April 6, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period October 2014 through April 2015. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a wholesaler of tobacco products. 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 ***** (the “Distributor”). The assessment is based on sales information provided by the Distributor 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 Distributor, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributor for resale, when compared to sales of cigarettes reported by the Taxpayer to the Department. The auditor multiplied the cartons of cigarettes by the purchase price to estimate the tax liability.
On December 11, 2015, the Department sent the Taxpayer a summary of the findings and the proposed tax liability. 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 Taxpayer failed to respond to the Department’s request for documentation within the allotted time and the assessment was issued.
The Taxpayer contests the sales tax assessment and claims that it is not responsible for the collection of the retail sales tax because all purchases of cigarettes by the Taxpayer are for resale purposes only. With its appeal, the Taxpayer provides two resale exemption certificates from customers to support the exempt sale of cigarettes. In addition, the Taxpayer has provided invoice documentation for review.
DETERMINATION
Resale Exemption Certificate
Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia.
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 . . . .
The Department has previously ruled in Public Document 98-29 (2/20/1998) that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was not accepted in good faith. Thus, it is the Department's longstanding policy 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. Accordingly, such certificates are acceptable only if the Department is able to confirm that the customer’s use of the certificate is valid and proper for a specific transaction identified during the audit.
In this instance, the documentation provided by the Distributor shows that the Taxpayer purchased cigarettes exempt of the tax for resale. A comparison of the cigarette sales provided by the Distributor to the Taxpayer’s sales reported to the Department shows that the Taxpayer made cigarette purchases totaling $xxx,xxx.xx exempt of the tax that are not supported by any resale exemption certificates or tax reporting documentation. Because the Taxpayer obtained the exemption certificates after the start of the audit, they are not considered accepted in good faith and are subject to greater scrutiny by the Department.
The Taxpayer provided resale exemption certificates from two customers to the effect that the cigarettes purchased are exempt for resale. The Department’s records show that both registrations are closed and the customers failed to report any sales to the Department. As such, the Department cannot validate that the customers intended to use the cigarettes purchased for the exempt purposes claimed on the certificate of exemption. Because the Taxpayer did not accept the exemption certificates from the customers at the time of sale, and the intent of the customers cannot be confirmed, the certificates are not valid. In accordance with the Department's policy, the certificates of exemption were correctly disallowed by the auditor and the assessment is correct with respect to this issue.
In regard to the additional documentation, it is my understanding that the Taxpayer provided invoices documenting cigarette sales to two customers. The invoices in this instance are in connection with the two customers’ resale exemption certificates addressed above. Because the Department determined that the resale exemption certificates supporting the exempt sales could not be validated, the invoices have no bearing in this case.
A tax assessment by the Department is deemed prima facie correct. See Virginia Code § 58.1-205 1. This means that the burden of proof is upon the Taxpayer to demonstrate how an assessment may be incorrect. Contrary to what the Taxpayer may believe, the burden of proof rests with the Taxpayer. In this instance, the Taxpayer has failed to establish that the sales in question qualify for the resale exemption. Accordingly, there is no basis to remove the tax assessed on these sales from the assessment.
CONCLUSION
The assessment is correct as issued. An updated bill with accrued interest will be issued to the Taxpayer and should be paid within 30 days of the bill 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: *****.
The Code of Virginia sections 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, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/706.T