Could a Virginia seller reduce an audit assessment with valid customer exemption certificates obtained after the audit began?

Subject

The Taxpayer failed to obtain valid certificates of exemption from its customers for the sample period.

Plain-English summary

Virginia allowed the seller's audit to be adjusted after it supplied valid customer exemption certificates. The manufacturer had treated sales as exempt without holding valid certificates during the audit sample period, then collected certificates after the audit began.

Virginia presumes tangible-personal-property sales are taxable unless the seller proves otherwise. A certificate taken from the buyer in good faith normally carries that burden. A certificate obtained only after an audit starts is not treated as having been accepted in good faith, so the Department subjects it to greater scrutiny and must confirm that the customer's claimed use was valid for the specific audited transaction.

Here, the Department found that the later-submitted certificates were valid and returned the audit to field staff for revision. A revised report and bill were to follow.

What this means for you

• Collect and review exemption certificates at the time of sale whenever possible.
• A late certificate is not automatically worthless, but it must withstand transaction-specific verification.
• Match each certificate to the legal exemption, customer, purchase period, and audited invoice.
• Keep certificate-expiration, renewal, and validation procedures in the seller's tax controls.

Common questions

Q: Are certificates collected after an audit begins accepted in good faith?

A: No. The ruling says their late timing means they receive greater scrutiny.

Q: Can a late certificate still support an adjustment?

A: Yes, if the Department can confirm that the customer's use of the certificate was valid and proper for the specific transaction.

Q: What happened in this case?

A: The certificates were found valid, and the audit was returned for revision.

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. 15-81

Original ruling text

April 22, 2015

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

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the audit period June 2011 through April 2014.

FACTS

The Taxpayer is a manufacturer and seller of weld studs and fastening equipment serving the automotive, construction and industrial markets. The Department's audit disclosed that the Taxpayer made sales transactions exempt of the tax that were not supported by valid exemption certificates. The Taxpayer disagrees with the Department's assessment of the sales tax on such sales. The Taxpayer has secured exemption certificates to qualify the sales as exempt sales. The Taxpayer seeks an adjustment of the Department's assessment based on the submitted certificates.

DETERMINATION

Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are presumed to be subject to tax until the contrary is established. Title 23 of the Virginia Administrative Code 10-210-280 A interprets Va. Code § 58.1-623 and 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.

The Department has previously ruled in Public Document 98-29 (2/20/98) that the absence of an exemption certificate at the time of a sales transaction indicates that 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 the audit.

The Taxpayer failed to obtain valid certificates of exemption from its customers for the sample period. The Taxpayer has since provided exemption certificates to support the exempt sales to its customers. Based on all of the information presented and the fact that the Taxpayer has submitted valid exemption certificates from its customers, I find basis for an adjustment of the Department's audit.

The Department's audit will be returned to the appropriate field audit staff for a revision of the Department's assessment. A copy of the revised audit report and a revised bill will be sent to the Taxpayer as soon as possible.

The Code of Virginia section, regulation 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 determination, please contact * of the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5888720785.Q