Rulings of the Tax Commissioner

August 21, 2024

Re: § 58.1-1821 Appeal: Retail Sales and Use Tax    

Dear *****:

This will reply to your letter submitted on behalf of ***** (the “Taxpayer”) in which you dispute the denial of a retail sales and use tax refund for the period January 2018 through July 2020. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a manufacturer of medical devices and equipment, submitted a refund claim for the taxable period at issue contending that it had erroneously remitted tax on exempt sales. To support its claim, the Taxpayer submitted exemption certificates from several customers involved in transactions on which sales tax was remitted, but not collected. The refund claim was reviewed and denied in full because the exemption certificates provided by customers were not valid. The Taxpayer filed an application for correction, asserting that the certificates support the allowance of the exemption. 

DETERMINATION

Exemption Certificates 

Virginia Code § 58.1-623 A provides “[a]ll sales or leases are subject to the tax until the contrary is established.” 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 provides 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 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.”

The reasonable care and judgement standard is addressed in International Paper Company v. Virginia Department of Taxation, CL-2009-360, Circuit Court of Fairfax County, July 29, 2010, also issued as Public Document (P.D.) 10-258 (10/25/2010). The Court held that a dealer could satisfy the good faith and reasonable care and judgment standards in taking a certificate to the effect that the acceptance is exempt if: 

Upon a facial examination of the certificate, a dealer could reasonably conclude that the items purchased could potentially be used for any of the exempt purposes claimed on the certificate of exemption; or 

Based upon the actual dealer’s knowledge of the business of its purchaser, the dealer could reasonably determine in good faith that the specific purchaser intended to use the items purchased for one or more of the exempt purposes claimed on the certificate of exemption. 

The standard addressed in International Paper Company is applicable only when a valid certificate is received and retained at the time of sale and can be produced by the dealer at the time of an audit. The absence of a valid exemption certificate at the time of a sales transaction indicates that the certificate was not accepted in good faith. This longstanding policy has been reiterated in numerous determinations. For example, see P.D. 98-29 (2/20/1998), P.D. 04-75 (8/25/2004), P.D. 10-201 (8/31/2010), P.D. 16-1 (2/2/2016), P.D. 20-57 (7/28/2020), and P.D. 23-99 (8/17/2023).

When a dealer fails to receive a valid certificate at the time of sale, the “good faith acceptance” privilege is invalidated, and the dealer becomes subject to the tax that was not applied to the transaction. Under audit, the dealer has the responsibility to prove the transaction is exempt. In addition, the Department applies “greater scrutiny” to determine whether the transaction is exempt. The Department may perform a search of its records to determine if the customer has a registration number, a sales and use tax return filing history, or other records indicating a particular purchaser may be exempt. Once this search is performed, the Department can reasonably conclude whether the purchase made by the customer would qualify for an exemption. The Department takes these additional steps because dealers do not have access to the registration and filing histories of their customers and, therefore, cannot reasonably be expected to provide such scrutiny regarding the acceptance of exemption certificates. Exemption certificates are acceptable only if the Department can confirm that a purchaser’s use of the certificate was valid and proper for a specific transaction identified during an audit.

The exemption certificates furnished by the Taxpayer during the audit where received after the sales transactions at issue and have been reviewed and their use evaluated. Each customer listed below purchased medical equipment from the Taxpayer. Virginia Code § 58.1-609.11 was enacted to create an administrative process enabling the Department to issue sales tax exempt status to qualifying nonprofit organizations in lieu of requesting exemptions from the legislature.

***** (Customer 1)

The Taxpayer claims that the equipment it sold to ***** (the “Purchaser”) was covered by the exemption certificate provided by Customer 1. Because the name on the exemption certificate did not match, the auditor concluded that the certificate was completed incorrectly and disallowed the exemption. An exemption certificate for nonprofits was issued by ***** (Business A). It is unclear what the relationship is between Customer 1, Business A, and the Purchaser. 

The Taxpayer has provided a Certificate of Trade Name and certificate from the State Corporation Commission of Virginia that shows that ***** (Business B) is operating as Customer 1. As such, it contends that the exemption certificate applies to the Purchaser. 

In P.D. 12-68 (5/3/2012), the Department accepted an exemption certificate that listed an entity’s legal name as the purchaser, while the trading-as name was the customer’s name. The Department deemed this exemption certificate acceptable because the Department was able to independently verify the customer was entitled to claim the exemption. In this case, the Department searched its records, but was unable to verify that Customer 1 was entitled to use the exemption certificate. 

***** (Customer 2)

The Taxpayer contends that the exemption certificate provided by Customer 2 confirmed that the medical equipment that it sold was exempt. Several exemption certificates were submitted for Customer 2 in regard to the refund request. The first, dated October 19, 2020, was for the purchase of industrial materials used directly in processing, manufacturing, refining, mining or converting products for sale or resale and for equipment, materials or supplies used directly in the production of a publication for sale of free distribution pursuant to Virginia Code § 58.1-609.3 2 (iii) and § 58.1-609.6 3 respectively. The second exemption certificate, dated February 22, 2021, exempted the Taxpayer from collecting sales tax from Customer 2 pursuant to the manufacturing exemption only. The Taxpayer’s refund claim was for transactions that occurred between January 2018 and July 2020, before any of the exemption certificates were issued. 

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. 17-114 (6/29/2017) and P.D. 22-69 (4/13/2022). Exemption certificates are acceptable only if the Department can confirm that the customer’s use of the certificate is valid and proper for the specific transaction. See P.D. 98-29. It appears that the Taxpayer may qualify for the manufacturing exemption because Customer 2 is a manufacturer of disposable medical devices. 

Under such circumstances, the Department utilizes a number of inquiry steps to determine whether the transactions at issue are exempt. The Department’s auditor begins by investigating the tax compliance of the customer by performing a search of the Department’s registration and accounting databases for the customer’s registration status and filing and payment history of sales tax and use tax returns. Once the auditor confirms the customer’s registration and filing history (or lack thereof), the auditor can reasonably conclude whether the purchases made by the customer would be exempt sales for resale (or another exemption) and, if warranted, will remove the sales transactions corresponding to the customer from the audit exceptions list. See P.D. 16-104 (5/25/2016). 

CONCLUSION 

The exemption certificate issued to the Taxpayer by Customer 1 did not fulfill the certificate requirements because the name on the certificate did not match the name of the Purchaser. An exemption certificate was, however, issued to Business A. It appears that Customer 1, Business A, Business B, and the Purchaser are all related. The exemption certificate used by Business A does not include all of its related businesses. Accordingly, the refund request for Customer 1 is denied.

The sales to Customer 2 occurred before either of the exemption certificates were issued and it cannot be confirmed whether the medical equipment it purchased were used directly in the manufacturing process. The audit staff, however, did not review Customer 2’s registration status and filing and payment history of sales tax and use tax returns. As such, the exemption claim was not strictly scrutinized. 

In accordance with this determination, the refund request will be returned to the audit staff to perform the Department’s greater scrutiny procedures. If additional information is required from the Taxpayer, audit staff will set up a mutually agreed upon time for such information to be provided. Audit staff will review the Taxpayer's documents, make adjustments as appropriate, and issue an updated audit report. If the audit results in an overpayment, a refund will be issued along with any refund interest in accordance with the Guidelines for Retail Sales and Use Tax Refund Claim Procedures, published as P.D. 17-98 (6/12/2017). If the audit results in an underpayment, the Department will only be permitted to issue assessments within the statute of limitations provided under Virginia Code § 58.1-634.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) ***** or email at *****@tax.virginia.gov.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/3808.B