Was a medical-equipment service contract exempt when a resale certificate was obtained after audit and the contract named a third-party vendor as purchaser?

Subject

Post-audit resale certificate did not prove the maintenance contract was exempt

Plain-English summary

Virginia upheld tax on the medical-equipment service-and-supplies contract. The seller had treated the sale as exempt without a certificate, then obtained a resale certificate from a third-party vendor after the audit began.

A late certificate was not automatically invalid, but it received greater scrutiny because it had not been accepted in good faith at the time of sale. The seller needed transaction-specific evidence that the third party's resale use was valid.

The contract named the third party as purchaser and made its terms binding between the seller and that vendor. The agreement between the third party and nonprofit hospital was not provided. Performing maintenance on hospital-owned equipment did not prove that the seller had made a direct exempt sale to the hospital.

What this means for you

• Sales were presumed taxable until exemption was established.
• A certificate obtained after audit required supporting evidence for the specific transaction.
• Contract language identifying the purchaser could outweigh later billing-agent characterizations.
• A nonprofit end user did not automatically exempt an upstream sale to another business.

Common questions

Was the late certificate automatically rejected?

No, but Virginia required greater scrutiny and confirmation that its use was valid and proper.

Why did the hospital exemption fail?

The contract identified the third party as purchaser, and no downstream agreement proved that it merely billed for a direct hospital sale.

Citations and references

• Va. Code § 58.1-623.
• 23 VAC 10-210-280(A).
• P.D. 98-29.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-74

Original ruling text

May 26, 2009

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

Dear *:

This is in response to your letter in which you seek correction of a retail sales and use tax audit assessment issued to * (the "Taxpayer") for the period January 2005 through December 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is engaged in sales and services of medical imaging, diagnostic, and therapeutic equipment. The Department's audit disclosed that the Taxpayer made an exempt sale of a service and supplies contract on equipment that was not supported by a certificate of exemption. The Taxpayer contests the tax assessed on the service and supplies contract and claims the contract qualifies as an exempt sale to a nonprofit hospital and billed through a third party vendor. The Taxpayer subsequently obtained a resale certificate of exemption from the third party vendor; however, the auditor disallowed the certificate because it was not sufficient to determine if the sale qualifies for exemption.

DETERMINATION

Virginia Code § 58.1-623 states that [a)II 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 tree property is exempt under this chapter."

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A states:

All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the 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 .... A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

The Department has previously ruled in Public Document (P.D.) 98-29 (2/20/98) that the absence of an exemption certificate at the time of a sales transaction indicates the certificate was never accepted in good faith. Thus, exemption certificates obtained after the start of an audit cannot be accepted "in good faith" and are subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during audit.

In this instance, the Taxpayer provided a resale exemption certificate for the contested service and supplies contract after the audit was in progress. The auditor denied the exemption certificate because it alone was insufficient to determine if the use of the resale exemption was valid for the transaction. Because the third party vendor is a provider of clinical equipment maintenance services, the auditor needed to review the agreement between the third party vendor and the hospital to determine if the certificate of exemption was valid for the transaction. The agreement was not provided.

The Taxpayer now maintains that the service and supplies contract is an exempt sale between the Taxpayer and a nonprofit hospital, and that the third party is only providing billing services. The Taxpayer relies on the service and supplies contract and license agreement to support its contention.

A review of the service and supplies contract shows the Taxpayer agrees to provide corrective and preventative maintenance for the products described in the contract. The third party vendor is listed in the contract as the purchaser of the service and supplies contract. In addition, the contact clearly states the terms and conditions of the contract are binding between the Taxpayer and the third party vendor. Further, the fact that the Taxpayer is providing the corrective and preventative maintenance on the hospital-owned equipment does not provide supportive evidence that the service and supplies contract is a sale to the nonprofit hospital. Based on this information, I cannot agree with the Taxpayer's claim that the sale of the service and supplies contract qualifies as an exempt sale to the nonprofit hospital.

Pursuant to Va. Code § 58.1-623, VAC 10-210-280 A and P.D. 98-29, the Taxpayer has not met its burden of proving that the sale of the service and supplies contract is an exempt sale.

CONCLUSION

Based on the foregoing, there is no basis to make any adjustment to the Department's audit assessment. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of the bill.

The Code of Virginia section, regulation and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2163754861.T