Tax Type
Retail Sales and Use Tax
Description
Exemption certificates were invalid or missing
Topic
Exemptions
Records/Returns/Payments
Date Issued
08-31-2010
August 31, 2010
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued as a result of an audit for the period March 2003 through February 2006. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a retailer of industrial supplies. An audit resulted in the assessment of asset purchases and sales of tangible personal property. According to the auditor, these sales were assessed because of invalid exemption certificates. I understand the Taxpayer obtained exemption certificates from its customers after being contacted to schedule an audit. The auditor found many of these exemption certificates were incomplete or invalid because of incorrect information. The auditor determined that the exemption certificates were not taken in good faith because they were obtained two years after the sampled sales were made and thus required closer scrutiny. Although more time was allowed for the Taxpayer to obtain valid and complete certificates, the auditor indicates that acceptable certificates were not furnished for the sales exceptions held in the audit.
The Taxpayer takes exception to taxing sales made to four customers. According to the Taxpayer, the auditor denied exemption claims on the basis that the exemption certificates were invalid or missing. The Taxpayer also believes the auditor's sampling methodology overstates the amount of tax due. The Taxpayer requests abatement of the tax assessed on sales for which documentation has been provided.
DETERMINATION
Subsection A of Va. Code § 58.1-612 requires all dealers to collect and remit the retail sales and use tax on all sales or leases of tangible personal property. Subsection A of Va. Code § 58.1-623 provides the following:
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- 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 properly 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.
In addition to the above, Va. Code § 58.1-623 B states, "The certificate . . . 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."
In Public Document (P.D.) 04-75 (8/25/04), the Tax Commissioner cited the longstanding policy set out in P.D. 98-29 (2/20/98) that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was never accepted in good faith. In such instances, the exemption certificates are subject to greater scrutiny by the Department and are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during audit.
***** (Customer One)
Customer One has furnished a complete and signed resale exemption certificate, Form ST-10, dated February 25, 2009. On the form, only one box is checked, i.e., box #3 which is the exemption for packaging materials. Customer One describes itself as engaged in the packaging, packaging services, and wholesale distribution business. The certificate of registration number is valid. The concern is whether this exemption certificate is valid.
In addition, the Taxpayer submits an affidavit from a former controller of Customer One in support of the resale exemption certificate submitted. The former controller states he was employed by Customer One in May 2004 and has personal knowledge of Customer One's purchases from the Taxpayer. He represents that the packaging materials were marketed with products being sold and became the property of the customers after the sale.
It is my understanding that this exemption certificate was denied because Customer One performs packaging and transportation services and is considered the user or consumer of packaging materials pursuant to subsection C of Virginia Administrative Code (VAC) 10-210-400. This regulation provides that "[p]ersons who provide packaging and transportation services must pay the tax on all material used in providing such services unless the materials are resold to a customer and no transportation services are provided therewith." A, review of Customer One's website indicates that Customer One does provide packaging and transportation services and much of its packaging would appear to be taxable on the cost price paid. A closer look at such website, however, indicates Customer One also provides thermoform or blister card plastic packaging to market client's products to retail customers. The primary use of such thermoform or blister packaging appears to be packaging products for sale. This type of packaging clearly would become the property of the purchaser. Accordingly, Customer One may claim the resale exemption for its thermoform or blister packaging but would be taxable on other forms of packaging when used primarily for transporting the client's products.
Furthermore, Customer One is taxable on purchases of packaging equipment or other types of equipment. As noted on Form ST-10, Customer One claimed an exemption for "packaging materials such as containers, labels, cans, boxes, drums or bags that are marketed with a product being sold and become the property of the purchaser." Because the packaging equipment and other equipment are not types of packaging materials, the resale exemption certificate submitted cannot be used to exempt packaging equipment or other types of equipment held in the audit.
In addition, there is no evidence that Customer One did not use the equipment held in the audit. Pursuant to subsection D of Title 23 VAC 10-210-400, "The tax applies to the purchase of equipment for use in the operation of a business even though such equipment may be used in connection with the shipment or sale of tangible personal property." The equipment at issue appears to be the type of equipment used by Customer One.
Moreover, there is no evidence that Customer One is engaged in the business of selling equipment on a wholesale or retail basis. In fact, Customer One's website provides no indication that it is so engaged. Accordingly, there is no evidence that Customer One bought the equipment for resale purposes.
Based on the foregoing, the packaging materials exemption cannot be extended to any equipment. Thus, the equipment (conveyors, thermocouple and label applicator) and packaging used primarily for shipment purposes will remain in the audit.
The audit may be revised to remove only the thermoform or blister packaging materials, if any. To aid in this revision, the Taxpayer must provide information or documentation indicating which packaging materials were sold to Customer One for use in thermoform or blister packaging. Upon receipt of such information or documentation within 45 days of the date of this letter, the audit assessment may be revised accordingly.
***** (Customer Two)
Customer Two has furnished a complete and signed exemption certificate, Form ST-11, dated February 14, 2006 with a registration number. On this form, box #8 is checked for "materials, containers, labels, sacks, cans, boxes, drums or bags for packaging tangible personal property for shipment or sale, whether returnable or nonreturnable." Customer Two describes itself as engaged in the auto parts business. More recently, Customer Two has furnished a complete and signed exemption certificate, Form ST-11, dated May 20, 2009 without any registration number. The second Form ST-11 describes Customer Two as engaged in auto parts manufacturing.
A registration number is not mandatory for Form ST-11 unless one has been assigned to the purchaser. I understand that the auditor denied the exemption because neither exemption certificate indicated a valid registration number. It is not clear why the customer has not furnished a valid registration number or whether such customer does not understand. Despite these issues, the Department's records maintain a valid registration for the customer but under a different certificate of registration number.
For this audit only, and based on the fact that exempt packaging materials were sold to this customer, I will remove the two contested sales made to Customer Two. Beginning the month following the month in which this determination is issued, the Taxpayer is directed to tax all sales made to this customer until such time that the customer has furnished a valid exemption certificate. Upon receipt of a new exemption certificate from such customer, the Taxpayer may contact the Department's Customer Service Center at (804) 367-8031 to determine whether the customer's registration number is valid. If the number is not valid, the Taxpayer is expected to deny the exemption certificate and charge and collect the sales tax on sales made to such customer.
***** (Customer Three)
Customer Three has furnished a complete and signed resale exemption certificate, Form ST-10, dated for 2003. On the form, box #1 is checked to indicate that property is purchased for resale purposes. In addition, Customer Three certifies that all property purchased after 2003 will be purchased for resale, unless otherwise specified on each order. Customer Three describes itself as engaged in the wholesale distribution of sunglasses, watches and lighters.
The audit sample contains one sale to Customer Three for cable, spade lugs, and slip-on lugs. According to invoice #912, the transaction is a repair job to replace a bad motor and wiring. Because this customer is in the business of reselling sunglasses, watches and lighters, none of the repair items at issue appear to be purchased for resale purposes. Rather, they appear to be purchased for taxable use or consumption by Customer Three. Furthermore, no purchase order has been presented to indicate that the customer had not specified a resale purpose. For these reasons, I find no basis for removing this item from the sample.
***** (Customer Four)
Customer Four has furnished a complete and signed exemption certificate, Form ST-11, dated February 22, 2006. On this form, boxes #1, #2, #5, and #8 are checked. Box #8 is the exemption claim for packaging materials. On this certificate, the purchaser's name is shown as ***** (the legal entity), but the trading-as name is that of Customer Four. The auditor found nothing to tie Customer Four to the legal entity. Moreover, while the certificate of registration number on the certificate is valid for the legal entity, it is not certain that it is valid for Customer Four, who is listed as the purchaser in the audit. The certificate describes the type of business engaged in by the purchaser as manufacturing.
Based on the available facts and a search performed in the Department's registration system, there is no evidence that Customer Four was ever registered for sales and use tax purposes or was required to register for sales tax collection or use tax remittance purposes. In the absence of such evidence, I will not require a certificate of registration number for this customer's Form ST-11. Furthermore, my staff did find publicly available information to support Customer Four's manufacturing claim. For these reasons, I will accept this customer's exemption certificate (dated February 22, 2006) for the audit period at issue.
The three contested sales made to this customer are for packaging materials. Accordingly, these three sales will be removed from the audit.
CONCLUSION
Upon receipt of the requested information and documentation within the allotted time, the assessments will be revised in accordance with this determination. Updated bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."
The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Linda D. Foster
Deputy Tax Commissioner
- Linda D. Foster
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AR/1-4165271688.R
Rulings of the Tax Commissioner