When could a Texas seller accept a resale or exemption certificate in good faith, and could the purchaser invoke good faith when issuing it?

Plain-English summary

A metal-storage-tank manufacturer disputed an auditor's treatment of resale or exemption certificates, including a certificate issued for paint masks used in manufacturing.

The Comptroller said a purchaser could not use a "good faith" defense for issuing a certificate. For a seller, a signature alone was insufficient. Good-faith acceptance required a properly completed, facially valid certificate taken at or before the sale, no actual knowledge that the transaction failed to qualify, attention to whether the purchaser's business normally resold the items, and a complete and valid exemption reason.

A seller was not required to police a customer when those conditions were met, but no seller could claim good faith for a certificate obtained after the transaction.

The requester manufactured metal storage tanks and appeared to use, rather than resell, the paint masks. The letter therefore said COMPANY A could not accept a resale certificate for them in good faith. If the masks qualified for a manufacturing exemption under Rule 3.300, the purchaser instead had to issue a properly completed exemption certificate.

What this means for you

Certificate protection depended on timing, completeness, facial validity, and the seller's knowledge of the customer's ordinary business. A resale certificate was not interchangeable with a manufacturing-exemption certificate.

Common questions

Could the purchaser argue that it issued a certificate in good faith? No.

Was a signed certificate automatically sufficient? No.

When did the seller have to receive it? At or before the sale.

Did the seller have to investigate every customer? Not when a timely certificate was complete and valid on its face and the seller had no contrary knowledge.

Why was the paint-mask resale certificate problematic? Metal-tank manufacturers normally used paint masks rather than reselling them.

Citations and references

• 34 Tex. Admin. Code Rule 3.285 — resale certificates
• 34 Tex. Admin. Code Rule 3.287 — exemption certificates
• 34 Tex. Admin. Code Rules 3.286 and 3.288 — also identified as audit guidelines in the letter
• 34 Tex. Admin. Code Rule 3.300 — possible manufacturing exemption for the paint masks

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9105L1110D06

Original ruling text

May 20, 1991

Dear **:

I am writing in response to your second letter regarding the good
faith issuance and/or acceptance of certificates in lieu of tax.
I should explain that I was not trying to evade answering your
questions.

I will preface this letter with the statement that the auditor is
on site and is aware of more information than can be conveyed to
me in a letter. However, the guidelines used to audit and those
used to write this response are the same. These are found in
Rules 3.286, 3.285, 3.287, 3.288, and the applicable statute
references. I have enclosed copies of these for your information.
I am also including copies of administrative hearings that have
been issued on these topics.

Secondly, a purchaser cannot use the "good faith" argument in
relation to his issuance of resale or exemption certificates. Now
to your specific questions.

1) If we accept a signed certificate in good faith, can an
auditor refuse the signed certificate?

Yes. Signature (nor any of the enumerated criteria) alone
does not complete good faith. The seller may think he is
accepting a certificate in good faith, but the certificate
may be facially invalid. Rules 3.285 regarding resale
certificates and 3.287 regarding exemption certificates set
out the basic criteria that establishes food faith
acceptance. 1) The properly completed and valid certificate
must be accepted 2) at or before the time of sale in order
for good faith to apply. 3) The seller must not have any
actual knowledge that the sale is not a sale for resale. 4)
In connection with number 3, the seller is responsible to
notice the type of business of the purchaser and evaluate
whether the items being purchases are the type that would
normally be resold in the purchaser's business. 5) The rea-
son given on an exemption certificate must be a complete and
valid claim to exemption. For example, if the resale certificate
is incomplete or attempts to cover items that the
purchaser would normally use in the regular course of
business, rather than resell in the regular course of
business, the certificate is invalid on its face and should
not be accepted in good faith even at the time of sale.

Again, please review the copies of hearings or partial
hearings which I have enclosed. I believe these will provide
examples as requested in your second question.

3) Please give me a definition of good faith. COMPANY A
accepted our certificate in good faith and the sales tax
auditor refused it. What is good faith?

Good faith is better described than defined. It is a condition
of trusting the information provided to the seller by
his customer balanced with the seller's responsibilities for
collecting and remitting taxes or proper certificates in lieu
of the taxes that may be due on a given transaction. I feel
I should point out that no seller may claim good faith when
the certificate is taken after the transaction occurs.

This agency has taken the position that the seller is not
required to "police" or "question" his customers when the
certificate is properly completed and is valid on its face
and is given to the seller by the purchaser at or before the
time of the transaction. However, sellers have basic
responsibilities to the state for insuring that taxes are
accurately collected and remitted. Please review the response
to your first question, the response dated March 26, and the
enclosed hearings and rules.

Specifically regarding the certificate issued for the paint
masks, your company manufactures metal storage tanks. It
appears to me that the paint masks are purchased for use by
your employees when manufacturing these metal storage tanks.
It does not appear that your company is reselling the paint
masks in the regular course of business. If the paint masks
qualify for exemption based upon Rule 3.300 regarding
manufacturing exemptions, etc., then **** is correct.
Your company was responsible to issue a properly completed and
valid exemption certificate to COMPANY A. You may also be
purchasing other items from COMPANY A that require a resale
certificate to be issued. It is my opinion based upon the
limited facts available to me that COMPANY A could not
accept a resale certificate in good faith, because paint
masks are not normally resold by manufacturers of metal
storage tanks; they are normally used by those businesses.

As a final comment, it is my understanding based upon telephone
conversations with the auditor that certificates which COMPANY A
had on hand at the time the audit was initiated were not
disallowed for the audit period, although some could have been
disallowed. Any of the certificates that were partially incorrect
or that were on old forms, etc., were being updated.

This opinion is based on the facts presented. If there are
additional or different facts, the opinion may change.

You may also write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,

Tax Administration Division