Was a parts-and-labor maintenance contract for machinery used directly in manufacturing exempt from Virginia sales tax despite a late exemption certificate?

Subject

Maintenance contract for exempt manufacturing machinery was removed from the audit

Plain-English summary

Virginia removed a parts-and-labor maintenance contract from a sales-tax audit because it serviced exempt machinery used directly in manufacturing. The taxpayer had not held a valid exemption certificate when the contract was sold, and the later certificate was dated after the transaction.

That late certificate did not establish the exemption. Virginia nevertheless confirmed the actual use of the machinery and applied its published treatment exempting parts-and-labor maintenance contracts for qualifying manufacturing machinery. The single disputed sale was therefore removed from the assessment.

What this means for you

• A dealer normally bears the burden of proving that a sale is exempt.
• An exemption certificate obtained during or after an audit is not automatically valid for an earlier transaction.
• The Department may still examine the underlying transaction and customer use.
• Parts-and-labor maintenance contracts for machinery used directly in manufacturing were exempt under the cited Department policy.

Common questions

Did Virginia accept the updated exemption certificate?

No. It was dated after the contract sale and was not valid for that transaction.

Why was the sale removed anyway?

The Department independently confirmed that the contract covered exempt machinery used directly in the manufacturing process.

Did the ruling remove the whole audit?

It addressed and removed the single disputed maintenance-contract sale.

Citations and references

• 23 VAC 10-210-280(B).
• Virginia Public Documents 95-247 and 95-310.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-131

Original ruling text

July 12, 2010

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

Dear *:

This is in response to your letter written on behalf of * (the "Taxpayer") requesting correction of the retail sales and use tax assessment issued for the period of October 2005 through September 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a manufacturer of semi-conductor manufacturing equipment. The Taxpayer also sells repair parts and services. As a result of the Department's audit, the auditor disallowed a single exempt sale for which the Taxpayer did not have a valid exemption certificate in its possession. The sale was for a maintenance contract that included both repair parts and labor for the servicing of machinery used directly in the manufacturing process. The Taxpayer disagrees with the assessment of tax and has presented an updated certificate of exemption to support the exempt status of the sale at issue.

DETERMINATION

Title 23 of the Virginia Administrative Code 10-210-280 B states:

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 . . . . However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable.

Public Document 95-310 (12/08/95) states that certificates of exemption obtained during or after an audit situation will be accepted only if the Department can confirm that the customer's use of the certificate was valid and proper for the specific transaction. The certificate of exemption presented by the Taxpayer is not valid for the transaction at issue because it is dated after the contract sale date.

However, Public Document 95-247 (9/27/95) specifically exempts the sale of parts and labor maintenance contracts for manufacturing machinery from the retail sales and use tax. The Department has confirmed that the maintenance contract at issue is for exempt machinery used directly in the manufacturing process. Therefore, the sale of the contract is exempt and will be removed from the audit assessment.

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

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3673865219.M