April 13, 2022
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 for the period September 2015 through July 2018. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a manufacturer and distributer of various fabrics. As a result of the Department’s audit, the Taxpayer was assessed sales tax on untaxed sales to customers where the auditor determined the resale exemption certificates were not on file at the time of the transaction. The Taxpayer appeals, contending that the sales transactions were to exempt customers and should be removed from the audit. The Taxpayer also disputes the assessed penalties.
DETERMINATION
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 or 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.” Title 23 VAC 10-210-280 B then states that “[r]easonable care and judgement 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 items of tangible personal property not covered by the exact wording of the certificate”.
In accordance with Public Document (P.D.) 01-36 (4/11/2001), when a dealer is afforded the opportunity to secure exemption certificates to support untaxed sales after the performance of an audit, the Department's longstanding policy is to more closely evaluate the validity of the certificate because the taxpayer did not originally rely on the certificate to make the exempt sale.
The Department has well settled policy regarding the date of an exemption certificate. If the exemption certificate is dated after the sales transaction, it cannot be deemed to have been accepted in good faith for transactions occurring before its receipt. In such instances, an exemption claim is subject to greater scrutiny. See P.D. 98-29 (2/20/1998), P.D. 04-75 (8/25/2004), P.D. 10-201 (8/31/2010) and P.D. 17-114 (6/29/2017).
In accordance with the aforementioned policies, the exemption certificates furnished by the Taxpayer have been reviewed and the use of the certificate for the sales in question evaluated. Certificates for each customer listed below were not on file at the time of the audit.
***** (Customer 1)
According to the Taxpayer, Customer 1 claims that it does not have to pay sales tax. The Taxpayer, however, has provided no additional documentation to support a finding that Customer 1 is eligible to make purchases of tangible personal property exempt of the Virginia sales tax.
***** (Customer 2)
The Taxpayer provided a copy of the exemption certificate from Customer 2 with the appeal. The exemption certificate is dated January 2019, which is after the conclusion of the audit period, and therefore cannot be deemed to have been accepted in good faith for transactions occurring before its receipt. Further, after a review of the Department’s records, Customer 2 was not registered at the time of the purchase recorded on the exceptions list.
***** (Customer 3)
The Taxpayer provided an exemption certificate from Customer 3 with the appeal. However, the certificate is not dated, and therefore does not comply with the requirements of Virginia Code § 58.1-623 B. In addition, the Department’s records do not show that Customer 3 was registered at the time of the purchase recorded on the exceptions list.
Under these circumstances, the Taxpayer has failed to show these exemption certificates were accepted in good faith and further examination of these the information provided reveals the certificates could not have been valid at the time of the transactions.
Penalty
Virginia Code §58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 provides that the application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer’s compliance ratio. In second generation audits, the penalty will generally be applied unless the taxpayer’s compliance ratios meet or exceed 85% for sales tax and 60% for use tax. In this second generation audit, the Taxpayer’s use tax compliance ratio was 0%. The Taxpayer is required to remit all sales tax collected to the Department. Upon examination of the tax payable account, it was determined the Taxpayer did not remit all tax collected to the Department. Thus, penalty was properly applied.
Amnesty Penalty
The 2017 General Assembly enacted legislation establishing a Tax Amnesty program, spanning a 60-75 day period that was administered by the Department. The Guidelines for the Virginia Tax Amnesty Program are addressed in P.D. 17-156 (9/5/2017). Taxpayers with delinquent returns for amnesty-eligible periods qualified for amnesty benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties. The amnesty-eligible periods for ongoing field audits is the month of April 2017 and prior. Since the audit period includes months prior to April 2017, the amnesty penalty must be assessed.
CONCLUSION
After review of the above authorities and the documentation provided by the Taxpayer, I find no basis to remove the sales to the customers at issue from the audit or grant relief for the penalties assessed. Accordingly, the audit assessment is upheld in its entirety. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill.
The Code of Virginia sections, regulations 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 determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1993.A