Interstate Commerce
June 20, 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 2016 through December 2017.
FACTS
An audit was conducted on the books and records of the Taxpayer, a distributor of tobacco products, for the period at issue. Based on a sample period of one calendar year, the Department issued an assessment for tax and interest due on untaxed sales. The Taxpayer filed an application for correction contesting the assessment and providing additional resale exemption certificates. Because documentation was not provided during the audit, the Department returned the case to the audit staff to review the certificates and granted the Taxpayer the right to appeal any liability remaining in the revised audit report. Based on the certificates provided, audit staff accepted some of the certificates, adjusted the audit report, and reduced the assessment. The Taxpayer submitted an application for correction along with additional certificates contending that: 1) the majority of the certificates were complete and valid; 2) the incomplete exemption certificates provided included only minor defects; 3) two customers that failed to provide resale exemption certificates had clearly made purchases for resale; and 4) some sales were made to out-of-state customers.
ANALYSIS
Strict Construction of Exemptions
The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, the settled case law requires strict construction of sales and use tax exemptions. Where 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 MotorBus, 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation, 214 Va. 161 (1973); and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).
Resale Exemption
Virginia Code § 58.1-602 defines a “retail sale” to be “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...” As such, a sale of tangible personal property for resale is exempt from sales and use tax. A purchaser must provide a resale exemption certificate to the dealer in order to exonerate such dealer from the responsibility for collecting and remitting sales tax. The Department has prescribed the Resale Exemption Certificate (Form ST-10) as the certificate of exemption for dealers to use when making purchases of tangible personal property for resale purposes only.
Exemption Certificates
With its application, the Taxpayer provided resale exemption certificates obtained from customers. Pursuant to Virginia Code § 58.1-623 A, “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.” 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.”
Title 23 VAC 10-210-280 B provides that reasonable care and judgment must be exercised by both the purchaser and dealer when ensuring the completeness and correctness of exemption certificates. An exemption certificate may be accepted in good faith when the certificate has been:
1. Submitted as part of the original transaction,
2. Filled out completely,
3. Afforded reasonable care by both parties to the transaction to ensure correctness, (i.e. there are no obvious errors in the form’s completion), and
4. Submitted to purchase the tangible personal property covered by the exact wording of the certificate.
See Public Document (P.D.) 01-36 (4/11/2001), P.D. 11-8 (1/20/2011), and P.D. 19-50 (5/9/2019).
In International Paper Company v. Virginia Department of Taxation, CL-2009-360, Circuit Court of Fairfax County (July 29, 2010), also issued as P.D. 10-258, the court held that a dealer could “satisfy its burden of good faith and reasonable care and judgment in taking a certificate to the effect that the property purchased is exempt” if the following was met:
Upon a facial examination of the certificate, a dealer could reasonably conclude that the items purchased could potentially be used for any of the exempt purposes claimed on the certificate of exemption; or
Based upon the actual dealer's knowledge of the business of its purchaser, the dealer could reasonably determine in good faith that the specific purchaser intended to use the items purchased for one or more of the exempt purposes claimed on the certificate of exemption.
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 and P.D. 23-99 (8/17/2023).
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 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 Department takes these additional steps in order to reasonably deduce that sales tax would have been remitted for the ultimate sale of the tangible personal property.
Complete Exemption Certificates
The Taxpayer states that it received over 30 completed resale exemption certificates from its customers. It indicates that it had collected these exemption certificates in both paper and electronic form prior to the transactions at issue and had made them available to the audit staff at the time of the audit. However, the audit staff indicates that most of these certificates were not provided at the time of the audit. While the resale exemption certificates may have been filled out completely, it does not appear that they were made available to the audit staff at the time of the audit and therefore will not be considered to have been accepted in good faith. In cases where a dealer accepts an exemption certificate obtained after the commencement of an audit, the claim for exemption is subject to greater scrutiny by the Department. See P.D. 23-40 (4/12/2023).
In accordance with the greater scrutiny test, the accounts of the purchasers who provided the exemption certificates were reviewed by both audit staff and a tax law analyst. In almost all cases, the purchasers did not file sales and use tax returns during the audit period. Further, three of the exemption certificates the Taxpayer claims to be complete were found to have errors.
Incomplete Exemption Certificates
The Taxpayer contends that 19 exemption certificates should be accepted by the Department because they only have minor defects. In addition, as stated above, three of the exemption certificates that the Taxpayer listed as being valid were found to be incomplete. After being returned to audit staff, these exemption certificates were disallowed. When exemption certificates are incomplete, they cannot be accepted in good faith and they are subject to greater scrutiny
The Department has accepted resale exemption certificates that contain minor errors provided that the relevant customer presenting the exemption certificate had an active sales tax account and filing history that allows the Department to reasonably conclude that the relevant purchases made by the customer would qualify for an exemption. See P.D. 22-45 (3/15/2022). However, when applying the greater scrutiny test, the Department will not accept resale exemption certificates in which the account number is incorrect because it cannot verify the customer. An additional review of these certificates was conducted. As a result, a number of the certificates met the greater scrutiny requirements.
Missing Exemption Certificates
The Taxpayer believes that it collected the exemption certificate from ***** (Customer A) but has been unable to locate it. Regardless, the Taxpayer asserts that the exceptions for Customer A should be removed from the audit because it can show that Customer A was registered to collect sales tax and that the pick-up slips show that the sales were for resale. Pursuant to Virginia Code § 58.1-623 A, the Department will not treat transactions as exempt when the dealer cannot provide a copy of the exemption certificate.
Interstate Commerce Exemption
The Taxpayer indicates that seven customers were located outside of Virginia and the sales should have been exempt. Virginia Code § 58.1-609.10 4 provides an exemption from the retail sales and use tax for:
Delivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth. Delivery of goods destined for foreign export to a factor or export agent shall be deemed to be delivery of goods for use or consumption outside of the Commonwealth.
Title 23 VAC 10-210-780 interprets the interstate commerce exemption. Specifically, this regulation provides that a “sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.” Further, Title 23 VAC 10-201-780 A provides four examples of transactions that constitute exempt sales in interstate or foreign commerce:
1. The sale of tangible personal property delivered to the purchaser outside of the state in the seller’s vehicle;
2. The sale of tangible personal property delivered to the purchaser outside of the state by an independent trucker or contract carrier hired by the seller;
3. The sale of tangible personal property delivered by the seller to a common carrier or to the U.S. Post Office for delivery to the purchaser outside of the state;
4. The purchase of tangible personal property for resale and immediate transportation out of the state by a dealer properly registered in another state provided a valid certificate of exemption is secured by the Virginia seller.
In accordance with this regulation, all interstate transactions delivered by common carriers to a purchaser outside Virginia are sales in interstate commerce and exempt from the tax. The Department also provides an Out-of-State Dealer Exemption Certificate (Form ST-14) for use by a dealer located in another state that purchases tangible personal property in Virginia for immediate transportation outside of Virginia in its own vehicle for resale. During a compliance audit, a dealer must present documentation to the Department that evidences delivery was made to a customer in another state. See P.D. 94-80 (3/22/1994) and P.D. 18-86 (5/16/2018). While the invoices at issue include a “ship to“ address, no evidence of the delivery method used has been provided. Without such documentation, the Department is unable to determine whether the sales to the out-of-state customers meet the exemption for interstate commerce.
DETERMINATION
In accordance with evidence provided and the analysis above, the audit will be returned to the appropriate staff to make the following adjustments:
• For the exemption certificates that were filled out completely, exceptions for two will be removed from the audit. The rest will remain in the audit because they did not meet the greater scrutiny standard.
• For the incomplete certificates, eight meet the greater scrutiny standards and the associated exceptions will be removed from the audit. The remaining eight will remain in the audit.
• The exceptions for Customer A will remain in the audit.
• The exceptions for the sales made to out-of-state vendors will remain in the audit.
The attached schedule indicates which certificates and exemptions will be considered to be valid and which are not accepted. After removing the exempt transactions from the exceptions list, a revised audit report and adjusted assessment will be mailed to the Taxpayer. No further interest will accrue provided the outstanding liability is paid within 30 days of the date of the updated bill.
The Code of Virginia sections and regulations 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/3888.B