Tax Type
Retail Sales and Use Tax
Description
Invalid exemption certificates; customers paid use tax directly to the Department
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Exemptions
Date Issued
12-20-2011
December 20, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period April 2005 through March 2008. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a distributor of flooring products. The Taxpayer was audited and assessed sales tax on untaxed sales identified in a one-month sample of sales. The auditor determined that the Taxpayer did not have valid exemption certificates on file to support the exempt sales held in the audit. The Taxpayer seeks the removal of these sales from the audit based on copies of exemption certificates and other customer documentation furnished to the Department. The Taxpayer also maintains that some customers accrued and paid use tax directly to the Department on some of the sales transactions in the audit and seeks the removal of these sales from the audit sample. The Taxpayer claims that the Department's sample methodology is flawed because the sample period chosen was not representative of the entire audit period.
DETERMINATION
Exemption Certificates
In 2007, the Taxpayer solicited and received new or updated resale exemption certificates from many of its tax exempt customers. The auditor sampled the Taxpayer's sales for the period of October 2005. Because the Taxpayer obtained the exemption certificates after the sampled sales transactions occurred, the certificates were considered by the auditor to have not been taken by the Taxpayer in good faith. In accordance with the Department's policy with respect to the good faith acceptance of exemption certificates, the auditor reviewed each certificate in detail and determined that some were not valid. The auditor considered some of the certificates invalid because customers described their type of business on the Form ST-10 as flooring contractor, contractor or a similar description. The auditor could not verify valid sales and use tax registrations for other customers that provided exemption certificates. Sales to the customers that issued these exemption certificates were included in the audit.
The Taxpayer has submitted copies of resale exemption certificates and other documentation for several of the customers with sales exceptions in the audit. The Taxpayer contends the certificates at issue were accepted in good faith and the certificates are valid on their face. The Taxpayer asserts that the exemption certificates and customer documentation provided support the removal of the respective sales exceptions from the audit sample.
Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia. Virginia Code § 58.1-612 requires dealers that have sufficient contact with the state of Virginia to collect and remit the retail sales and use tax on all sales or leases of tangible personal property. Virginia Code § 58.1-623 A provides that:
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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 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.
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- Virginia Code § 58.1-623 B then states, in part:
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- 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.
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A interprets Va. Code, § 58.1-623 and states "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice." Public Document (P.D.) 98-29 (2/20/98) sets out the Department's longstanding policy 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, exemption certificates are subject to greater scrutiny by the Department and are acceptable only if the Department can confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during an audit.
Virginia Code § 58.1-610 A provides that real property contractors are the taxable users and consumers of purchases of tangible personal property used to provide real property services. Generally, contractors cannot make exempt purchases for resale of property used and consumed by them for real property jobs. Dealers are required to collect the retail sales tax on the sale, distribution or lease of tangible personal property to contractors.
Virginia Code § 58.1-610 D provides an exception to the general treatment of real property contractors and states, in part:
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- Any person selling fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings (as distinguished from the floors themselves), cabinets, countertops, kitchen equipment, window air conditioning units or other like or comparable items, shall be deemed to be a retailer of such items and not a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers ....
Further, Title 23 VAC 10-210-410 B recognizes that real property contractors can also be retailers and states, "A person who is a using and consuming contractor, as explained in subsection A, may also be engaged in the business of selling tangible personal property to customers ...." The regulation explains that such contractors must register as dealers with the Department and may purchase tangible personal property for resale by issuing resale exemption certificates to their vendors.
As previously noted, the Department will accept an exemption certificate that is incomplete or was not taken in good faith by a dealer only if it can be confirmed that a customer's use of the certificate was valid and proper for a specific transaction identified during an audit. After considering the authorities cited above and based on a review of the exemption certificates, customer documentation and the Department's records, the sales exceptions for the following customers will be removed from the audit: *****, *****, *****, *****, *****, *****, *****, ***** and *****.
The sales exceptions for the following customers will remain in the audit because the exemption certificates were incomplete and the Department could not confirm that the customers were entitled to the resale exemption: *****, *****. The Taxpayer did not provide an exemption certificate or documentation for ***** which was listed in Exhibit A of the appeal. Sales transactions for this customer will remain in the audit.
To ensure that exemption certificates received from its customers are taken in good faith, the Taxpayer must exercise reasonable care and judgment when taking exemption certificates in accordance with Title 23 VAC 10-210-280 B. Exemption certificates must be complete and adhere to the requirements set out in the applicable statutes, regulations and public documents discussed in this determination.
Sales Sample
The Taxpayer contests the use of October 2005 as the sample period for the sales sample. The Taxpayer states that October 2005 is not, representative of the audit period because new or updated exemption certificates were obtained from its customers in 2007. Thus, the use of a sample period after the certificates were obtained would more accurately reflect the Taxpayer's compliance for the audit period.
In accordance with the Department's policy, the auditor did not recognize that the exemption certificates obtained by the Taxpayer in 2007 were taken in good faith because the Taxpayer did not have the certificates when the sales occurred in October 2005. This is why the Taxpayer disputes the period used for the sales sample.
Based on the Taxpayer's treatment in the Exemption Certificates section of this determination, the Taxpayer's argument with respect to this issue no longer has merit. A member of my staff has reviewed copies of all the exemption certificates obtained by the Taxpayer in 2007 or later that were provided with this appeal. Because this was the Taxpayer's first audit and the Taxpayer made a documented effort to obtain exemption certificates in 2007, which was prior to the start of the audit, the date the Taxpayer received the certificates was not considered during the Department's review. If the certificate was complete and valid on its face, it was accepted. For certificates that were incomplete, it was verified that each customer's use of the certificate was valid for the transactions in the audit. Sales to those customers that provided the Taxpayer with valid certificates will be removed from the audit. In some cases, other customer documentation was furnished by the Taxpayer and considered during the review. I have agreed to remove from the audit sales to those customers if it was verified that the customers qualified for exemption.
Sales exceptions for the customers previously identified in this letter remain in the audit because the exemption certificates were incomplete and, after a thorough review, the Department was unable to confirm that these customers qualified for the resale exemption at the time of the sale. These certificates were not disallowed because they were obtained after the date of sale. Based on the authorities previously cited, an incomplete exemption certificate cannot be accepted in good faith and is subject to scrutiny just as a certificate that is received after the date of sale. Based on the above, the review and acceptance of exemption certificates received from customers after the date of sale has addressed the Taxpayer's concerns with respect to the sample period used in the audit.
The Taxpayer also maintains that it did not agree to the selection of the sample period. The auditor notes that the selection of the October 2005 sample period was discussed with and accepted by the Taxpayer. However, as noted previously, the sample period used in the audit is no longer an issue for this case.
Other Sales Transactions
The Taxpayer contends that other sales transactions should be removed from the audit. I will address these sales transactions.
*****
The Taxpayer states that sales to this customer were not Virginia sales because title to the products sold passed to the customer in an out-of-state warehouse. The auditor noted that the invoices for this customer showed Virginia shipping addresses. The Taxpayer has produced documentation showing that the transactions at issue were sales for resale and this customer arranged to have the products picked up in another state and delivered to its customers in Virginia. Based on the information presented, the sales exceptions for this customer will be removed from the audit.
*****
The auditor reviewed sales invoices in which this customer's name did not match the name on the exemption certificate on file with the Taxpayer. The Taxpayer has provided a new exemption certificate and documentation that clarifies the customer at issue qualifies for the resale exemption on the sales held taxable in the audit. The sales exceptions for this customer will be removed from the audit.
Customers Self-Assessed and Paid the Tax
Some customers informed the Taxpayer that they paid use taxes directly to the Department on exempt purchases made from the Taxpayer. The Taxpayer seeks the removal of these sales from the audit sample. The auditor allowed a credit against the audit liability for those customers identified during the audit that had paid use taxes directly to the Department on the Taxpayer's exempt sales to them.
The Department has previously addressed this issue in P.D. 04-99 (9/8/04) and other public documents. These documents explain that the sales sample used in audits determines the error rate at which taxpayers fail to charge sales and use tax on untaxed sales made without a valid, supporting exemption certificate. The inclusion of credits for customers' self-assessed use tax payments in the sales sample or the removal of these untaxed sales from the sample distorts the error factor determined by the sales sample. The sales sample is not intended to determine the combined compliance of the Taxpayer and its customers. Although customers reported and paid use tax to the Department on their purchases from the Taxpayer, this is not a reflection of the Taxpayer's sales tax collection compliance. The Taxpayer's obligation to collect sales tax on all Virginia sales without valid exemption certificates is not dependent on whether customers self-assess and pay use tax directly to the Department. Accordingly, there is no basis to recalculate the error factor determined by the audit's sales sample.
The Department's consistent policy has been to allow credits against the seller's audit liability for the use taxes paid directly to the Department by the seller's customers. The auditor applied this policy by allowing credits in the audit for use taxes that were self-assessed by the Taxpayer's customers and paid directly to the Department. The credits were allowed based on documentation provided during the audit.
The Taxpayer claims that additional customers self-assessed and paid use tax to the Department on sales exceptions included in the audit. A member of my staff requested documentation to support the Taxpayer's claim. However, the information furnished by the Taxpayer is not sufficient to allow credits in the audit for these customers. The documentation to support such credits should include sufficient detail to determine that use taxes were paid by the Taxpayer's customers on the sales held in the audit. Return information from the customers should be provided that shows the periods for which the tax was reported and paid, a schedule of the purchase amounts that make up the total measure for the use taxes reported on the return, the related sales invoices and any information that allows the Department to confirm that the customers paid the use taxes due on the transactions at issue.
I will allow the Taxpayer to provide detailed information regarding the self-assessment and payment of use tax directly to the Department by ***** and *****. A credit for the use taxes paid to the Department will be allowed against the audit liability based on a review of this information. As previously noted, the sales exceptions for these customers will not be excluded from the sales sample calculation.
CONCLUSION
The Taxpayer will be allowed 30 days to provide the information requested in this letter. After the 30-day period has expired, the audit will be referred to the auditor to make the revisions in this determination and any applicable revisions based on the documentation requested in this letter. If no additional information is provided by the Taxpayer, the audit and assessment will be considered correct in accordance with this determination. The Department's records indicate that a payment of ***** has been applied to the audit assessment issued as bill number *****. After the audit and assessment are adjusted, an updated bill with accrued interest will be issued to the Taxpayer. The bill should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections, regulations and public documents cited, along with other reference documents, 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 concerning this determination or wish to provide documentation for the audit credits, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4685077232.S
Rulings of the Tax Commissioner