Tax Type
Retail Sales and Use Tax
Description
Exemption certificates; Certificates secured after audit.
Topic
Exemptions
Date Issued
02-20-1998
February 20, 1998
Dear**********:
This is in reply to your letter in which you seek correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period January 1994 through December 1996. I apologize for the delay in our response.
FACTS
The Taxpayer is a wholesaler and a retailer selling automotive equipment and supplies. The department's audit disclosed that the Taxpayer entered into certain sales with customers in which the sales tax had not been collected. These untaxed sales are the basis of the assessment being contested.
The Taxpayer disagrees with the audit results, stating that the identified sales are not subject to the tax. In support of its contention, the Taxpayer has supplied the department with certificates of exemption from each of the subject customers stating that its reliance on such documentation is supported by Code of Virginia Sec. 58.1-623. Accordingly, the Taxpayer seeks a waiver of the department's assessment.
DETERMINATION
Certificates of Exemption
Title 23 of the Virginia Administrative Code (VAC) 10-210-280(A) interprets and supports Code of Virginia Sec. 58.1-623 by explaining that the burden of proving that the tax does not apply rests with a dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The language makes clear that the dealer is required to obtain a valid certificate of exemption from the purchaser at the time of the sale. The regulation further provides that the seller must use reasonable care and judgement in selling tangible personal property exclusive of the tax, even when an exemption certificate from the purchaser may be on file.
n response, the Taxpayer contends that it cannot be expected to police its customers to determine the ultimate use and disposition of the products sold, and further states that such an expectation is "clearly not in line with the policy established by the Department of Taxation.'
I note that within the context of the current audit, the Taxpayer did not have any certificates of exemption on file for the sales at issue. The Taxpayer was afforded an opportunity to secure exemption certificates from its purchasers in the event that the sales may have been exempt sales for resale. When a dealer is afforded a "second chance' to secure exemption certificates to support untaxed sales, the department's longstanding policy is to more closely evaluate the validity of the certificate. Accordingly, once the exemption certificates were presented to the auditor, the certificates, were acceptable only if the department was able to confirm that the customer's use of the certificate was valid and proper for the specific transaction. It was noted that the certificates furnished by the Taxpayer were not on file at the beginning of the audit. The absence of such certificates at the moment of the transaction indicates that such certificates were never accepted "in good faith.' I also note that the sales under protest were sales of consumable items used by auto body shops, and were not entitled to the exemption under a resale certificate.
The department's position with respect to exemption certificates and exempt sales is based on the provisions of Code of Virginia Sec. 58.1-623, and as interpreted by 23 VAC 10-210-280. Of equal importance are the provisions of Code of Virginia Sec. 58.1-203(A) which give the Tax Commissioner "the power to issue regulations relating to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department.' Code of Virginia Sec. 58.1-205(2) then states that "[a]ny regulation ... shall be sustained unless unreasonable or plainly inconsistent with applicable provisions of law.' In support, the courts have also agreed that the Tax Commissioner's construction of a tax statute is entitled to great weight (see Commonwealth. Dep't of Taxation v. Wellmore Coal Corp., 228 Va. 149, 320 S.E.2d 509(1984)).
Additionally, I have enclosed copies of previous rulings, P.D.'s 90-16, 01/11/90, and 97-467, 12/02/97, which further detail the department's longstanding position.
In a separate issue, the Taxpayer states that specific sales held in the audit sample were also included as taxable purchases in the audit of one of its customers. In the event that the specific sales in question were taxed in an audit of the Taxpayer's customer, there is sufficient cause for an adjustment of the audit. I will have the auditor review this issue to determine if an adjustment is appropriate.
Purchaser liability for tax
Alternatively, the Taxpayer states that the liability for payment of the tax falls on the purchaser, and that the assessment, if not waived based on the provision of the exemption certificates, should be withdrawn on this point.
Code of Virginia Sec. 58.1-612 legally requires the dealer to collect and remit the sales tax on all sales or leases of tangible personal property. In contrast, Code of Virginia Sec. 58.1-625 also makes the tax the legal debt of the purchaser. This has been recognized by the federal courts, which have held that "the legal incidence of the Virginia sales and use tax is on the purchaser' United States v. Forst. 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir 1978). In light of the construction of these two statutes, it has been the department's longstanding position that the department may proceed against either the retailer or the purchaser for payment of the tax liability. (See P.D. 88-78, 05/10/88, copy enclosed).
Unfortunately, based on the foregoing, I find no basis for correction of the department's assessment, pending the auditor's review of the specific sales which may have been included as purchases in an audit of the Taxpayer's customer. Accordingly, I will refer this matter back to the department's****** District Office. The auditor will make any appropriate adjustments within 30 days from the date of this letter. The Taxpayer will then receive an updated assessment with interest accrued through the date of the Taxpayer's protest letter, August 13, 1997. Once the Taxpayer has received a revised assessment, the Taxpayer will have 30 days to submit its payment. If payment is not received within the allotted time, interest will accrue on the unpaid balance.
If you should have any additional questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Dear**********:
This is in reply to your letter in which you seek correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period January 1994 through December 1996. I apologize for the delay in our response.
FACTS
The Taxpayer is a wholesaler and a retailer selling automotive equipment and supplies. The department's audit disclosed that the Taxpayer entered into certain sales with customers in which the sales tax had not been collected. These untaxed sales are the basis of the assessment being contested.
The Taxpayer disagrees with the audit results, stating that the identified sales are not subject to the tax. In support of its contention, the Taxpayer has supplied the department with certificates of exemption from each of the subject customers stating that its reliance on such documentation is supported by Code of Virginia Sec. 58.1-623. Accordingly, the Taxpayer seeks a waiver of the department's assessment.
DETERMINATION
Certificates of Exemption
Title 23 of the Virginia Administrative Code (VAC) 10-210-280(A) interprets and supports Code of Virginia Sec. 58.1-623 by explaining that the burden of proving that the tax does not apply rests with a dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The language makes clear that the dealer is required to obtain a valid certificate of exemption from the purchaser at the time of the sale. The regulation further provides that the seller must use reasonable care and judgement in selling tangible personal property exclusive of the tax, even when an exemption certificate from the purchaser may be on file.
n response, the Taxpayer contends that it cannot be expected to police its customers to determine the ultimate use and disposition of the products sold, and further states that such an expectation is "clearly not in line with the policy established by the Department of Taxation.'
I note that within the context of the current audit, the Taxpayer did not have any certificates of exemption on file for the sales at issue. The Taxpayer was afforded an opportunity to secure exemption certificates from its purchasers in the event that the sales may have been exempt sales for resale. When a dealer is afforded a "second chance' to secure exemption certificates to support untaxed sales, the department's longstanding policy is to more closely evaluate the validity of the certificate. Accordingly, once the exemption certificates were presented to the auditor, the certificates, were acceptable only if the department was able to confirm that the customer's use of the certificate was valid and proper for the specific transaction. It was noted that the certificates furnished by the Taxpayer were not on file at the beginning of the audit. The absence of such certificates at the moment of the transaction indicates that such certificates were never accepted "in good faith.' I also note that the sales under protest were sales of consumable items used by auto body shops, and were not entitled to the exemption under a resale certificate.
The department's position with respect to exemption certificates and exempt sales is based on the provisions of Code of Virginia Sec. 58.1-623, and as interpreted by 23 VAC 10-210-280. Of equal importance are the provisions of Code of Virginia Sec. 58.1-203(A) which give the Tax Commissioner "the power to issue regulations relating to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department.' Code of Virginia Sec. 58.1-205(2) then states that "[a]ny regulation ... shall be sustained unless unreasonable or plainly inconsistent with applicable provisions of law.' In support, the courts have also agreed that the Tax Commissioner's construction of a tax statute is entitled to great weight (see Commonwealth. Dep't of Taxation v. Wellmore Coal Corp., 228 Va. 149, 320 S.E.2d 509(1984)).
Additionally, I have enclosed copies of previous rulings, P.D.'s 90-16, 01/11/90, and 97-467, 12/02/97, which further detail the department's longstanding position.
In a separate issue, the Taxpayer states that specific sales held in the audit sample were also included as taxable purchases in the audit of one of its customers. In the event that the specific sales in question were taxed in an audit of the Taxpayer's customer, there is sufficient cause for an adjustment of the audit. I will have the auditor review this issue to determine if an adjustment is appropriate.
Purchaser liability for tax
Alternatively, the Taxpayer states that the liability for payment of the tax falls on the purchaser, and that the assessment, if not waived based on the provision of the exemption certificates, should be withdrawn on this point.
Code of Virginia Sec. 58.1-612 legally requires the dealer to collect and remit the sales tax on all sales or leases of tangible personal property. In contrast, Code of Virginia Sec. 58.1-625 also makes the tax the legal debt of the purchaser. This has been recognized by the federal courts, which have held that "the legal incidence of the Virginia sales and use tax is on the purchaser' United States v. Forst. 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir 1978). In light of the construction of these two statutes, it has been the department's longstanding position that the department may proceed against either the retailer or the purchaser for payment of the tax liability. (See P.D. 88-78, 05/10/88, copy enclosed).
Unfortunately, based on the foregoing, I find no basis for correction of the department's assessment, pending the auditor's review of the specific sales which may have been included as purchases in an audit of the Taxpayer's customer. Accordingly, I will refer this matter back to the department's****** District Office. The auditor will make any appropriate adjustments within 30 days from the date of this letter. The Taxpayer will then receive an updated assessment with interest accrued through the date of the Taxpayer's protest letter, August 13, 1997. Once the Taxpayer has received a revised assessment, the Taxpayer will have 30 days to submit its payment. If payment is not received within the allotted time, interest will accrue on the unpaid balance.
If you should have any additional questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Rulings of the Tax Commissioner