Tax Type
Retail Sales and Use Tax
Description
Audit sample; Exemption certificates; Government contractor
Topic
Collection of Delinquent Tax
Exemptions
Persons Subject to Tax
Date Issued
03-15-1999
March 15, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****************
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ************* (the Taxpayer) for the period February 1994 through February 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a retailer of packaging supplies. As a result of the department's audit, an assessment was made for untaxed sales in which the Taxpayer failed to obtain valid exemption certificates. The Taxpayer contends that the sample method used overstates its tax liability. The Taxpayer provides a printout of a monthly sales analysis for the entire audit period and claims that it more accurately reflects the tax liability due.
DETERMINATION
Sampling
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
In this case, the auditor reviewed one month that represented average sales. The auditor found recurring errors in which the Taxpayer failed to collect the tax on sales for which it did not obtain valid exemption certificates. The Taxpayer disputed the results of the one month sample and claimed that the sample was not representative of its sales. The department agreed to expand the sample by an additional month and again found recurring errors in which the Taxpayer failed to collect the tax on certain sales. The auditor determined an error factor for the representative sample period selected. The error factor was then extrapolated over gross sales for the audit period.
While I find the audit procedures were correctly applied, based upon the additional information presented by the Taxpayer, the audit will be returned to the department's ***** District Office for further review. An auditor from the department's ***** audit staff will contact the Taxpayer shortly to set up an appointment to verify the Taxpayer's information.
Exemption certificates
There seems to be a recurring problem regarding untaxed sales in the absence of exemption certificates or the acceptance of invalid certificates. As such, I feel that it is necessary to address the department's policy regarding this issue.
The department's policy with respect to exemption certificates is discussed in Title 23 of the Virginia Administrative Code (VAC) 10-210-280. The regulation states that ``all sales or leases are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law.' This same section notes that when a certificate is inconsistent, incomplete, invalid, or infirm on its face, it is never acceptable, either before or after notice by the department. Section B of Title 23 VAC 10-210-280 provides 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.'
In this case, exemption certificates were either missing, incomplete, or invalid. The Taxpayer must exercise due caution in selling packaging supplies and other related items exempt of the tax. Before accepting a certificate of exemption, the Taxpayer must ensure that it is fully completed and shows the customer's Virginia Certificate of Registration number where indicated.
Government contractors
A large percentage of the Taxpayer's sales are to government agencies. Therefore, I feel it necessary to address the application of the tax as it relates to government contractors.
Title 23 VAC 10-210-693 addresses government contractors. As explained in the regulation, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its services, even though title to some or all of the property may pass to the government. Conversely, if a contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate.
Accordingly, the Taxpayer is responsible for either collecting the tax on sales to its government contractor customers or taking from the customer a resale certificate of exemption, Form ST-10, indicating that the property will be resold.
Sales made directly to the government (I.e., via official purchase orders and paid for with public funds) are exempt of the tax. In making such sales, the Taxpayer may accept a governmental certificate of exemption, Form ST-12, from its government customers. The Taxpayer may not accept Form ST-12 from a contractor as the exemption is limited to the Commonwealth, political subdivisions of the Commonwealth, and the United States.
Summary
The audit will immediately be returned to the ***** District Office. Upon review of the additional information and possible revisions to the audit, a revised notice of assessment will be mailed to the Taxpayer. If you have any questions in regard to this determination, please contact ******** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16429T
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****************
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ************* (the Taxpayer) for the period February 1994 through February 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a retailer of packaging supplies. As a result of the department's audit, an assessment was made for untaxed sales in which the Taxpayer failed to obtain valid exemption certificates. The Taxpayer contends that the sample method used overstates its tax liability. The Taxpayer provides a printout of a monthly sales analysis for the entire audit period and claims that it more accurately reflects the tax liability due.
DETERMINATION
Sampling
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
In this case, the auditor reviewed one month that represented average sales. The auditor found recurring errors in which the Taxpayer failed to collect the tax on sales for which it did not obtain valid exemption certificates. The Taxpayer disputed the results of the one month sample and claimed that the sample was not representative of its sales. The department agreed to expand the sample by an additional month and again found recurring errors in which the Taxpayer failed to collect the tax on certain sales. The auditor determined an error factor for the representative sample period selected. The error factor was then extrapolated over gross sales for the audit period.
While I find the audit procedures were correctly applied, based upon the additional information presented by the Taxpayer, the audit will be returned to the department's ***** District Office for further review. An auditor from the department's ***** audit staff will contact the Taxpayer shortly to set up an appointment to verify the Taxpayer's information.
Exemption certificates
There seems to be a recurring problem regarding untaxed sales in the absence of exemption certificates or the acceptance of invalid certificates. As such, I feel that it is necessary to address the department's policy regarding this issue.
The department's policy with respect to exemption certificates is discussed in Title 23 of the Virginia Administrative Code (VAC) 10-210-280. The regulation states that ``all sales or leases are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law.' This same section notes that when a certificate is inconsistent, incomplete, invalid, or infirm on its face, it is never acceptable, either before or after notice by the department. Section B of Title 23 VAC 10-210-280 provides 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.'
In this case, exemption certificates were either missing, incomplete, or invalid. The Taxpayer must exercise due caution in selling packaging supplies and other related items exempt of the tax. Before accepting a certificate of exemption, the Taxpayer must ensure that it is fully completed and shows the customer's Virginia Certificate of Registration number where indicated.
Government contractors
A large percentage of the Taxpayer's sales are to government agencies. Therefore, I feel it necessary to address the application of the tax as it relates to government contractors.
Title 23 VAC 10-210-693 addresses government contractors. As explained in the regulation, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its services, even though title to some or all of the property may pass to the government. Conversely, if a contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate.
Accordingly, the Taxpayer is responsible for either collecting the tax on sales to its government contractor customers or taking from the customer a resale certificate of exemption, Form ST-10, indicating that the property will be resold.
Sales made directly to the government (I.e., via official purchase orders and paid for with public funds) are exempt of the tax. In making such sales, the Taxpayer may accept a governmental certificate of exemption, Form ST-12, from its government customers. The Taxpayer may not accept Form ST-12 from a contractor as the exemption is limited to the Commonwealth, political subdivisions of the Commonwealth, and the United States.
Summary
The audit will immediately be returned to the ***** District Office. Upon review of the additional information and possible revisions to the audit, a revised notice of assessment will be mailed to the Taxpayer. If you have any questions in regard to this determination, please contact ******** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16429T
Rulings of the Tax Commissioner