April 6, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of retail sales and use tax assessments issued to***** (the “Taxpayer”) for the period October 2012 through September 2015. The Taxpayer has paid the contested assessments in full. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer sells and distributes fire, emergency, towing and recovery vehicles. The Taxpayer sells fire, rescue and safety equipment as well as equipment used by the towing industry. The Taxpayer also services, refurbishes and repairs vehicles and equipment.
The Department audited the Taxpayer and assessed the retail sales tax on untaxed sales that were made to various customers, including nonprofit fire and rescue organizations and government entities. The Taxpayer did not have exemption certificates on file to support the untaxed sales made to some of the customers. In some cases, the Department’s auditor determined that exemption certificates taken from some of the Taxpayer’s customers were not valid.
The Taxpayer contests the assessment of the sales tax on various sales transactions in the audit. The Taxpayer maintains that some of the customers are exempt from the tax under the exemptions for nonprofit organizations and government entities. Other sales transactions are contested based on the application of the motor vehicle exemption, the church exemption and the resale exemption.
DETERMINATION
Strict Construction of Exemptions
The Virginia courts have consistently required the strict construction of sales and use tax exemptions. Based on this principle, if there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973). In addition, Virginia Code § 58.1-205 1 states that “[a]ny assessment of a tax by the Department shall be deemed prima facie correct.” This means that the burden is on taxpayers to prove that an assessment issued by the Department is not correct.
Exemption Certificates
Virginia Code § 58.1-623 A states, in part:
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 then states, in part:
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 Virginia Code § 58.1-623 and states that "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. [Emphasis added.]
Virginia Code § 58.1-633 A also provides 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.
The Taxpayer concedes that in some instances it did not obtain certificates of exemption from its customers to support the untaxed sales that were assessed in the audit. During and subsequent to the audit, the Taxpayer obtained exemption certificates from some of its customers. The Taxpayer provided the Department copies of the exemption certificates and other documentation with this appeal and in a supplemental filing with the Department.
Sales to Volunteer Fire Companies
The Taxpayer states that sales to volunteer fire companies were assessed in error for two reasons. First, the Taxpayer claims that volunteer fire companies are instrumentalities of the local Virginia governments that they serve and qualify for exemption from the sales and use tax pursuant to the government exemption. Virginia Code § 58.1-609.1 4 exempts from the tax “[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States.” In support of this claim, the Taxpayer cites Virginia Code § 27-6.02 A, which states:
Any county, city, or town may provide firefighting services to its citizens by (i) establishing a fire department as a department of government pursuant to § 27-6.1 or (ii) contracting with or providing for the provision of firefighting services by a fire company established pursuant to § 27-8.
Virginia Code § 27-6.02 B, also cited by the Taxpayer, then states:
In cases in which a county, city, or town elects to contract with or provide for the provision of firefighting services by a fire company pursuant to clause (ii) of subsection A, the fire company shall be deemed to be an instrumentality of the county, city, or town and, as such, exempt from suit for damages done incident to fighting fires therein.
The Taxpayer maintains that the cited statutes establish that volunteer fire companies are instrumentalities of Virginia political subdivisions and are entitled to the government exemption in Virginia Code § 58.1-609.1 4. Under the legal doctrine “noscitur a sociis” which translates to “it is known from its associates,” the meaning of a word “takes color and expression from the purport of the entire phrase of which it is a part and it must be read in harmony with its context.” Turner v. Commonwealth, 226 Va. 456, 309 S.E.2d 337 (1983). Therefore, the term “instrumentality” must be read in harmony with the rest of the language in Virginia Code § 27-6.02 B. In reading the entire statute, it is clear that the statute is limited in its application. The purpose of the statute is to exempt volunteer fire companies from suits for damages done incident to fighting fires. Thus, volunteer fire companies are considered instrumentalities only for the purpose of exempting them from lawsuits resulting from fighting fires.
This conclusion is supported by an opinion of the Virginia Attorney General dated October 19, 1990. This opinion discusses the application to volunteer fire and rescue companies of the state and local government exemption for state recordation taxes. The opinion states that the statutory language in Virginia Code § 27-23.6 (now Virginia Code § 27-6.02) limits the exemption to damage suits and does not provide tax exemptions for fire companies that are deemed instrumentalities of Virginia counties. The opinion further states that the Virginia legislature typically grants tax exemptions by specific legislative language. It is noted in the opinion, that at the time, there was a specific sales and use tax exemption in Virginia Code § 58.1-608 8 a for volunteer fire and rescue companies. This exemption was later recodified as Virginia Code § 58.1-609.8 1 and remained in effect through June 30, 2003.
Based on the foregoing and the doctrine of strict construction adopted by the courts in interpreting tax exemptions, volunteer fire companies do not qualify for sales and use tax exemption as instrumentalities of local Virginia governments.
Exemption for Nonprofit Organizations
The Taxpayer also contends that volunteer fire companies qualify for the sales and use tax exemption for nonprofit entities pursuant to Virginia Code § 58.1-609.11. The Taxpayer suggests that nonprofit organizations that meet the criteria set out in this statute qualify for the sales and use tax exemption, regardless of whether an exemption certificate has been obtained from the Department. For this reason, the Taxpayer believes that the sales transactions with nonprofit volunteer fire companies should be removed from the audit.
Prior to the enactment of Virginia Code § 58.1-609.11, there was no general sales and use tax exemption for nonprofit organizations. Individual nonprofit organizations or specific groups of organizations would seek legislation to obtain statutory exemptions from the retail sales and use tax. The enactment of Virginia Code § 58.1-609.11 created a general exemption from the sales and use tax that was available for certain nonprofit entities. The legislation eliminated the need for legislators to introduce multiple bills during each legislative session to enact individual exemptions for nonprofit organizations. The new legislation created a process in which nonprofit organizations must apply for the exemption and meet certain eligibility criteria. The Department is required to review nonprofit exemption applications to insure that an organization meets all the statutory criteria for the exemption. If the criteria are met, the Department then issues the qualifying organization an exemption certificate.
Virginia Code § 58.1-609.11 A provides, in pertinent part, that
Any nonprofit organization that holds a valid certificate of exemption from the Department of Taxation … that exempts it from collecting or paying state and local retail sales or use taxes as of June 30, 2003, pursuant to § 58.1-609.4, 58.1-609.7, 58.1-609.8, 58.1-609.9, or 58.1-609.10, as such sections are in effect on June 30, 2003, shall remain exempt from the collection or payment of such taxes under the same terms and conditions as provided under such sections as such sections existed on June 30, 2003, until … (iii) July 1, 2004, for the first one-half of such entities that were exempt under § 58.1-609.8 …. At the end of the applicable period of such exemptions, to maintain or renew an exemption for the period of time set forth in subsection E, each entity must follow the procedures set forth in subsection B and meet the criteria set forth in subsection C…. (Emphasis added.)
Subsection A of Virginia Code § 58.1-609.11 requires those organizations with existing exemptions to apply for renewal of the exemptions based on a timeline and the Code of Virginia section under which the organizations qualified for their existing exemptions. Nonprofit volunteer fire and rescue organizations qualified for exemption under Virginia Code § 58.1-609.8. The exemption for volunteer fire and rescue organizations was in the first half of this group of exemptions. As such, the exemption for nonprofit volunteer fire and rescue organizations was set to expire July 1, 2004. Each organization was required to file for the renewal of its sales and use tax exemption to extend it beyond the expiration date. However, 2004 legislation was later enacted that extended the expiration date through June 30, 2006 for volunteer fire and rescue organizations.
For nonprofit organizations that were not exempt from the sales and use tax as of June 30, 2003, Virginia Code § 58.1-609.11 B 1 states, in part,
On and after July 1, 2004, in addition to the organizations described in subsection A, and except as restricted in subdivision 2, the tax imposed by this chapter or pursuant to the authority granted in §§ 58.1-605 and 58.1-606 shall not apply to purchases of tangible personal property for use or consumption by any nonprofit entity that, pursuant to this section, (i) files an appropriate application with the Department of Taxation, (ii) meets the applicable criteria, and (iii) is issued a certificate of exemption from the Department of Taxation for the period of time covered by the certificate.
Subsection B allows nonprofit organizations that did not have an existing exemption as of July 1, 2003 to apply for an exemption. Subsection B states that organizations must meet three requirements to qualify for a nonprofit exemption. The nonprofit applicant must file an exemption application, meet the criteria in subdivision C and be issued a certificate of exemption by the Department. Based on the statutory provisions of both subsections A and B of Virginia Code § 58.1-609.11, nonprofit organizations are not exempt from the sales and use tax unless the Department has reviewed the organization’s nonprofit application and issued an exemption certificate to the nonprofit organization. As such, all vendors, including the Taxpayer, should have a nonprofit exemption certificate on file to support exempt sales made to each nonprofit customer that claims to be exempt.
The Taxpayer has obtained and provided the Department nonprofit exemption certificates for various customers. In some cases, the Taxpayer did not provide exemption certificates but furnished other evidence of customers’ nonprofit status. The information includes copies of the organizations’ Federal Form 990 filings and charitable organization registrations with the Virginia Department of Agriculture and Consumer Services. The Taxpayer suggests that the information provided confirms the nonprofit status of the customers and their eligibility for the sales and use tax exemption.
While I appreciate the Taxpayer’s efforts in providing this additional information, only valid nonprofit exemption certificates are acceptable as confirmation that a customer is exempt from the sales and use tax. It is true that nonprofit organizations applying for the exemption must submit to the Department information such as Form 990 returns and evidence of registration as charitable organizations. However, other statutory criteria must be met before the Department will grant a nonprofit exemption. The information submitted by the Taxpayer does not demonstrate that the customer’s nonprofit exemption has been or would be approved. The nonprofit exemption certificate issued by the Department is necessary to confirm the approval of an organization’s nonprofit exemption and that sales to the organization may be made exempt of the tax.
The Taxpayer has provided nonprofit exemption certificates for various customers. The effective date on some of the exemption certificates is subsequent to the month and year of the contested sales. Pursuant to P.D. 98-29, exemption certificates obtained by a dealer after the date of sale are subject to greater scrutiny and are acceptable if the Department can confirm that the use of the certificate was valid and proper for a specific transaction identified in an audit. P.D. 16-72 (5/6/16) confirms that a nonprofit exemption certificate is not valid for sales made prior to the effective date of the certificate. As a result, the exemption certificates furnished by the Taxpayer that were effective after the date of the sales transactions are not valid. These sales transactions will remain in the audit.
Based on the authorities cited in this section and the provisions of Title 23 VAC 10-210-280, the Taxpayer was required to charge the tax on sales made to nonprofit customers that did not present valid exemption certificates at the time of the sale. The Department’s policy is to accept nonprofit exemption certificates obtained after the date of sale if it can be verified that the customer’s use of the certificate is valid for the sales transaction at issue. A review of the nonprofit exemption certificates provided by the Taxpayer demonstrates that some have effective dates that are prior to the date of the sales transactions with the customers that issued the certificates. As such, these exemption certificates are valid and the sales transactions with the customers that provided the certificates will be removed from the audit.
The parts sales exceptions (listed by the line item number) to be removed from the audit are: line item numbers 12, 16, 29, 30, 31, 41, 48, 71 and 108. The following sales transactions from the repair sales exceptions list will be removed from the audit: line item numbers 9, 12, 15, 20, 21, 38, 39, 45 and 48.
Sales to Government Entities
Virginia Code § 58.1-609.1 4 provides, in pertinent part, an exemption from the sales and use tax for “tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States.” The Taxpayer has provided copies of the government exemption certificate, Form ST-12, to support the removal from the audit of untaxed sales to various government entities. In accordance with the Department’s policy, the certificates that were obtained by the Taxpayer after the date of sale have been reviewed with greater scrutiny.
The Taxpayer provided a Form ST-12 to support the removal from the audit of a sale to *****. The Form ST-12 contains the name of a Federal government entity as the purchaser. The Form ST-12 contains a typed statement that this customer is a cost-reimbursement government contractor and is authorized to purchase goods and services for the government agency listed on the form. The sales invoice was issued to the customer and not the government entity. Title 23 VAC 10-210-410 addresses the application of the tax to contractors. Subsection A of the regulation states, in pertinent part, that “[n]o sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency ….” Further, the Form ST-12 states that:
The undersigned, for and on behalf of the governmental agency named below, hereby certifies that all tangible personal property purchased or leased from the above named dealer on and after this date will be for use or consumption by a governmental agency, that each such purchase or lease will be supported by the required official purchase order, and that such tangible personal property will be paid for out of public funds.
The language used on the Form ST-12 is based on the provisions of Title 23 VAC 10-210-690. This regulation interprets the government exemption. In the instant case, the Form ST-12 is not valid on its face because the customer is not a government entity. No evidence was provided that a government purchase order was issued to the Taxpayer or that the purchase was paid for with public funds. Finally, the Form ST-12 is undated and does not contain any of the required dealer information. Based on the above, the customer is not eligible for the government exemption. The Form ST-12 issued by this customer cannot be accepted in good faith by the Taxpayer, either before or after the date of the sale.
P.D. 15-100 (5/11/15) further supports the Department’s position. This determination discusses an electrical contractor that was advised by a local government entity to issue suppliers Form ST-12 to make exempt purchases of job materials. The Tax Commissioner stated that the Form ST-12 is used exclusively by governmental entities to make exempt purchases from retail vendors and there is no pass-through of the government exemption to third parties.
The Department’s records indicate that the customer held a valid nonprofit exemption for the period of time during which the Taxpayer made the exempt sale. While the customer’s use of the Form ST-12 was not valid, the Taxpayer will be allowed 45 days to obtain from this customer a copy of its nonprofit exemption certificate. The transaction will be removed from the audit contingent on the Taxpayer providing the audit staff with a copy of the customer’s nonprofit exemption certificate.
The Taxpayer provided a Form ST-12 and other documentation for an untaxed sale to ***** Volunteer Fire Department. This information includes a copy of a check issued to the Taxpayer by a Virginia county as payment for an invoice issued to the fire department. A review of the check copy indicates that the payment amount does not match the invoice amount. There is additional confusion regarding the invoice numbers. It is unclear whether the county’s payment was for the invoice listed in the audit. Finally, the information on the invoice copy lists the fire department as the party that was responsible for the bill and as the party to receive shipment of the items purchased.
The sales invoice indicates that the equipment was shipped to the fire department’s address. It is clear that the items purchased are for the use or consumption of the fire department rather than the government entity that issued the Form ST-12. The government exemption requires that purchases must be for use or consumption by a government entity. Again, the Form ST-12 is not valid on its face. Based on the cited authorities and the information provided, there is no basis to remove the sales transaction with this customer from the audit.
The Department’s review confirms that the use of Form ST-12 certificates was valid for specific sales transactions with various customers listed in the audit. The following sales transactions from the parts sales exceptions list will be removed from the audit: line item numbers 35, 72, 73, 74, 75, 85, 86, 87, 88, 98, 99, 105 and 106. The following sales transactions from the repair sales exceptions list will be removed from the audit: line item numbers 23, 37, 40, 41 and 49.
Motor Vehicle Accessories
The Taxpayer sold fire trucks to two customers. Various accessories and equipment were sold in addition to the fire trucks. The auditor included the untaxed charges for the accessories and equipment in the sales sample. The Taxpayer maintains that the charges for the accessories and equipment were included in the sales price of the fire trucks and are exempt from the retail sales and use tax.
Subsequent to the filing of this appeal, the Taxpayer provided a valid nonprofit exemption certificate for one of the customers. I have agreed in the nonprofit exemption section of this determination to remove the sales transaction for this customer, which is listed as line item #12 in the parts sales exceptions list.
With respect to the sales transactions with the remaining customer, the auditor assessed the sales tax on charges billed on four invoices. The accessories and equipment sold include tires, fire hose, suction hose, poles and loose equipment. The Taxpayer maintains that the sale of these items with the fire truck qualifies for the retail sales and use tax exemption in Virginia Code § 58.1-609.1 2, which exempts “[m]otor vehicles, trailers, semitrailers, mobile homes and travel trailers.”
Virginia Code § 58.1-2402 imposes a motor vehicle sales and use tax upon the sale or use of motor vehicles in Virginia. Virginia Code § 58.1-2401 defines various terms for purposes of administering the motor vehicle sales and use tax. “Sales price” is defined, in part, as “the total price paid for a motor vehicle and all attachments thereon and accessories thereto, as determined by the Commissioner, exclusive of any federal manufacturers’ excise tax, without any allowance or deduction for trade-ins or unpaid liens or encumbrances.” The Taxpayer contends that the equipment and accessories were included in the sales price of the fire truck. As the fire truck is a motor vehicle that is subject to the motor vehicle sales and use tax, the equipment and accessories sold with the fire truck should be exempt from the retail sales and use tax. The Taxpayer provided supporting documentation that includes a buyer’s order, a bid worksheet, the certificate of origin and the invoices assessed in the audit.
Title 23 VAC 10-210-990 interprets the sales and use tax exemption for motor vehicles. Subsection C states, in part, that:
The retail sales and use tax does not apply to repair and replacement parts and accessories and oil and grease installed on a motor vehicle before or at the time of sale, lease or rental that are included in the sales price for measuring the motor vehicle sales and use tax or the retail sales and use tax. (Emphasis added.)
In accordance with Title 23 VAC 10-210-990 C, the motor vehicle sales and use tax exemption has two requirements. Parts and accessories must be installed on motor vehicles before or at the time of sale. In addition, the parts and accessories must be included in the sales price, as defined in Virginia Code § 58.1-2401, of the motor vehicle. It is unclear from the documentation provided whether the accessories and equipment were installed before or at the time the fire truck was sold. It also cannot be determined if the items at issue were included in the sales price of the motor vehicle.
The Taxpayer issued separate sales invoices for the accessories and equipment that were assessed in the audit. The buyer’s order for the truck is dated April 22, 2014. The invoice dates are May 12, May 13, May 16 and May 29, 2014. The invoice dates suggest that the accessories and equipment were added to the vehicle after the date of sale. For this reason, it cannot be confirmed that the accessories and equipment meet the first requirement of Title 23 VAC 10-210-990 C, i.e., that installation of the items on the vehicle occurred before or at the time of the sale of the vehicle.
An additional concern is that the amounts on the buyer’s order, the bid worksheet and the invoices cannot be reconciled. While the bid worksheet contains charges for various services and equipment, this is not conclusive evidence that the charges were included in the sales price of the fire truck as calculated for purposes of the motor vehicle sales and use tax. The buyer’s order lists a line item for the purchase price of the vehicle and a line item charge for changes made to the contract. However, the charge for the contract changes is less than the total of the four invoice charges. It is not clear if the contract change charges are related to or include some of the charges on the four invoices. In conclusion, the documentation does not demonstrate if the charges billed on the invoices at issue were included in the sales price of the fire truck.
It is also my opinion that some of the contested items are not includable in the sales price of the fire truck. It is unlikely that some of the accessories and equipment are installed in some manner on the fire truck. Some of the items, such as hook poles, fire hose, and an axe, are tools and equipment used by firefighters rather than repair or replacement parts and accessories for the truck. In contrast, charges for mounting brackets or storage cabinets used to store or hang the tools on the fire truck are properly includable in the vehicle’s sales price, when installed on the vehicle. One of the invoices lists a charge for loose equipment. This suggests that there was no installation of these items. Another invoice contains a single charge described as “changes to Hot Springs.” It cannot be determined from this description what the charge represents. Finally, the remaining invoice at issue lists a charge for a set of tires and installation. This is clearly a charge for replacement parts for the fire truck.
The charge qualifies for exemption if it was included in the sales price of the vehicle.
In reviewing the authorities cited for this issue and under the rule of strict construction of sales and use tax exemptions, the Taxpayer has not met its burden of proving that the sales on the four invoices are exempt from the tax. However, I will allow the Taxpayer an opportunity to provide additional information that allows the Department’s audit staff to revisit this issue. The audit staff must be able to verify that the charges on the invoices were included in the sales price of the fire truck. The Taxpayer must also demonstrate that the contested items were installed on the fire truck in some manner. The audit will be adjusted if it can be confirmed that the invoice charges qualify for exemption from the tax.
Church Exemption
The Taxpayer sold automotive parts exempt of the tax to a church. The church provided a Form ST-13A to claim the church exemption for the sale. The exemption certificate was deemed to be invalid by the auditor.
Virginia Code § 58.1-609.10 16 provides, in pertinent part, an exemption for “property used in caring for or maintaining property owned by the church ….” Title 23 VAC 10-210-310 interprets the exemption for churches and lists in subsection D examples of the types of property that qualify for the exemption. The list of exempt property includes repair parts, accessories, oil, and similar items for use in motor vehicles owned by churches. The sale to the church, listed as line item #110 in the parts sales exceptions list, will be removed from the audit.
Resale Exemption
The Taxpayer has furnished a copy of a resale exemption certificate, Form ST-10, that was obtained from one of its customers. A review of the exemption certificate and the sales transaction with this customer indicates that the certificate is valid. Line item #81 in the parts sales exceptions list will be removed from the audit.
CONCLUSION
As soon as practicable, a member of the Department’s audit staff will contact the Taxpayer to set up a mutually agreeable time to revise the audit in accordance with this determination. The Taxpayer should be prepared to furnish the documentation needed to support further adjustments to the audit. When the Department’s review is completed, the tax and interest overpayment as determined by the revised audit liability, plus applicable interest, will be refunded to the Taxpayer.
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 Laws, Rules and Decisions section of the Department’s website. If you have any questions concerning this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1411.S