May 5, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter submitted on behalf of ***** (the “Taxpayer”), in which you contest the retail sales and use tax assessments issued for the period May 2012 through July 2016. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer’s main business is the retail and wholesale sale of fuels such as gasoline, on-road diesel, off-road diesel, and home heating fuel. In addition the Taxpayer sells oil and lubes, loan tanks and pumps, and services HVAC systems and other equipment. The Taxpayer also sells products and services related to these other products, such as maintenance contracts. The Department’s audit disclosed sales and use tax liability in several different areas including sales, purchases, exempt sales, and home heating sales.
DETERMINATION
The contested transactions in the Taxpayer’s appeal will be addressed following a discussion of the applicable statutes, regulations, and the Department’s policy that form the basis of the Taxpayer’s appeal and this determination.
Audit Sample
Sampling is an audit technique of significant value that is widely used in the public and private sectors. The Department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Likewise, this same methodology is used when considering transactions on which Virginia tax has been overpaid. Every effort is made to select objectively the sample periods that are representative of the period being audited.
The Department will remove an item from an audit sample if it is shown that the transaction is isolated in nature and not a normal part of the taxpayer's business activity. See Public Document (P.D.) 01-28 (03/28/2001).
Records
Virginia Code § 58.1-633 states that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and such other books of account as may be necessary to determine the amount of the tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner." 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.
First Use in Virginia
Virginia Code § 58.1-604 imposes the use tax "upon the use or consumption of tangible personal property in this Commonwealth." Virginia Code § 58.1-602 defines use as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." Title 23 Virginia Administrative Code (VAC) 10-210-6030 A interprets the Code of Virginia and states, "The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased."
Pursuant to P.D. 07-17 (3/27/2007), the use tax is a moment of transaction tax, i.e., tax liability is incurred at the moment of first use in Virginia. Commonwealth v. MillerMorton, 220 Va. 852, 263 S.E.2d 413 (1980) held taxable the storage of tangible personal property in Virginia even though the property would ultimately be shipped outside the state. If a taxable event occurs in Virginia, subsequent delivery outside this state does not immunize the taxable event.
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 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 VAC 10-210-280 A interprets Virginia 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."
P.D. 13-35 (3/18/2013) 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.
In accordance with P.D. 01-36 (4/11/2001), when a dealer is afforded the opportunity to secure exemption certificates to support untaxed sales after the performance of an audit, the Department’s longstanding policy is to more closely evaluate the validity of the certificate because the taxpayer did not originally rely on the certificate to make the exempt sale. P.D. 11-8 (1/20/2011) states that vendors cannot accept incomplete exemption certificates in good faith. A valid exemption certificate must include a date and indicate the specific exemption claimed by the purchaser, for example. In cases where the claim for exemption is subject to greater scrutiny by the Department, the exemption certificate will be accepted only if the Department can confirm that the customer’s use of the certificate was valid and proper for the specific sales transaction reviewed in the audit.
Collection of Tax
Virginia Code § 58.1-625 states:
The tax levied by this chapter shall be paid by the dealer; but the dealer shall separately state the amount of the tax and add such tax to the sales price or charge. Thereafter, such tax shall be a debt from the purchaser . . . to the dealer until paid and shall be recoverable at law in the same manner as other debts . . . .
Notwithstanding any exemption from taxes which any dealer now or hereafter may enjoy under the Constitution or laws of this or any other state, or of the United States, such dealer shall collect such tax from the purchaser . . . and shall pay the same over to the Tax Commissioner as herein provided . . . .
Any dealer who neglects, fails, or refuses to collect the tax on every taxable sale of tangible personal property made by him, his agents, or employees shall be liable for and pay the tax himself . . . .
Government Exemption
Virginia Code § 58.1-609.1 4 sets out an exemption for “tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States.” The exemption does not apply to “sales and leases to privately owned financial and other privately owned corporations chartered by the United States.”
Title 23 VAC 10-210-690 interprets the statute, explaining that generally, “sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. It is imperative to note that “sales made without the required purchase orders and not paid for out of public funds” and “sales to governmental employees for their own consumption or use in carrying out official government business” are taxable.
Out-of-State Exemption Certificates
Virginia Code § 5.1-623 sets out the minimum criteria needed for a valid exemption certificate. These criteria include a requirement that an exemption certificate "shall be substantially in such form as the Tax Commissioner may prescribe." Accordingly, the Department has prescribed Form ST-10 as the certificate of exemption for dealers to use when making purchases of tangible personal property for resale purposes only. In P.D. 91-105 (6/28/1991), the Department allowed the resale exemption for an out-of-state dealer, who was not registered with Virginia, provided it used the Department's Form ST-10 and appropriately referenced the out-of-state registration number on the ST-10.
Notwithstanding the foregoing, the Department will also accept resale exemption certificates issued by state tax government agencies of other states, provided all of the criteria set out by Virginia Code § 58.1-623 and all of the areas of information vital to the proper giving and receiving of the certificate are met as contained on the Department's Form ST-10.
Fuel Used for Manufacturing
Virginia Code § 58.1-609.3 2(iii) provides an exemption from sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale...." The term "used directly" is defined in Virginia Code § 58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing ... process, but not including ancillary activities such as general maintenance or administration."
In the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the Virginia Supreme Court held that the use of the word "directly" in the statute was intended to narrow the scope of the exemption. Therefore, the manufacturing exemption applies only when an item is indispensable to actual production and is primarily used or consumed immediately in the actual production of products. This standard established by the Court is also reflected in the Department's manufacturing regulation.
In P.D. 82-23 (03/19/1982), the Commissioner ruled that heating fuel used to heat a building did not qualify for the exemption. Although the use of the heating fuel insured that the equipment which manufactured the product operated properly, the fuel was used indirectly in the production facility and therefore was taxable.
Fuel for Domestic Consumption
Virginia Code § 58.1-609.10(1), which is interpreted by Title 23 VAC 10-210-630, provides an exemption from sales and use tax for "[a]rtificial or propane gas, firewood, coal or home heating oil used for domestic consumption." This section defines "domestic consumption" as the "use of artificial or propane gas, firewood, coal or home heating oil by an individual purchaser for other than business, commercial or industrial purposes." In providing its interpretation, Title 23 VAC 10-210-630 restricts domestic consumption to fuels used by individuals. Purchases by groups or organizations will be subject to the tax unless the fuel purchased is for use by an individual.
Records
Virginia Code § 58.1-633 states that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and such other books of account as may be necessary to determine the amount of the tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner." The record-keeping requirement is further explained in Title 23 VAC 10-210-470.
Strict Construction of Exemptions
The Virginia courts have consistently required the strict construction of sales and use tax exemptions. Based on this principle, if there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973). In addition, Virginia Code § 58.1-205 1 states that “[a]ny assessment of a tax by the Department shall be deemed prima facie correct.” This means that the burden is on taxpayers to prove that an assessment issued by the Department is incorrect.
Keeping the cited authorities in mind, I will address the contested issues as set out in the Taxpayer’s appeal letter by reference to the exceptions in the audit report.
Untaxed Miscellaneous Charges
The Taxpayer requests the removal of a fixed pricing contract with a customer for diesel that was supplied during the audit period. The Taxpayer states that the amount reported and included in the audit is inflated due to an error in billing and that the customer was later refunded. In addition, the Taxpayer states that the transaction should be removed from the sample measure because it was only for a specific period.
During the audit period, the Taxpayer informed the auditor that the billing error was only discovered during the audit and stated that they would refund the customer for the error. As of the close of the audit, the Taxpayer did not provide any documentation that showed a refund to the customer. The supporting documentation provided by the Taxpayer with its appeal is not sufficient to support a removal of the item from the audit.
The Taxpayer has also failed to demonstrate that this transaction is isolated in nature and not a normal part of the business activity. The Taxpayer is in the business of selling fuel and regardless of the method in which the Taxpayer bills its customer, the charge was a variable component of the sales price of the taxable product that was sold and not outside of the normal operations of the business. Accordingly, this item was properly included in the sample measure and will remain in the audit.
Purchases
The Taxpayer requests that the contested purchase exceptions be removed from the purchase sample measure and reclassified to the asset measure to be taxed in detail rather than extrapolated. The Taxpayer states that the purchases were erroneously coded during payable entry and that the accounts payable employee was removed from the position.
Based on a review of prior audits, similar purchases from some of the same vendors were held under the purchase samples and were not contested by the Taxpayer. In addition, the purchase exceptions in this case were not capitalized as fixed assets in the Taxpayer’s accounting or federal income tax returns. According to the Department’s auditor, the Taxpayer did not discover that these purchases were not capitalized until they were listed as exceptions under the purchase sample during the course of the audit. While reviewing fixed assets that were capitalized, the Taxpayer provided documentation that showed it regularly reclassified expensed purchases to various fixed asset accounts. The Taxpayer reclassified these purchases at the end of every quarter and year. The purchase exceptions at issue here, however, were not among those expenses that were reclassified as fixed assets by the Taxpayer.
During the course of the audit, the Taxpayer did not provide documentation to show that the items have been capitalized or that federal tax returns were amended. Accordingly, these items will remain in the sample measure.
Assets
The Taxpayer requested consideration be given for the purchase of tank monitors that were originally shipped to Virginia for inspection but later transported to a North Carolina location use. Because the product was first received in Virginia, first use by the Taxpayer occurred in Virginia. Consistent with the Supreme Court of Virginia’s decision in Commonwealth v. MillerMorton and Virginia Code § 58.1-604, the taxable event occurred in Virginia and the subsequent delivery of the property to another state did not immunize the taxable event. Therefore, this transaction will remain in the audit.
Invalid Exempt Sales
***** (Customer 1)
The Taxpayer states that fuel sold to this customer was for an exempt use, and the transaction should be removed from the audit.
The ST-11 exemption certificate provides an exemption for “fuel, power, energy, or supplies used directly in manufacturing . . . .” The customer purchased different fuels from the Taxpayer that appeared to be for a commercial use and for heating – Off Road Diesel Dyed Low Sulfur and #2 Dyed Low Sulfur. Because the ST-11 only provides an exemption for fuel used directly in manufacturing, the purchase of heating fuel by this customer was included in the audit. Heating fuel used to heat a building is not a direct use in the manufacturing process and is not exempt. However, if the fuel is used to maintain a controlled environment for the protection of the product, its purchase could be exempt.
The Taxpayer stated in its letter that it would provide a copy of the ST-11 and a letter of explanation. The documentation was not provided with the appeal although the Taxpayer states that the fuel sold to the customer is used in off-road equipment as part of its manufacturing process. As previously stated, 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. Additionally, since there is doubt concerning whether or not the customer’s use of the fuel is exempt, the burden of proof is on the Taxpayer to prove that the Department’s assessment is incorrect and the strict construction of exemptions requires that the doubt be resolved against the one claiming exemption. Based on the facts and circumstances in this case, the sale of #2 Dyed Low Sulfur will remain in the audit because it appears this fuel is used exclusively for heating and is not used directly in the manufacturing process.
***** (Customer 2)
The Taxpayer states that this customer accrued the use tax on the sales included in the audit.
As stated in P.D. 06-122 (10/17/2006), “[w]hile the tax on the transactions in question may have been paid by the Taxpayer’s customer, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. Therefore, to remove the sales in question from the sample base would skew the sample and nullify its validity.” Although the Taxpayer’s customer may have paid the use tax, a customer remitting use tax to the Department as a result of an audit assessment is not sufficient to relieve the Taxpayer from its obligation to collect tax at the time of the transaction. Accordingly, this item was properly included in the audit sample.
***** (Customer 3)
The Taxpayer contends that this customer presented an exemption certificate and letter that states the purchases were for a contract with the United States government and for use aboard public vessels of the United States. The invoice held in the audit was billed to the customer and the product was delivered to the customer in Virginia. The exceptions were originally listed because the exemption certificate given to the Taxpayer was a North Carolina streamline exemption certificate for multi-state use.
The Taxpayer was given an opportunity to obtain a Virginia exemption form from the customer. A Form ST-12 was filled out and signed by the customer; however, the customer used the federal entity’s name on the form. In addition, the Taxpayer provided a letter from the customer stating that the company is reimbursed by the government agency for these purchases and as such should not be subject to sales tax.
Per prior rulings of the Tax Commissioner, out-of-state exemption certificates are generally not accepted, except in limited circumstances such as when another state’s resale exemption certificate provides all the criteria set out by Virginia Code § 58.1-623 and all of the areas of information vital to the proper giving and receiving of the certificate are met as contained on the Department's Form ST-10.
In this instance, the North Carolina exemption certificate is not acceptable in place of a Form ST-12 (the Virginia exemption certificate that is used by Virginia government, and its political subdivisions, and the government of the United States) regarding exempt purchases. In addition, “sales made without the required purchase orders and not paid for out of public funds” and “sales to governmental employees for their own consumption or use in carrying out official government business” are taxable. The Taxpayer did not provide documentation to show that the customer was a purchasing agent for the federal government or that the federal government’s credit was bound to the transaction in question. Businesses that are reimbursed by the federal government do not qualify for sales and use tax exemption. The Taxpayer has not proven that the transaction in question is an exempt sale to the federal government. Therefore, this item will remain in the audit.
***** (Customer 4)
The Taxpayer states that the customer purchased motor fuels and oil for use in farming equipment. The Taxpayer accepted an incomplete ST-10 form in which the dealer’s name was only listed as “Farm”. The Taxpayer was given the opportunity to provide a correct Form ST-18, the Virginia exemption certificate used by farmers for making exempt purchases for agricultural production for market. The certificate was not provided by the close of the audit or with the Taxpayer’s appeal. Therefore, this item will remain in the audit.
Home Heating Sales
***** (Customer 1), ***** (Customer 2), ***** (Customer 3), ***** (Customer 4), ***** (Customer 5), ***** (Customer 6)
For home heating sales, the Taxpayer did not have completed ST-15 forms on file from residential customers to verify that the fuel was being purchased exempt for domestic use. However, Title 23 VAC 10-210-630 states that a dealer is not required to obtain a certificate of exemption if it is clearly identifiable as a sale of fuel for domestic consumption.
Based on the facts and circumstances in this case, Customers 1, 2, 3, 4, and 5 will be removed from the audit. The information provided by the Taxpayer is sufficient to establish that these were sales of fuel for domestic consumption. Customer 6 will remain in the audit, however, as further research indicated that the purchase was for the organization’s use in its own facility, and not to be given away to indigent persons.
ST-9 Reconciliation
***** (Customer 1)
The Taxpayer refunded the tax collected from sales to this customer and took credits for the refunded tax on their ST-9 returns. During the audit, it was noted by the Department’s auditor that no certificate was received for this customer. The Taxpayer later obtained an ST-10 exemption certificate from the customer dated 11/12/15 and submitted it for review.
According to the Department’s records, the customer had not registered to collect sales tax until November 2014, and the exceptions held in the audit were for credits taken by the Taxpayer on their May 2014 ST-9 return. The exemption certificate was accepted for other transactions for the customer that were dated after the customer registered to collect sales tax. Since the customer was not registered for sales tax until November 2014 and the exemption certificate was not accepted in good faith at the time of the transaction (refund/credit), the credit was properly held in the audit and will not be removed.
***** (Customer 2)
The customer provided ST-11 and ST-11A exemption certificates to the Taxpayer. The Taxpayer refunded the tax collected from sales to this customer and took credits for the refunded tax on its ST-9 returns. After a review of the exemption certificates, the credits taken for this customer will be removed from the audit. The Taxpayer accepted exemption certificates in good faith from the customer and used reasonable care and judgment in accepting the certificate. Therefore, the transactions related to this customer will be removed from the audit.
***** (Customer 3)
The Taxpayer states the product was shipped to Florida and the customer was notified that it was responsible for tax on the purchase.
The Taxpayer originally sold the product to the customer on an invoice in February 2014. The Taxpayer did not bill the customer for tax on that invoice, and subsequently issued an invoice for the sales tax in April 2014. In July 2014, the Taxpayer refunded the tax collected to the customer and took a credit for the tax on the July 2014 ST-9 return. The credit taken for the refunded tax on the sale was proper and valid, as the product was delivered to the customer in Florida. However, the Department was not able to verify that the tax originally collected from the customer was remitted on the April 2014 sales tax return and the credit was held in audit. The Taxpayer has not submitted documentation to show that the tax collected from February 2014 was included on its sales tax return. Therefore, the transaction will remain in the audit.
CONCLUSION
The assessments are paid in full. Therefore, a refund of the tax, penalty and interest attributable to the revised exceptions will be issued as soon as practical. Refund interest will be paid in accordance with Virginia Code § 58.1-1833.
The Code of Virginia sections, regulations, and public documents 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 matter, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1185H