession with the intent to distribute cigarettes in connection with operating a cigarette trafficking network. The investigation revealed that the Taxpayer purchased cigarettes exempt of the tax and sold them using business memberships for false businesses that didn’t exist. In *****, one owner pleaded no contest to a series of charges and was sentenced to four years in prison and faces $50,000 in civil penalties. The other owner pleaded guilty to cigarette trafficking and was sentenced to eighteen months of home incarceration and pay $25,000 in civil penalties. Based on the conviction of the owners of the Taxpayer, I find that the only reliable information available to reconstruct the Taxpayer’s sales or purchases is the documentation provided by the Distributors.
Exemption Certificates
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 states that:
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 VAC 10-210-280 A interprets Virginia Code § 58.1-623 and states "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice." Public Document 98-29 (2/20/98) sets out the Departments longstanding policy that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was never accepted in good faith. In such instances, exemption certificates are subject to greater scrutiny by the Department and are acceptable only if the Department can confirm that a customer’s use of the certificate was valid and proper for a specific transaction identified during an audit.
The Taxpayer provided resale exemption certificates with the appeal to support the exempt sale of cigarettes. Because the resale exemption certificates were provided with the Taxpayer’s appeal, there is no evidence that the certificates were accepted in good faith by the Taxpayer. Further, because of the criminal activity mentioned earlier, the resale exemption certificates provided by the Taxpayer are under even greater scrutiny by the Department.
In this instance, a review of the Department’s records indicate that the resale exemption certificates provided are invalid because the business tax accounts of the purchasers were closed prior to the sales transactions or the purchasers did not file any sales tax returns to remit the tax to the Department on cigarettes purchased exempt of the tax from the Taxpayer. Thus, the exemption certificates are denied because the Department has confirmed that the use of the exemption certificates was invalid.
Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proving that the assessment is erroneous is upon the Taxpayer. Lacking supporting documentation to prove otherwise, the Taxpayer has not met the burden of proof that the tax assessed on such cigarettes purchased exempt of the tax is erroneous. Accordingly, there is no basis to adjust the assessment.
Penalty
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies and provides that:
When any dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent in the aggregate . . . If such failure is due to providential or other good cause shown to the satisfaction of the Tax Commissioner, such return with or without remittance may be accepted exclusive of penalties. [Emphasis added.]
As the Taxpayer has not shown good cause for its failure to properly comply with its tax compliance responsibilities as a retailer of cigarettes, I find no basis to remove the assessed penalty.
Interest
Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had the use of money that was properly due the Commonwealth. Therefore, I find no basis to waive the interest assessed as a result of the Department’s audit.
CONCLUSION
The assessment is upheld as issued. 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, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessments, you may contact ***** at *****. The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions 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,
Craig M. Burns
Tax Commissioner