August 12, 2019
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 September 2006 through September 2009. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a global provider of networking and telecommunications equipment and supplies. As a result of the Department’s audit, the auditor assessed sales tax on sales of telecommunications equipment made exempt of the tax by the Taxpayer during the audit period. The Taxpayer maintains that the assessment of tax on these sales is contradictory to a prior determination letter issued to the Taxpayer by the Tax Commissioner. The Taxpayer further contends that the assessment ignores its good faith acceptance of exemption certificates in regard to the sales of telecommunications equipment. The Taxpayer also contends that an estimated assessment in the audit is incorrect.
DETERMINATION
***** (Customer A)
In the determination letter dated February 27, 2012, in regard to the Taxpayer’s previous audit, the Taxpayer contested the inclusion of sales made to its customer (1) in the audit, contending that the sales were properly made exempt of the tax for resale. On appeal, the Taxpayer provided resale exemption certificates and a multijurisdictional exemption certificate to support the exempt sales. The Taxpayer also provided an undated letter from the customer, stating the sales at issue were made for resale. The Tax Commissioner determined that the exemption certificates provided could not be deemed accepted in good faith to make the sales exempt of the tax. However, the Tax Commissioner ruled that the undated letter demonstrated that the sales at issue were made for resale and the transactions at issue were removed from the audit.
Relying on the determination letter, the Taxpayer made exempt sales to Customer A during the current audit period. In the audit and on appeal, the Taxpayer provides the undated letter (2) (Taxpayer’s Exhibit 1) regarding tangible personal property purchased for resale and the exemption certificates provided by Customer A. The Taxpayer states that these documents were deemed acceptable by the Department in the prior determination letter issued to the Taxpayer, and contends that exempt sales at issue were properly made pursuant to these documents. The sales at issue were held taxable in the current audit because the letter is undated and deemed unacceptable for audit purposes. Based upon the resale exemption certificate dated October 4, 2007, sales made in June 2009 were excluded from the audit because the auditor did not have proof of how the items were used by Customer A.
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 provides, in pertinent part, 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.
In the prior determination letter, the exempt sales at issue were removed from the audit based on the language included in the undated letter. The determination letter states that the letter demonstrated that the sales at issue were made for resale. However, the determination letter did not specifically restrict the use of this letter to the sales at issue in the appeal or to the audit period addressed in the determination letter. Accordingly, for the purposes of this audit only, the exempt sales at issue will be removed from the assessment.
When making sales of tangible personal property, the Taxpayer is reminded that Virginia Code § 58.1-623 requires that the sales tax must be charged and collected on all sales, unless a properly executed exemption certificate is accepted in good faith by the dealer. The exemption certificate provided by the Taxpayer was deemed invalid in the last audit because it does not include a valid registration number. The registration number included on the exemption certificate is still not a valid registration number. Going forward, the Taxpayer should note that this exemption certificate will not be accepted as a valid resale exemption certificate for sales made to Customer A, and the Taxpayer should obtain a valid resale exemption certificate from Customer A. Additionally, the undated letter is not a valid resale exemption certificate and going forward should not be used to make exempt sales to Customer A. Further, the undated letter will not be accepted by the Department going forward for sales made exempt of the sales tax by the Taxpayer to Customer A.
***** (Customer B)
The Taxpayer made exempt sales to Customer B during the audit period based upon a Virginia resale exemption certificate and a multi-jurisdiction resale exemption certificate. The exemption certificates provided for review state that Customer B made purchases on behalf of ***** (Third Party). Relying on Public Document (P.D.) 10-147 (7/26/10) and P.D. 13-132 (7/8/13), the Taxpayer maintains that it accepted the exemption certificates from Customer B in good faith.
During the audit, the Taxpayer provided letters from ***** dated May 12, 2015 and August 18, 2015 for review. ***** purchased Customer B on July 1, 2009 and began operating under the name *****. The May 12, 2015 letter states that Customer B was purchasing on behalf of Third Party. The August 18, 2015 letter states that the exemption certificates include the language that Customer B was purchasing on behalf of Third Party because the purchase orders related to these transactions had Customer B’s name on them. The letter further states that Third Party, not Customer B, was the actual purchasing company.
The sales at issue were held taxable in the audit because the information (multi-state resale exemption certificate, letters from ***** and information regarding company history) provided during the audit was inadequate to prove that the transactions were properly made exempt of the tax. Additionally, the documentation (transactions, invoices, sales Excel files, and purchase orders) reviewed by the auditor indicated that the transactions at issue were made to Customer B.
In accordance with Virginia Code § 58.1-623, a dealer may make sales to taxpayers exempt of the retail sales tax provided that a valid resale exemption certificate is presented by the taxpayer making the purchase. “Statutes granting tax exemptions are construed strictly against the taxpayer.” Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973). “Exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption.” Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1972).
In this instance, the information provided on appeal does not negate the findings in the audit that the sales at issue were made by Customer B. The letters provided to Customer B with respect to these sales provide conflicting information regarding which entity was the actual purchaser. I find that there is doubt with respect to the exempt sales as considered in the Virginia Supreme Court opinions cited above. In order to make these sales exempt of the tax, Customer B should have presented an exemption certificate in its own name to the Taxpayer. Accordingly, the sales related to Customer B will remain in the audit. Going forward, the Taxpayer is advised to obtain a valid exemption certificate from Customer B before making sales exempt of the Virginia retail sales tax.
The determinations issued in P.D. 10-147 and P.D. 13-132 are not applicable in this instance. In those public documents, the taxpayers were found to have accepted resale exemption certificates in good faith because the certificates contained the proper information as required by Virginia law. The exemption certificate and other supporting documentation at issue have been deemed unacceptable for making exempt sales to Customer B.
Estimated Assessment
In the audit, an estimated assessment was issued for the tax collected and not remitted portion of the audit liability because the documentation provided by the Taxpayer was insufficient to verify that all tax collected by the Taxpayer was in fact remitted to the Department during the audit period. The Taxpayer provided the Department’s auditor with a detail listing of all Virginia sales invoices for the audit period, which included both taxable and non-taxable sales and Virginia sales tax charged to the Taxpayer’s customers. The Taxpayer also provided every Virginia sales tax return for the audit period. The Taxpayer maintains that these documents provide all the necessary information to support that all collected sales tax was remitted to the Department. The Taxpayer disagrees with the estimated assessment that was issued, contending it has provided all information necessary to confirm that all billed Virginia sales tax was remitted to the Department.
Virginia Code § 58.1-633 A states that:
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.
Virginia Code § 58.1-633 A requires that taxpayers keep and preserve suitable records. When the records are insufficient for the Department to determine a taxpayer’s sales and use tax compliance, the Department is authorized under Virginia Code § 58.1-618 to make an estimated assessment. In accordance with this statute, such estimated assessments are deemed to be prima facie correct. The taxpayer has the burden of proving that the assessment is incorrect. See, P.D. 97-215 (5/15/97).
The Taxpayer’s general ledger for accruals is set up by legal entity, rather than by the states the Taxpayer is registered with for retail sales and use tax purposes. This is problematic because the Taxpayer is unable to provide a detailed analysis of its Virginia sales tax accrual account, showing all credits and debits for each month of the audit period. This method makes it impossible to reconcile the Taxpayer’s Virginia sales and use tax account, especially in instances where there are discrepancies.
As such, the Taxpayer’s general ledger is insufficient in this instance to verify whether the correct amount of tax has been remitted to the Department on sales the Taxpayer made to its customers during the audit period. The Taxpayer’s general ledger does not provide detailed information regarding the Taxpayer’s Virginia sales and the Virginia sales tax charged, collected and remitted to the Department. The documentation provided in the audit and with the Taxpayer’s appeal lacks the detail necessary to determine the Taxpayer’s sales and use tax compliance. The Taxpayer has not met its burden of proving that the estimated assessment is incorrect. Accordingly, an adjustment of the estimated assessment is not warranted and the assessment is upheld as issued.
CONCLUSION
Based upon this determination, the assessment will be adjusted as stated herein. Once the adjustments are made, a revised bill, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections and public documents 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, a*****.
Sincerely,
Craig M. Burns
Tax Commissioner
(1) *****, the customer at issue in the prior determination letter, is the customer at issue in this appeal.
(2) The letter referenced by the Taxpayer in its appeal is an undated later from Customer A that was addressed to the Taxpayer regarding a Form ST-10 dated October 4, 2007. This letter was provided by the Taxpayer with its prior appeal for the audit period September 2000 through August 2006.
AR/622P