When could a Virginia seller accept an exempt organization's certificate in good faith, and whose funds had to pay?

Plain-English summary

A properly completed exemption certificate protected the seller only when it was accepted with reasonable care and the exempt organization's own credit was bound. The seller had to examine the certificate before the tax-free sale and confirm that the property purchased was within the certificate's exact wording.

Purchases billed directly to the organization and paid by its check or credit card qualified. Government purchases could use an official purchase order or valid Form ST-12; qualifying federal cards had to bind federal credit and be billed to and paid by the government.

An employee's personal cash, check, or credit-card purchase remained taxable even if the organization later reimbursed the employee. Virginia recommended retaining proof of payment in case the exempt status was questioned.

What this means for you

• Review certificates for completeness, signature, validity, and product scope before sale.
• Confirm that billing and payment bind the exempt organization, not an employee.
• Keep payment evidence even though the ruling described retention as recommended.
• Do not use a certificate for property outside its exact exempt wording.

Common questions

Q: Is a certificate alone always enough?
A: No. The dealer must exercise reasonable care and verify that the purchase fits the certificate.

Q: Is an employee purchase exempt if reimbursed later?
A: No. The ruling treated employee-funded purchases as taxable.

Q: Must proof of payment be retained?
A: The ruling recommended retaining it to substantiate organizational payment if questioned.

Citations and references

• Va. Code §§ 58.1-612 A, 58.1-623 A, 58.1-609.1 4, and 58.1-609.11.
• 23 VAC 10-210-280 A and 10-210-690.
• Virginia Public Document 03-94 (December 12, 2003).

Subject

Application of retail sales and use tax to sales to exempt organizations

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-9

Original ruling text

January 31, 2013

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which you request a ruling regarding the application of the retail sales and use tax to sales to exempt organizations that present properly completed exemption certificates and what constitutes "good faith." I apologize for the delay in responding to your letter.

FACTS

The Taxpayer sells tangible personal property to exempt organizations and questions the acceptance of an exemption certificate in good faith. The Taxpayer specifically asks if the exemption applies only to purchases paid directly from an organization's funds whether by organizational check or by credit card. The Taxpayer also questions if it is necessary to retain proof of payment, such as a copy of the organization's check or credit card, to substantiate the exempt sale.

RULING

Virginia Code § 58.1-612 A requires all dealers to collect and remit the retail sales and use tax on all sales or leases of tangible personal property. Va. Code § 58.1-623 A states that "[a]ll 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." See also Title 23 of the Virginia Administrative Code (VAC) 10-210-280 (A) which further interprets the foregoing statutes. This same regulation further provides that "[r]easonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or 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." (Emphasis added.) As such, the seller must use reasonable care and judgment in selling tangible personal property exclusive of the tax, even when an exemption certificate from the purchaser is on file. Therefore, acceptance "in good faith" must be established by the dealer. The property actually purchased must be of the same class as that identified on the certificate as exempt. Acceptance in good faith requires that the dealer examine the certificate for compliance before a tax-free sale takes place.

Thus, once the Taxpayer obtains a properly completed and signed certificate of exemption from the purchaser, whether such purchaser is an exempt religious organization, a nonprofit organization exempt under either § 501(c)(3) or § 501(c)(4) of the Internal Revenue Code, a political subdivision or a governmental agency, certifying that the purchase qualifies for an exemption under the Virginia retail sales and use tax law, and has used reasonable care in receiving the exemption certificate, the Taxpayer is absolved from collecting the tax on the sale. Specifically, purchases by an exempt organization that are billed directly to the organization and paid for by the organization's check or credit card are exempt of the tax.

With regard to nonprofit organizations, effective July 1, 2004, the Virginia General Assembly enacted a new process by which nonprofit organizations obtain sales and use tax exemptions. Virginia Code § 58.1-609.11 provides that any nonprofit organization that held a valid exemption certificate on June 30, 2003, retains its exemption until the current exemption expires. Provided the nonprofit organization meets the criteria, it will be entitled to an exemption from the retail sales and use tax on purchases of tangible personal property for its use or consumption.

With regard to government entities Va. Code § 58.1-609.1 4 provides an exemption from the retail sales and use tax for "tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States." Title 23 VAC 10-210-690 provides further interpretation regarding sales to government entities and provides that exempt sales may be made to the federal government, Virginia government agencies, and Virginia local government entities provided that either the purchase is made pursuant to an official government purchase order or the purchaser provides the Taxpayer with a valid government exemption certificate, Form ST-12. The purchase order must show a direct billing to the government agency. Once a Form ST-12 is furnished, the Taxpayer will not be required to receive an official purchase order each time that an exempt sale is made to the governmental agency.

Purchases by the federal government can be paid through direct billing to the agency or via an approved government credit card. Only those credit card purchases for which the credit of the federal government is bound and billings are sent directly to and paid by the federal government are exempt from the retail sales and use tax. The Department has agreed that federal government credit cards issued under the General Services Administration (GSA) SmartPay Program may be used to make exempt purchases in accordance with the government exemption outlined in Va. Code § 58.1-609.1 4. In Public Document 03-94 (12/12/03), the Department addresses the application of the retail sales and use tax to the various types of credit cards issued under the GSA SmartPay Program.

If an employee of an exempt organization uses their own funds such as cash, check or credit card to purchase tangible personal property, and the exempt organization will reimburse the employee then such purchases are correctly subject to the tax. Only when the credit of the exempt organization is bound in the transaction, i.e. , the exempt organization's funds by check or credit card are being used, would such purchases be exempt of the tax. Accordingly, the purchase of tangible personal property by an organization that is paid for directly from the organization's funds is deemed to be an exempt purchase. The retention of proof of payment is recommended in the event that a question may arise regarding an organization's exempt status.

The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions regarding this matter, please contact * of the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5043518215.Q