April 15, 2015
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you submit on behalf of your client, ***** (the "Taxpayer"), a request for correction of the retail sales and use tax assessments issued as a result of an audit for the period July 2011 through June 2014.
FACTS
The Taxpayer is a retailer of office furnishings. An audit resulted in the assessment of untaxed sales and purchases of tangible personal property. The Taxpayer disputes the inclusion in the audit of certain untaxed sales made to one customer and contends that the sales are exempted from the tax.
DETERMINATION
The Taxpayer raises an issue with a written response from the Department's Customer Services unit. The Taxpayer claims that it relied upon the response when it sold office furnishings (i.e., lounge chairs, credenzas, panels, office equipment, keyboards, mouse, lamps, desk, tackboard, desk chair, file pedestal and bookcases) exempt of the retail sales tax. The customer to whom the exempt sales were made initially submitted an unsigned and undated statement claiming that it was a manufacturer of machinery and was not required to register to collect the sales and use tax. There is no mention in such statement that the customer claimed an exemption from the retail sales and use tax on its purchases. After receipt of such statement, the Taxpayer contacted the Department's on-line Customer Services response team and specifically asked if such statement was acceptable. The Taxpayer also indicated that the customer purchased office furnishings that were not used in its manufacturing process.
The Department's Customer Services responded that a Virginia business can purchase machines, which are used in a manufacturing process, sales tax exempt by using the ST-11 sales tax exemption certificate. A copy of such exemption certificate was attached to the emailed response for the Taxpayer's convenience.
According to the Taxpayer, it in turn requested its customer to complete the Form ST-11 and subsequently received a completed certificate. The customer certified that the tangible personal property for purchase was tax exempt based on the manufacturing or research or research and development exemptions when it checked boxes 1, 2, 5, and 8 on the form. The customer subsequently purchased tax-exempt several office furnishings from the Taxpayer.
In regard to the ST-11 exemption certificate, box #1 is for industrial materials for future manufacturing into articles of tangible personal property for resale where such materials enter into the production or become a component part of the finished product. Box #1 also applies to industrial materials that are coated upon or impregnated into the product at any stage of its manufacture for resale. Box #2 is for machinery, tools or repairs parts or replacements for such, equipment, fuel, power, energy, or supplies, when used directly in manufacturing products for sale or resale. Box #5 is for tangible personal property purchased for use or consumption directly and exclusively in basic research in the experimental or laboratory sense or research and development in the experimental or laboratory sense. Box #8 is for materials, containers, labels, sacks, cans, boxes, drums or bags for packaging tangible personal property for shipment or sale. None of these exemptions are applicable to the contested office furnishings. Moreover, such furnishings do not constitute industrial materials, manufacturing machinery, basic research property, research and development property, packaging materials, or any of the other items listed as used directly in an exempt manufacturing process.
Furthermore, the Department has long held in its regulations that such exemption certificate has no application to office furniture or office machines. For instance, see subdivision C 4 of Title 23 of the Virginia Administrative Code (VAC) 10-210-280, i.e., the regulation on certificates of exemption. Such regulation specifically states that office furniture and office machines are not used directly in manufacturing for sale or resale and are subject to the tax. The regulation goes on to state that "[n]o exemption certificate offered in making such a purchase is acceptable." Thus, while the exemption certificate was not cancelled until the Taxpayer was audited, such certificate was never acceptable for its intended use with the Taxpayer.
The Customer Services response clearly lacks any expressed approval allowing the Taxpayer to accept the Form ST-11 exemption certificate from the customer in purchasing office furnishings. Rather, the Department's response plainly states that machines used in a manufacturing process may be purchased exempt from the retail sales tax. Furthermore, the Taxpayer has admitted that none of the furnishings sold to the customer were used in the customer's manufacturing process. As the office furnishings were not machines used directly in a manufacturing process, the industrial manufacturing exemption is not applicable to any of the contested sales of tangible personal property.
Title 23 VAC 10-210-280 A also sets out general guidance when using certificates of exemption, as follows:
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, infirm or inconsistent on its face is never acceptable, either before or after notice. [Emphasis added.]
Based on the facts presented, I also find no "good faith" acceptance of the ST-11 exemption certificate. First, the Taxpayer erroneously interprets the Department's Customer Services response as an acceptance of the manufacturing exemption certificate for office furnishings. Clearly, the response is not such an acceptance since the Department never approved the use of the certificate in such a manner. Second, the Taxpayer proposed to its customer to use the ST-11 exemption certificate. While the customer eventually submitted the exemption certificate to the Taxpayer, such submission was done at the direction of the Taxpayer. As such, there was no good faith acceptance by the Taxpayer.
In addition, I find that the research or research and development exemption is not applicable to the customer's purchases in this case. The customer indicates that it is engaged in the business of manufacturing beverage can machinery. As such, it is not engaged in manufacturing furniture and, therefore, is not entitled to the research or research and development exemption on purchases of furniture. Because the exemption certificate is not reasonable on its face for exemption of the sale of furniture by the Taxpayer and the contested purchases are not consistent with or within the scope of the exemption language of the certificate, the ST-11 exemption certificate should have been denied in its entirety by the Taxpayer. See Public Document 09-120 (8/7/09).
In regard to the Department's sales and use tax field audit procedures, the Taxpayer indicates that such procedures state the following:
Manufacturers purchase many items that can be used in both taxable and/or exempt ways. It is often difficult to determine taxability from the dealer's perspective. One should accept a properly executed ST-11 in these cases. [Emphasis added.]
The instant case is different. The Taxpayer is a retailer of office furnishings and does not sell items to manufacturers for use in both taxable and exempt ways. In this case, the Taxpayer sought advice from the Department and the advice received did not permit the Taxpayer to accept the customer's statement or otherwise approve the use of the ST-11 exemption certificate for exempt customer purchases of office furnishings and office equipment. Thus, in this case, the Taxpayer should have denied the customer's request for exemption and charged the sales tax at the appropriate rate.
CONCLUSION
Based on this determination, the contested assessments are correct. Updated bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balances should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to the address stated on the bills.
The Code of Virginia section, regulation and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5888720880.R