June 19, 2025
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will respond to your letter in which you seek correction of the Retail Sales and Use tax assessment issued to ***** (the “Taxpayer”) for the period January 2021 through December 2023.
FACTS
An audit was conducted on the books and records of the Taxpayer, a specialty coffee roaster, for the period at issue. The Taxpayer primarily sells its coffee and other products to food service companies, hotels, and restaurants. For the three-month sample period, the auditor found sales for which no tax was collected and no exemption certificate was provided. Under the first-generation audit, the Department issued an assessment based on the untaxed sales. The Taxpayer filed an application for correction, contending that it was able to procure a valid resale exemption certificate from ***** (Customer 1) and that ***** (Customer 2) indicated it remitted sales tax on its purchases.
ANALYSIS
Exemption Certificates
With its application, the Taxpayer provided an undated resale exemption certificate obtained from Customer 1. Virginia Code § 58.1-623 A sets out that all transactions involving the sale or lease of tangible personal property are subject to the tax until the contrary is established. Under this statute, “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.” Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A further explains, in part, that “a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.”
An exemption certificate cannot be deemed to have been accepted in good faith for transactions occurring before its receipt. In such instances, an exemption claim is subject to greater scrutiny. See P.D. 98-29 (2/20/1998), P.D. 04-75 (8/25/2004), P.D. 10-201 (8/31/2010), P.D. 17-114 (6/29/2017), and P.D. 22-69 (4/13/2022). Exemption certificates are acceptable only if the Department is able to confirm that a purchaser’s use of the certificate is valid and proper for the specific transaction. See P.D. 98-29.
When transactions relying on an exemption certificate are afforded greater scrutiny because the dealer failed to receive a valid certificate at the time of sale, the Department’s policy is to determine whether the transaction is exempt in order to avoid collecting the tax when and where it is not due. To accomplish this, the Department utilizes a number of inquiry steps. The Department begins by investigating the tax compliance of the purchaser by performing a search of our registration and accounting databases for the purchaser’s registration status and filing and payment history of sales tax and use tax returns. Once a registration and filing history (or lack thereof) is confirmed, the Department can reasonably conclude whether the purchases would be exempt for resale (or another exemption) and, if warranted, will remove the sales transactions corresponding to the purchaser from the audit exceptions list. See P.D. 16-104 (5/25/2016).
The Taxpayer has furnished a signed, undated resale exemption certificate (Form ST-10) from Customer 1, with the resale exemption box checked. Customer 1 describes itself as a coffee shop. A certificate with a missing date provides no evidence of good faith acceptance and is therefore subject to closer scrutiny even for transactions occurring after its receipt.
According to the Department’s records, Customer 1 is a restaurant and is registered with the Department to collect Virginia sales tax. Customer 1 purchased food products from the Taxpayer consistent with the operation of a restaurant. Based on these facts, Customer 1 was eligible to claim the resale exemption.
Sales Tax Remitted by Consumers
The Taxpayer did not collect sales tax or obtain an exemption certificate from Customer 2 but contends that the customer remitted the tax to the Department. Virginia Code § 58.1-625 D states that “[a]ny dealer who neglects, fails, or refuses to collect such tax upon every taxable sale, distribution, lease, or storage of tangible personal property made by him, his agents, or employees shall be liable for and pay the tax himself ....” It is well established that dealers making retail sales of tangible personal property are liable for the sales tax even if they fail to collect the tax from customers.
Under long-settled principles of sales and use tax law, the Department may seek payment of the tax from either the seller or the purchaser of tangible personal property. The case of United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977) aff'd, 569 F.2d 811 (4th Cir. 1978) held that while “the seller is legally obligated to collect the tax from the purchaser, the statute [Virginia Code § 58.1-625] makes the tax the legal debt of the purchaser.”
Under Virginia Code § 58.1-633, every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due and “such other pertinent information as may be required by the Tax Commissioner.” See Virginia Code § 58.1-633 A. The Taxpayer asserts that Customer 2 remitted the sales tax from its purchases from Customer 2. However, no evidence has been provided to show that Customer 2 remitted the tax to the Department for these sales.
DETERMINATION
In accordance with this determination, the exceptions attributable to Customer 1 were valid resale transactions and will be removed from the audit.
Absent evidence to the contrary, the Taxpayer was required to collect and remit sales tax from Customer 2. Consequently, the exceptions for Customer 2 will remain in the audit.
The audit will be returned to the appropriate staff to make adjustments based on this determination. A revised audit report showing the adjusted tax, penalty, and interest will be issued to the Taxpayer. Once the revisions are complete, an updated invoice will be sent to the Taxpayer. The Taxpayer should pay the amount due within 30 days from the date on the invoice to avoid the accrual of additional interest or possible collection action.
The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/5049.B