Which graphic-printing audit items did Virginia remove after reviewing late certificates, invoices, shipment records, and customer facts?

Plain-English summary

Virginia removed five audit items but kept the remaining disputed transactions because the certificates and records had to support the exact exemption claimed. The graphic printer submitted exemption forms and other documents after an earlier determination.

Government, manufacturing, and resale certificates failed when they were incomplete, undated, furnished after audit began, used by a private company claiming a government exemption, described property outside the certificate language, listed an implausible customer business, or lacked the related invoice.

Virginia accepted a late resale certificate for line 43 and customer website evidence for line 35, but only for this audit, because the customer facts reasonably supported resale.

Items 2, 5, and 6 were removed because invoices showed shipment outside Virginia or an art charge connected to the out-of-state order. Virginia kept Virginia-delivered property described as labor, fleet graphics without a resale certificate, a resale claim with no support, and a claim of tax paid elsewhere contradicted by Virginia bill-to and ship-to addresses.

What this means for you

• Take complete exemption certificates in good faith when the sale occurs.
• Match the customer's business and purchased property to the certificate wording.
• Keep invoices and shipment records for out-of-state sales.
• Do not label tangible printed products as labor without supporting transaction facts.

Common questions

Q: Which line items were removed?
A: 2, 5, 6, 35, and 43.

Q: Were all late certificates rejected?
A: No, but Virginia scrutinized them closely and accepted two resale claims only for this audit.

Q: Why did most disputed items remain?
A: The taxpayer did not prove the exact exemption or out-of-state tax treatment claimed.

Citations and references

• Va. Code §§ 58.1-205, 58.1-609.1(4), 58.1-609.3(2), and 58.1-623.
• 23 VAC 10-210-280.
• Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973).
• Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1972).
• Virginia Public Document 01-36 (April 11, 2001).

Subject

Subtractions and Exclusions, Taxable Transactions

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-137

Original ruling text

July 28, 2011

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period February 2002 through January 2008. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a large format, graphic printing company located in *. In its original appeal, the Taxpayer contested the inclusion of certain transactions in the audit. A determination letter was issued stating the Taxpayer had not met its burden of proving that the assessment was incorrect. Upon receipt of the determination letter, the Taxpayer contacted the Department, indicating it had exemption certificates to provide in support of its contention that the assessment as issued is incorrect. This determination is based upon a review of those exemption certificates and other supporting documentation provided by the Taxpayer. The contested transactions will be addressed below based upon the Taxpayer's explanation as to why the transactions are not subject to the retail sales and use tax.

DETERMINATION

Virginia Code § 58.1-623 A states:

All 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 the property is exempt under this chapter.

Virginia Code § 58.1-623 B provides, in pertinent 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 10-210-280 B states:

Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent of 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.

Finally, Virginia Code § 58.1-205 states, "Any assessment of a tax by the Department shall be deemed prima facie correct." The burden of proving the assessment is incorrect is upon the taxpayer.

Exemption Certificates

The Taxpayer maintains that it accepted exemption certificates for the transactions reflected in the following line items and as a result, the transactions are exempt of the retail sales and use tax.

Line Item 17

The exemption certificate provided for review is incomplete, undated, and it was provided to the Taxpayer after the start of the audit 1 . A government exemption certificate was provided; however, the customer is not the Commonwealth, or a subdivision of the Commonwealth or the federal government as required by Va. Code § 58.1-609.1 4. Based upon a review of the customer's website, the customer is a private company.

"Statutes granting tax exemptions are construed strictly against the taxpayer." Commonwealth v. Community Motor Bus Co., Inc. , 214 Va. 155, 198 S.E.2d 619 (1973). "Exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption." Golden Skillet Corp. v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1972). Pursuant to Public Document 01-36 (4/11/01), when a dealer is afforded the opportunity to secure exemption certificates to support untaxed sales, after the performance of an audit, the Department's long-standing policy is to more closely evaluate the validity of the certificate because the taxpayer did not originally rely on the certificate to make the exempt sale.

In this instance, the exemption certificate at issue is more closely evaluated because it was provided to the Taxpayer after the start of the audit. The exemption certificate is invalid on its face because the Taxpayer's customer is not a government entity and is not entitled to the government exemption provided under Va. Code § 58.1-609.1 4. Additionally, pursuant to Va. Code § 58.1-623 B and the aforementioned case law and public document, the exemption certificate is invalid because it is incomplete. Accordingly, the transaction at issue is not exempt of the retail sales and use tax, and this line item will remain in the audit.

Line Item 18

The Taxpayer provided an industrial manufacturing exemption certificate for review with respect to the transaction at issue. The products, sold by the Taxpayer are not "industrial materials used for future manufacturing, processing, refining, or conversion into articles of tangible personal property" as claimed on the exemption certificate and required by Va. Code § 58.1-609.3 2. Additionally, the exemption certificate was provided by the Taxpayer's customer after the start of the audit. 2 Furthermore, the exemption certificate is incomplete and has an invalid date. Pursuant to the aforementioned references, the exemption certificate is invalid. Accordingly, the transaction at issue is not exempt of the retail sales and use tax, and this line item will remain in the audit.

Line Item 31

The exemption certificate is undated and incomplete. Additionally, the exemption certificate was provided to the Taxpayer after the start of the audit. 3 Pursuant to the aforementioned references, the exemption certificate is invalid. Accordingly, the transaction at issue is not exempt of the retail sales and use tax, and this line item will remain in the audit.

Line Item 33

The Taxpayer provided an industrial manufacturing exemption certificate for review with respect to the transaction at issue. The products sold by the Taxpayer are not "machinery or tools or repair parts therefor or replacements, thereof, equipment, fuel, power, energy, or supplies, used directly in manufacturing, processing, refining, mining or converting products for sale or resale" as claimed on the exemption certificate and required by Va. Code § 58.1-609.3 2. Additionally, the exemption certificate is dated after the start of the audit. 4 Pursuant to the aforementioned references, the exemption certificate is invalid on its face. Accordingly, the transaction at issue is not exempt of the retail sales and use tax, and this line item will remain in the audit.

Line Item 38

In this instance, a manufacturing exemption certificate was provided by the Taxpayer's customer after the start of the audit. 5 The exemption claimed on the exemption certificate is for tangible personal property used for shipment or sale. An invoice depicting the sale has not been provided by the Taxpayer to verify the nature of the sale at issue. Pursuant to Va. Code § 58.1-205, the Taxpayer has not met its burden of proving that this transaction was incorrectly included in the audit. Accordingly, this line item will remain the audit.

Line Item 42

In this instance, the exemption certificate was provided by the Taxpayer's customer after the start of the audit. 6 The exemption certificate is incomplete and undated. The purchaser is listed as a grocer on the resale exemption certificate. The Taxpayer does not sell the type of products that a grocer would purchase for resale. Pursuant to the aforementioned references, the exemption certificate is invalid. Accordingly, the transaction at issue is not exempt of the retail sales and use tax, and this line item will remain in the audit.

Line Item 43

In this instance, a resale exemption certificate was provided by the Taxpayer's customer after the start of the audit 7. Based upon the description of the customer's business on the exemption certificate and a review of the customer's website, it is reasonable to conclude that the property at issue was purchased for resale by the customer. For the purpose of this audit only, the exemption certificate will be accepted for the transaction at issue. Accordingly, this line item will be removed from the audit.

Sales for Labor Only

The Taxpayer maintains that the transactions reflected in the following line items were for labor only and are exempt of the retail sales and use tax.

Line Item 2

The invoice provided indicates that the tangible personal property at issue was shipped to North Carolina. Accordingly, this line item will be removed from the audit.

Line Item 5

This invoice relates to Purchase Order (P.O.) 10750. The invoice shows 18 sets of the product shipped to Missouri and 17 sets of the product shipped to North Carolina. The charge for the products shipped to Missouri was held in the audit. The charge for the products shipped to North Carolina was not held in the audit. The Taxpayer provided additional invoices that confirm shipment of products to Missouri. Accordingly, this line item will be removed from the audit.

Line Item 6

This invoice also relates to P.O. 10750, and the transaction is listed as an "art charge." The other charges relating to this P.O. are for products that were not shipped into Virginia. Accordingly, this line item will be removed from the audit.

Line Item 11

The invoice at issue indicates the sale of tangible personal property to a Virginia customer that is shipped to that customer in Virginia, not the sale of labor as the Taxpayer contends. Pursuant to Va. Code § 58.1-205, the Taxpayer has not met its burden of proving that this transaction was incorrectly included in the audit. Accordingly, this line item will remain in the audit.

Line Items 20, 21, 22, 23, 24, 25, 26, 27, 28, 29

In addition to contending that these line items represent transactions for labor only, the Taxpayer also asserts that these transactions were made for resale by the Taxpayer's customer.

The invoices provided indicate the sale of tangible personal property to a Virginia customer that is shipped to that customer in Virginia, not the sale of labor as the Taxpayer contends. In order to make a sale for resale to its customer, the customer would need to provide a valid resale exemption certificate to the Taxpayer, pursuant to Va. Code § 58.1­623. The Taxpayer has not provided a resale exemption certificate from this customer with respect to the transactions at issue. Additionally, the invoices are for tangible personal property sold to the customer for its fleet of commercial trucks. Pursuant to Va. Code § 58.1-205, the Taxpayer has not met its burden of proving that these transactions were incorrectly included in the audit. Accordingly, these line items will remain in the audit.

Sales for Resale

Line Item 35

The Taxpayer claims that the transaction at issue is exempt as a sale for resale. However, the Taxpayer has not provided a resale exemption certificate with respect to this transaction. Based upon a review of the customer's website, it is reasonable to conclude that the property at issue was purchased for resale by the customer. For the purpose of this audit only, the transaction is deemed exempt based upon the information on the Taxpayer's website. Accordingly, this line item will be removed from the audit.

Line Item 58

The Taxpayer claims that the transaction at issue is exempt as a sale for resale. However, the Taxpayer has not provided a resale exemption certificate with respect to this transaction. Pursuant to Va. Code § 58.1-205, the Taxpayer has not met its burden of proving that this transaction was incorrectly included in the audit. Accordingly, this line item will remain in the audit.

Tax Paid to the Applicable State

Line Item 16

The Taxpayer maintains that the tax related to this line item was due and paid to another state. Numerous invoices were provided that indicate Virginia "bill to" and "ship to" addresses. Pursuant to Va. Code § 58.1-205, the Taxpayer has not proven that the tax was due and paid to another state, nor has it proven that the transactions were incorrectly included in the audit. Accordingly, this line item will remain in the audit.

CONCLUSION

Title 58.1 of the Code of Virginia provides exemptions from the retail sales and use tax in very specific situations. However, taxation is the rule, and exemptions are granted only when the criteria set out in the Code of Virginia have been met. When they Taxpayer makes exempt sales, it is incumbent upon the Taxpayer to use reasonable care and judgment to prevent the receiving of false, fraudulent or bad faith exemption certificates. See, Title 23 VAC 10-210-280. Virginia Code § 58.1-623 provides guidance to taxpayers regarding the manner in which exempt sales are to be made pursuant to valid exemption certificates.

Based upon this determination, the audit staff will remove line items 2,5, 6, 35 and 43 on the Non-Contested Sales Exceptions list and recalculate the assessment based on this revision. Once the revisions to the audit are complete, a revised bill, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 E. Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4107221924.P

1.The Exemption certificate has a fax date of March 2008

2.The exemption certificate has a fax date of March 2008.

3.The exemption certificate has a fax date of March 2008.

4.The exemption certificate is dated for November 2008

5.The exemption certificate has a May 2008 fax date.

6.The exemption certificate has a May 2008 fax date.

7.The exemption certificate is dated for November 2009.