October 14, 2016
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 for the period November 2007 through June 2013. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer provides facility assessments and energy cost reduction products for its customers. The Taxpayer maintains that it is a wholesaler and it operated as a wholesaler during the audit period.
The auditor assessed sales tax in the audit on sales transactions because the Taxpayer did not provide invoices to support its contention that the majority of its sales were made outside Virginia. The tax was also assessed on invoices provided by the Taxpayer where the amount charged does not tie back to the sales that were recorded in the Taxpayer's financial records. During the performance of the audit, the Taxpayer did not provide invoices for the actual recorded transactions, and the Taxpayer did not provide a resale exemption certificate for the sale made to a Virginia customer.
The auditor also assessed use tax in the audit on purchase transactions because the total amount on the detailed account list does not tie back to the Taxpayer's federal return and income statement that were provided in the audit. Additionally, the Taxpayer did not provide the invoices related to these transactions.
The auditor further assessed use tax in the audit on fixed assets because the Taxpayer did not provide invoices for office equipment purchases that were made by the Taxpayer in 2011 and 2012.
Additionally, the Taxpayer was held liable for the tax as a retailer by the auditor. Based upon the information provided during the performance of the audit, the auditor was unable to determine if the Taxpayer operated solely as a wholesaler during the audit period, or if the Taxpayer operated as a wholesaler and a retailer.
The Taxpayer contests the assessment of tax on sales, purchases and fixed assets transactions that occurred during the audit period. The Taxpayer maintains that the audit assessment is incorrect and requests that the assessment be abated in full. Additionally, the Taxpayer maintains that paying the assessment will cause a financial burden to its business.
Wholesaler
The Taxpayer contends that as a wholesaler it can purchase exempt of the tax the tangible personal property that it will sell for resale. The Taxpayer questions whether it is required to register for the sales tax with the Department, and whether if required to be registered, it would be required to file sales and use tax returns with the Department.
Virginia Code § 58.1-633 B states:
In order to aid in the administration and enforcement of the provisions of this chapter, all wholesalers and jobbers in this Commonwealth shall keep a record of all sales of tangible personal property, whether such sales be for cash or on terms of credit. Such records shall include the name and address of the purchaser, the number of the certificate of registration issued to the purchaser, the date of the purchase, the article purchased, and the price at which the article is sold to the purchaser. Any wholesaler or jobber failing to keep such records shall be guilty of a Class 1 misdemeanor. Any person who is both a retailer and a wholesaler or jobber and who fails to keep proper records showing wholesale sales and retail sales separately shall pay the tax as a retailer on both classes of his business.
Title 23 of the Virginia Administrative Code (VAC) 10-210-6080 A states:
A wholesaler, as distinguished from a retailer, is a seller who sells for resale only. If a seller sells to any user or consumer, however large or small, he becomes a retailer for those sales. If he fails to keep adequate records to show sales for resale and retail sales separately, he is required to pay the tax as a retailer on both classes of his business.
Title 23 VAC 10-210-6080 B states:
Every wholesaler is required to keep a record of all sales of tangible personal property, whether such sales be for cash or credit. These records must include the name and address of the purchaser, the number of the Certificate of Registration issued to the purchaser, the date of the purchase, the article purchased and the price at which the article is sold to the purchaser. Records must be kept for three years.
In its appeal, the Taxpayer has not provided documentation, such as records of sales to support its contention that it operates solely as a wholesaler. During the performance of the audit, the Taxpayer did not provide sufficient records to support its claims that it was operating as a wholesaler and that the sales tax was properly applied on sales made to its customers. Additionally, both during the audit and while the appeal was pending, the Taxpayer's website indicated that the taxpayer operates as both a wholesaler and a retailer. Accordingly, I am unable to find that the Taxpayer operated exclusively as a wholesaler during the audit period.
It is my understanding that the Taxpayer contacted the Department indicating that it no longer needed to file sales and use tax returns, effective October 31, 2007. On July 17, 2008, the Department issued a Confirmation of Closing Account letter to the Taxpayer. Additionally, the Taxpayer requested and received an exemption from the sales and use tax. A Notice of Sales Tax Exemption (the “Notice”) was issued to the Taxpayer on October 4, 2009. The letter was issued to the Taxpayer with the understanding that the Taxpayer's business is strictly wholesale, selling to other retailers, not to individuals. The Notice instructs the Taxpayer to use the Form ST-10 and a copy of the Notice to make purchases exempt of the tax. The Notice further instructs the Taxpayer that should it conduct any retail transactions or incur a use tax liability, or if the Taxpayer anticipates that it will engage in retail sales that the Taxpayer should contact the Department to register for the sales tax. Going forward, if the Taxpayer is in fact operating as a wholesaler, the Taxpayer should follow the instructions listed in the Notice. If the Taxpayer makes retail sales, the Taxpayer will need to register for the retail sales and use tax, and the Taxpayer will be required to file sales and use tax returns with the Department.
Records
Virginia Code § 58.1-633 A states:
Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.
Title 23 VAC 10-210-470 provides that “Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.
The auditor found that during the audit period, the Taxpayer did not maintain proper records as required by law. Going forward, the Taxpayer must be certain to maintain proper records in accordance with Va. Code § 58.1-633 and Title 23 VAC 10-210-470. Such records are necessary for the Department to determine whether the Taxpayer has properly complied with Virginia tax code and to determine the tax liability. Without such records, the Department is authorized to issue an assessment based upon the best information available, in accordance with Va. Code § 58.1-618.
With respect to the sales transaction with ***** (the “Customer”), the Taxpayer maintains that it properly sold the tangible personal property at issue to the Customer exempt of the tax. The Taxpayer provides a letter regarding the Customer's authorization to make purchases of tangible personal property exempt of the tax. The letter appears to be from the Virginia Department of Taxation; however, the letter is not on Department letterhead. Further, the letter is not dated, making it impossible to know if this letter was provided to the Taxpayer at the time the sale was made. Additionally, a copy of this letter could not be found in the Customer's records with the Department. Finally, Form ST-10 is not attached to the letter, as is the Department's policy for sales made to a wholesale business. The documentation provided is insufficient to support the Taxpayer's claim that the sale at issue was properly made exempt of the tax. Accordingly, the transaction at issue cannot be removed from the audit.
Audit Sample
The Taxpayer asserts that the sale made to the Customer mentioned above, should not have been included in the sample that was extrapolated across the audit period. The purpose of the audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for similar transactions on which Virginia tax has not been paid. Every effort is made to select objectively the sample periods that are representative of the period being audited. For an item to be removed from the audit sample, the taxpayer must establish that the transaction was an isolated event and not a normal part of its operations.
In this instance, the Taxpayer has not demonstrated that the sample used in the audit is incorrect. The Taxpayer has also not demonstrated that the transaction at issue is isolated in nature or that it is not representative of the Taxpayer's operations during other periods of the audit. Accordingly, I find no reason to deem the sample incorrect, or to warrant a change in the sample used in the audit at issue.
Exemption Certificates
Virginia Code § 58.1-623 A provides that:
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.
Virginia Code § 58.1-623 B states that:
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. If an exemption pertains to a nonprofit organization, other than a nonprofit church, that has qualified for a sales and use tax exemption under § 58.1609.11, the exemption certificate shall be valid until the scheduled expiration date stated on the exemption certificate.
The proper use of certificates of exemption is set out in Title 23 VAC 10-210-280, which states in Section B that “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.”
Going forward, the Taxpayer should exercise reasonable care and judgment when accepting exemption certificates from its customers, to insure that sales are properly made exempt of the tax. The Taxpayer also must be certain that the required information, as stated in Va. Code § 58.1-623, is provided on the exemption certificate. The Taxpayer is also required to retain exemption certificates provided by its customers to support the exempt sales made.
Future Audits
The Department typically conducts audits on taxpayers' records on a three year cycle. In accordance with Va. Code § 58.1-633 and Title 23 VAC 10-210-470, the Taxpayer must maintain records that support the returns filed with the Department. In future audits, the Department will request to review similar records as requested in the audit at issue. A review of the records allows the Department to determine the Taxpayer's sales and use tax compliance. In future audits, if the Taxpayer does not meet the compliance ratios, penalty will be assessed in the audit. Title 23 VAC 10-210-2032 B provides that in second generation audits, “Penalty will generally be applied unless the taxpayer's compliance ratios meet or exceed 85% for sales tax and 60% for use tax, as computed by the auditor or under the alternative method.” In all subsequent generation audits, “Penalty will generally be applied unless the taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax, as computed by the auditor or under the alternative method.”
Nonfiler Letters
During the performance of the audit, the Taxpayer received nonfiler letters from the Department because the Taxpayer was not filing sales and use tax returns, as required for a registered dealer. This issue has been resolved and requires no further action. Going forward, if the Taxpayer is registered for the sales and use tax, it will be required to file sales and use tax returns, even in months when the Taxpayer does not make any retail sales. If the returns are not filed, the Taxpayer will receive nonfiler letters from the Department.
Doubtful Collectibility
Virginia Code § 58.1-105 B authorizes the Tax Commissioner to compromise and settle a tax liability of doubtful collectibility.
The Taxpayer indicates that paying the full amount of the assessment will cause a financial burden. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectibility. The Taxpayer must present evidence of doubtful collectibility to support a claim of financial hardship.
If the Taxpayer wishes to pursue a settlement based on doubtful collectibility, please complete and return the enclosed Offer in Compromise Business Request For Settlement and Financial Information Statement For Businesses forms. These forms will allow the Department to review and analyze the Taxpayer's financial situation. Upon completion of the Department's review, a response will be issued based upon the information provided. The completed forms should be sent to: Tax Commissioner, Virginia Department of Taxation, Attn: CICT, P.O. Box 2475, Richmond, VA 23218-2475. You may also fax the forms to (804) 786-2645. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based upon doubtful collectibility.
CONCLUSION
Based upon this determination, the assessment is correct as issued. If the Taxpayer's offer in compromise based upon doubtful collectibility is not received within the allotted timeframe, a revised bill, with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill. Please remit payment within 30 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203.
The Code of Virginia sections and regulations 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, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5648201276.P