Tax Type
Retail Sales and Use Tax
Description
Exemption certificates; Sales to schools
Topic
Collection of Delinquent Tax
Exemptions
Property Subject to Tax
Date Issued
03-30-1999
March 30, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear **************
This is in response to your letter seeking correction of the sales and use tax assessment issued to ************** (the Taxpayer) as a result of an audit by this department. I apologize for the delay in responding to your letter. Copies of referenced sources are enclosed.
FACTS
The Taxpayer is a manufacturer and distributor of bottled beverages at wholesale and retail. An audit for the period December 1994 through November 1997 resulted in the assessment of sales tax on certain sales for which the exemption certificates were missing or deemed invalid. The Taxpayer takes exception to the sales tax assessed in this case since the contested sales were made mainly to retailers. The Taxpayer also requests waiver of penalty.
DETERMINATION
Generally. Code of Virginia § 58.1-623 and Title 23 of the Virginia Administrative Code (VAC) 10-210-280 set out the long established law and policy that all sales, leases and rentals of tangible personal property 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. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid or inconsistent on its face is never acceptable, either before or after notice.
When a dealer does not charge sales tax on a retail sale and fails to obtain a certificate of exemption from its customer, Code of Virginia § 58.1-625 requires that the dealer be held directly liable for the payment of the sales tax. Clearly, Virginia law places the Taxpayer under a legal obligation to be able to justify any nontaxed sale with a properly completed and valid exemption certificate.
In addition, Code of Virginia § 58.1-633 and 23 VAC 10-210-470 require dealers to keep and preserve adequate and complete sales and use tax records, including exemption and resale certificates, necessary to determine their proper tax liability. In the absence of sufficient and proper supporting records, the department may make an estimated assessment for any presumed tax deficiency.
Missing forms. In this eighth audit, it is my understanding that the Taxpayer had failed to obtain and maintain exemption certificates for many untaxed sales, even though it had been instructed in the previous audit to maintain department-issued exemption certificates for all untaxed sales and to accept only those which are complete in every way. When the Taxpayer fails to obtain and maintain an exemption certificate from a customer and has not charged and collected the sales tax on sales to such customers, it becomes directly liable for the tax, notwithstanding that the customer may have subsequently gone out-of-business or has refused to furnish an exemption certificate. Furthermore, it was our understanding at the conclusion of the prior audit that the Taxpayer would update and solicit exemption certificates from its customers. Under these conditions. I find no basis to remove such sales from the audit.
Substitute forms. Generally, the department will not permit a substitute form for a resale exemption certificate unless it satisfies all of the criteria set out by Code of Virginia § 58.1-623, contains all of the information vital to the proper use of the certificate, and is approved by the Tax Commissioner. I have enclosed copies of previous rulings [i.e., Public Documents (P.D.) 95-316 (12/15/95) and 97-95 (2/21/97)] which illustrate the department's policy for resale exemption certificates.
We have reviewed the resale exemption certificate created by the Taxpayer. Such substitute form, however, does not satisfy all of the information requirements prescribed by the department. For example, it does not state that property is purchased for the "sole' purpose of resale. It incorrectly asks for a license number rather than a certificate of registration number. It generally lacks certain required information as specified in P.D. 97-951. In addition, it lacks any statement to the effect that it is a substitute form for the Virginia ST-10 exemption certificate.
It is my understanding that the Taxpayer was notified at the conclusion of the prior audit to cease using its substitute resale exemption certificate and to use the department-issued Form ST-10. As the substitute form does lack some vital information, I believe that the Taxpayer was properly advised to discontinue its use. However, since the Taxpayer's substitute resale exemption certificates were honored in prior audits, relate to longstanding customers, and were kept on file since the prior audit, I will allow an adjustment to the current audit to remove those sales for resale which can be supported by these substitute resale exemption certificates.
However, the Taxpayer may not use a substitute resale exemption form for any new customers or customers for which it currently lacks a resale exemption certificate unless it is amended. If the Taxpayer still desires to use a substitute resale exemption certificate, it must submit an amended substitute form to the department for approval and such form must contain the prescribed information as set out in P. D. 97-95.
Facsimiles. Pursuant to P. D. 88-292 (10/31/88), I would note that dealers are permitted to use microfilm or microfiche for official recordkeeping of sales and use tax records provided they satisfy certain conditions stipulated in such ruling and in P.D. 88-237 (8/18/88). Thus, the maintenance of customer-furnished exemption certificates on microfilm or microfiche is also permitted. Since it is satisfactory to maintain copied records, it is also acceptable for dealers to take from customers in good faith a facsimile of an exemption certificate conveyed by electronic means, provided it is completely legible, easy to read, dated, signed and completed in every respect in accordance with 23 VAC 10-210-280. For recordkeeping purposes, the facsimile exemption certificate should be maintained either as a hard (printed) copy or on microfilm or microfiche.
Based on the foregoing, the audit will be revised to remove those assessed sales for which exists a valid and completed exemption certificate which was received by electronic means, i.e., a facsimile of the exemption certificate, provided the printed copy is sufficiently legible.
Schools. Nonprofit private and public elementary and secondary schools may use the Form ST-13 to make tax-free purchases2. In addition, the sale must be paid for directly by the nonprofit or public school out of its funds. Thus, sales paid by public school officials (e.g., a principal, teacher or school board member) from their personal funds (i.e., cash, personal credit card or personal checking account) are taxable even though they may be reimbursed by the school.
If the Taxpayer has a proper exemption certificate on file or subsequently obtains one from the schools at issue, the department will remove those sales from the audit, provided it is sufficiently established that the sales were paid for directly by the schools for exempt purposes of the school (e.g., for sale by the school or in connection with school lunches or fund-raising activities of the school). Otherwise, the sale is taxable.
Penalty. The application of penalty to tax deficiencies is mandated by law. However, the department has discretionary authority to waive penalty. In the case of sales and use tax audits performed on businesses, the department developed and has long used a compliance test which allows for waiver of penalty when a sufficient level of compliance is achieved. Without this compliance test, penalty could only be waived for exceptional mitigating circumstances. Thus, without the department's compliance test, penalty would apply to tax deficiencies found on any audit.
For third or subsequent audits, penalty is automatically waived if the compliance ratios meet or exceed 85% for sales tax and 85% for use tax. If this compliance level is not achieved, penalty applies unless there is evidence of exceptional mitigating circumstances which caused the low compliance. Although the Taxpayer may have experienced oversights, insufficient employee training, under staffing, or employee turnover, I do not consider such causes to be exceptional mitigating circumstances.
Accordingly, the department must rely on the compliance tests for this audit. On this eighth audit, the Taxpayer's sales tax compliance ratio is currently computed as 55%. As this is below the 85% standard, the penalty applies. However, the sales tax compliance ratio will be recomputed after the tax revisions set out in this determination have been completed. If the revised sales tax compliance ratio meets or exceeds 85%, penalty will be waived. Otherwise, penalty will apply to the revised sales tax deficiency.
In this audit, the use tax compliance ratio is 84.59%. If this is rounded up, it would be 85%. Accordingly, I will agree to waive the penalty assessed on the use tax portion of the audit.
Conclusion. The auditor will soon contact the Taxpayer to arrange for a final review of all exemption certificates related to the sales at issue. If the Taxpayer still requires additional time to obtain further exemption certificates, I will allow the Taxpayer an additional 60 days from the date of this letter. The audit will be revised in accordance with this determination. Upon completion of all revisions, a revised bill and audit report will be sent to the Taxpayer.
For the future. When an exemption certificate is not obtained from a customer and the Taxpayer does not charge and collect the sales tax on the sale, the burden of proving that an exemption applies falls solely upon the Taxpayer. Clearly, without the certificate, there is no declaration of intent by the customer to certify that the purchase is exempt under the law at the time of sale. Accordingly, an exemption certificate obtained during or after an audit to justify a prior untaxed sale is subject to closer scrutiny by the department. As a precaution, it is imperative that the Taxpayer abide by the laws and regulations applicable to the taking and keeping of exemption certificates in order to avoid a similar situation in the future.
I appreciate your comments and concerns about taxpayer instruction on the correct use and completion of exemption certificates. Although the Taxpayer must exercise reasonable care and caution in the taking of exemption certificates from its customers, please feel free to refer customers to the department when questions arise over these issues or about their exemption status. They may contact the department's ***** District Office at ***** or the Office of Customer Services at the department's central office in Richmond at (804) 367-8037.
If you have questions about this response, please contact ***** of my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
1Although the purchaser does certify the resale nature of the purchase, the substitute form does not contain a statement that the purchaser certifies that he or she is authorized to sign the certificate, etc. It does not ask for the "trade name' of the customer. It does not ask for the kind of business engaged in by the customer. It also lacks a statement as to who must sign the form when the purchaser is a corporation, partnership, association, or sole proprietorship.
2Form ST-12 may also be used by public schools, but it may not be used by private nonprofit or for-profit schools.
Rulings of the Tax Commissioner