Tax Type
Retail Sales and Use Tax
Description
Certificates of Exemption Accepted In Good Faith
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
07-08-1985
[Opinion - Virginia Attorney General: 1985 at 321]
REQUEST BY: Honorable Glenn B. McClanan Member, House of Delegates
OPINION BY: Mary Sue Terry, Attorney General
OPINION:
You ask my opinion on a question concerning certificates of exemption authorized under the Virginia Retail Sales and Use Tax Act, § 58.1-600 et seq. of the Code of Virginia, as implemented in State tax regulations. You ask specifically whether, during the audit of a sales tax return, the Department of Taxation can require a dealer to obtain additional verification that a particular transaction was tax exempt if the dealer accepted a certificate of exemption in good faith at the time of the transaction.
Section 58.1-623 reads, in pertinent part, as follows:
"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.
B. 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."
The Tax Commissioner has issued a regulation1 relating to certificates of exemption, designated as § 630-10-20 of the Virginia Retail Sales and Use Tax Regulations, the pertinent portions of which read as follows:
"A. Generally . . . . 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, infirm or inconsistent on its face is never acceptable, either before or after notice.
B. Legitimate use of exemption certificates is vital. Reasonable 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 item of tangible personal property not covered by the exact wording of the certificate." (Emphasis added.)
Based on the foregoing, it is my opinion that, during the audit of a sales tax return, the Department of Taxation may not require a dealer to obtain additional verification that a particular transaction was tax exempt if the dealer accepted a certificate of exemption in good faith. Compare 1970-1971 Report of the Attorney General at 387.
Acceptance "in good faith" must be established by the dealer. As indicated in Regulation § 630-10-20(A), a certificate which is incomplete, infirm or inconsistent on its face is never acceptable. Also, the property actually purchased must be of the same class as that identified on the certificate as exempt. Thus, acceptance in good faith requires that the dealer examine the certificate for compliance with § 630-10-20(A) before a tax-free sale takes place.
If, during audit by the Department of Taxation, it is determined that a certificate was not accepted by a dealer in good faith, the Department may proceed against the dealer for the amount of sales tax that he should have collected. See § 58.1-623(B); 1970-1971 Report of the Attorney General, supra.
1 See § 58.1-203 as to the Commissioner's power to issue tax regulations.
Attorney General's Opinion