Could a graphic printer overturn tax using incomplete or post-audit exemption certificates and unsupported resale or manufacturing claims?

Plain-English summary

Virginia upheld the remaining assessment because the graphic printer did not supply valid, applicable exemption support. A certificate that is incomplete, invalid, infirm, or inconsistent on its face is unacceptable, and dealers must use reasonable care when accepting certificates.

Virginia scrutinized certificates obtained after the audit more closely because the printer had not relied on them when making the original sales. The Department said the challenged certificates were disallowed for substantive reasons, not merely because they were undated or incomplete.

One claimed resale remained taxable because the customer had not provided a resale certificate. A separate claim involving graphic design and application to corrugated containers did not prove that the industrial manufacturing exemption applied. One other transaction had already been removed under the prior determination.

Common questions

Q: Can a dealer cure every untaxed sale by collecting a certificate after audit?
A: No. Virginia closely reviews late certificates and rejects those that are incomplete, invalid, inconsistent, or do not cover the transaction.

Q: Was a verbal resale explanation enough without a resale certificate?
A: No. The ruling required a valid certificate for the claimed resale.

Citations and references

• Va. Code §§ 58.1-205, 58.1-603, 58.1-609.3, 58.1-612, and 58.1-623.
• 23 VAC 10-210-280(A)-(B) and 23 VAC 10-210-920.
• Virginia Public Document 01-36.

Subject

Tax disallowed certain exemption certificates.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-71

Original ruling text

May 4, 2012

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 request a reconsideration of the prior determination issued to the Taxpayer. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a large format, graphic printing company located in *. In its original appeal letter, the Taxpayer contested the inclusion of certain transactions in the audit. A determination letter was issued on October 16, 2009, stating that 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 at issue was incorrect. The documentation provided was reviewed and a determination was issued on July 28, 2011. In the determination letter, some transactions were removed from the audit and others remained in the audit based upon the explanation provided. The issues presented by the Taxpayer are addressed below.

DETERMINATION

Exemption Certificates

The Taxpayer disagrees with the Department's decision to disallow certain exemption certificates. The Taxpayer asserts that exemption certificates were disallowed by the Department based upon fax dates, received dates, types of business and the completion of the certificate itself. The Taxpayer believes the Department should be more appreciative of the Taxpayer that acts as an agent collecting money under the Commonwealth's laws.

Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia. Virginia Code § 58.1-612 requires dealers that have sufficient contact with the state of Virginia to collect and remit the sales and use tax on all sales or leases of tangible personal property. Virginia Code § 58.1-623 A provides:

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 (VAC) 10-210-280 A interprets Va. Code § 58.1-623 and states, "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice." Pursuant to Public Document (P.D.) 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.

"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).

In its November 12, 2009 letter, the Taxpayer provided exemption certificates for seven customers and maintained that the sales to these customers were properly made exempt of the tax pursuant to the exemption certificates. In the Department's determination letter, exemption certificates for six of the transactions at issue were disallowed. In only one instance was the exemption certificate disallowed solely because the exemption certificate was undated and incomplete. In the other five instances, the fact that the exemption certificates were undated and incomplete was a secondary reason for disallowing the exemption certificates, and my determination letter clearly establishes the reasons for disallowing the exemption certificates at issue.

It is the duty of Virginia taxpayers to ensure that exemption certificates received from its customers are taken in good faith. Taxpayers must exercise reasonable care and judgment when taking exemption certificates in accordance with Title 23 VAC 10-210-280 B. Exemption certificates must be complete and adhere to the requirements set out in the applicable authorities referenced in this determination.

Pursuant to Va. Code § 58.1-205, "[a]ny assessment of a tax by the Department shall be deemed prima facie correct." The burden of proving that an assessment of tax by the Department is incorrect rests with the taxpayer. In this instance, the Taxpayer has not met its burden of proving that the tax assessed is incorrect. Accordingly, the assessment with respect to these transactions is upheld, and I find no basis to overturn the determination issued in my July 28, 2011 letter.

The Taxpayer maintains that sales to this customer are for resale. The Taxpayer states that sales for resale exist when a truck sales and leasing company sells the graphics on the truck to the end consumer.

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 § 58.1-623. The Taxpayer has not provided a resale exemption certificate from this customer with respect to the transactions at issue. The Taxpayer has not met its burden of proving that the tax assessed is incorrect as required by Va. Code § 58.1-205. The Code of Virginia very clearly provides that a dealer must charge and collect the Virginia sales and use tax from its customers on the sale of tangible personal property, unless the Taxpayer takes from its customer a valid exemption certificate. Without such exemption certificate, the transaction at issue is subject to the sales tax. Accordingly, the tax assessed with respect to these transactions is correct, and I find no basis to overturn the determination issued in my July 28, 2011 letter.

The transaction related to this customer was removed from the audit in accordance with my determination letter dated July 28, 2011. No further action is required with respect to this transaction.

The Taxpayer states that its transactions with this customer usually include the design of graphics and a process by which to adhere the graphics to the corrugated containers produced. Based upon this statement, the Taxpayer maintains that these activities entail industrial processing and the industrial manufacturing exemption applies.

Virginia Code § 58.1-609.3 governs the industrial manufacturing exemption with respect to the Virginia retail sales and use tax. Title 23 VAC 10-210-920 provides further guidance on the application of the exemption to retail sales. Based upon the information provided, the Taxpayer has not met its burden of proving that the industrial manufacturing exemption applies in this instance, or that the tax as assessed is incorrect. Accordingly, with respect to this transaction, I find no basis to overturn the determination issued in my July 28, 2011 letter.

CONCLUSION

Based on the foregoing, the assessment is correct. A bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

While I understand the Taxpayer's continuing disagreement with the Department's position, this letter represents the Department's final determination with regard to the tax assessment for the audit period at issue.

If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4965467934.P