Can a Virginia cigarette wholesaler reduce an estimated sales-tax assessment by producing signed resale certificates and sales invoices after the audit?

Plain-English summary

The Department estimated a cigarette wholesaler's retail sales tax liability from distributor records showing cigarettes purchased tax-free for resale. The wholesaler had not timely supplied records showing what happened to those purchases, so the Department treated them as taxable retail sales using the best information available.

On appeal, the wholesaler produced customer-signed resale certificates and sales invoices. The Commissioner found that those documents satisfied the resale and wholesaler recordkeeping requirements, even though the auditor previously rejected invoices without customer signatures. The audit had to be revised to remove tax on the sales supported by the signed certificates and invoices.

The result was only a partial reduction. A comparison still showed cigarette purchases with no supporting resale documentation. The Commissioner upheld tax on the cost of those cigarettes because the dealer could not prove an exempt resale.

The Commissioner also kept the penalty and interest. The wholesaler did not show good cause for failing to meet its retailer compliance responsibilities, and interest under Va. Code § 58.1-1812 compensates the Commonwealth for the taxpayer's use of money that was due rather than serving as a discretionary penalty.

What this means for you

Cigarette and tobacco wholesalers

Keep wholesale and retail activity separately documented. Required records include the purchaser's name and address, registration-certificate number, purchase date, item, and price, and the regulation requires retaining records for three years.

Dealers facing an estimated assessment

An assessment based on supplier or distributor data can be reduced if you later produce credible transaction-level documentation. Unsupported gaps remain taxable, so reconcile purchases acquired for resale to either documented wholesale sales, tax-collected retail sales, or inventory.

Common questions

Q: Did the wholesaler win the appeal?
A: Partly. Documented resale sales were removed, but undocumented cigarette purchases remained in the assessment.

Q: Were invoices alone enough?
A: The Commissioner relied on the invoices together with resale exemption certificates signed by the customers.

Q: Why did penalty and interest remain?
A: The taxpayer did not establish good cause to waive the penalty, and Virginia law mandates interest on tax assessments.

Citations and references

• Va. Code § 58.1-602 (sale for resale)
• Va. Code § 58.1-623 and 23 VAC 10-210-280(A) (exemption certificates)
• Va. Code § 58.1-633(A)-(B) and 23 VAC 10-210-6080 (dealer and wholesaler records)
• Va. Code § 58.1-618 (best information available)
• Va. Code § 58.1-635 (penalty)
• Va. Code § 58.1-1812 (interest)

Subject

Cigarette Wholesaler: Sales for Resale - Exemption Certificates; Required Records: Failure to File Penalty: Interest required on Assessments

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-7

Original ruling text

January 31, 2019

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

Dear *:

This is in response to your letter on behalf of your client * (the "Taxpayer") in which you seek correction of the retail sales tax assessment for the period January 2012 through June 2014. apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a wholesale dealer of cigarettes and other tobacco products. The Department utilizes a compliance program that verifies retail sales and use tax compliance regarding cigarettes purchased for resale and sales of cigarettes by a retail or wholesale dealer. As a result of this compliance program, the Taxpayer was issued an assessment for tax, penalty and interest on untaxed cigarettes purchased from * and *** (the “Distributors”). The assessment is based on sales information provided by the Distributors identifying the Taxpayer’s purchases of cigarettes exempt of the tax for resale.

It is the Department’s position that the cigarettes purchased by the Taxpayer for resale would have been sold to the Taxpayer’s customers and, therefore, the sales tax should have been collected and remitted to the Department on such sales. Based on the sales information provided by the Distributor, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributor for resale. On *, 2014, the Department sent the Taxpayer a summary of the findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate whether the Taxpayer’s purchases from the Distributor qualified for the resale exemption or whether the Taxpayer collected and remitted the sales tax on the sale of those purchases. The Taxpayer failed to respond to the Department’s request for documentation within the allotted time and the assessment was issued.

The Taxpayer contests the assessment and claims that the sales invoices denied by the auditor are the direct result of valid customer telephone and text orders and provides supporting documentation. The Taxpayer requests that these exempt sales be removed from the assessment.

DETERMINATION

Purchases/Sales

The resale exemption provided under the Virginia retail sales and use tax is found in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of “retail sale,” which is defined as a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter.

Virginia Code § 58.1-623 sets forth the requirements for the proper use of exemption certificates and, in section A, provides that "[a]lI 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." Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides further explanation of the proper use of exemption certificates. Subsection A states that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

Virginia Code § 58.1-633 A provides that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner."

Virginia Code § 58.1-633 B states that:

all wholesalers and jobbers in this Commonwealth shall keep a record of all sales of tangible personal property, whether such sales be for cash or on terms of credit. Such records shall include the name and address of the purchaser, the number of the certificate of registration issued to the purchaser, the date of the purchase, the article purchased, and the price at which the article is sold to the purchaser. Any wholesaler or jobber failing to keep such records shall be guilty of a Class 1 misdemeanor. Any person who is both a retailer and a wholesaler or jobber and who fails to keep proper records showing wholesale sales and retail

sales separately shall pay the tax as a retailer on both classes of his business.

The record keeping requirement for wholesalers and jobbers is further explained in Title 23 VAC 10-210-6080 as follows:

Every wholesaler is required to keep a record of all sales of tangible personal property, whether such sales be for cash or credit. These records must include the name and address of the purchaser, the number of the Certificate of Registration issued to the purchaser, the date of the purchase, the article purchased and the price at which the article is sold to the purchaser. Records must be kept for three years.

When a dealer fails to maintain adequate records, the Department is authorized by Virginia Code § 58.1-618 to use the best information available to reconstruct a dealer’s sales or purchases to determine whether a tax liability exists.

The documentation provided by the Distributors show that the Taxpayer purchased cigarettes totaling $* exempt of the tax for resale. The assessment is calculated based on the sales documentation provided by the Distributors as this was the best information available. The auditor multiplied the cartons of cigarettes purchased by the cost to estimate the tax liability.

After the assessment was issued, the Taxpayer provided documentation in support of exempt sales. The auditor reviewed the documentation and adjusted the assessment to remove the tax assessed on the exempt sales to Discount Tobacco in the amount of $*. However, the auditor denied sales invoices provided by the Taxpayer with no customer signature and deemed them invalid. These sales remained in the calculation of the tax liability.

Based upon the cited authorities, I find that the sales invoices provided with the Taxpayer’s appeal and the resale exemption certificates signed by the customers meet the record keeping requirements and show that the Taxpayer sold cigarettes to customers exempt of the tax for resale. Accordingly, the assessment will be adjusted to remove the tax assessed on such sales.

Undocumented Sales

A comparison of the sales documentation provided by the Taxpayer to the cigarette purchases from the Distributors show that the Taxpayer purchased $* in cigarettes exempt of the tax that are not supported by any resale documentation. Lacking evidence to support the exempt resale of such cigarettes, the auditor properly held these purchases taxable on the cost of the cigarettes.

Penalty

Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies and provides that:

When any dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent in the aggregate . . If such failure is due to providential or other good cause shown to the satisfaction of the Tax Commissioner, such return with or without remittance may be accepted exclusive of penalties. [Emphasis added.]

As the Taxpayer has not shown good cause for its failure to properly comply with its tax compliance responsibilities as a retailer of cigarettes, I find no basis to remove the assessed penalty.

Interest

Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had the use of the money that was properly due the Commonwealth. Therefore, I find no basis to waive the interest assessed as a result of the Department’s audit.

CONCLUSION

The audit will be revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at . Questions about this determination letter should be directed to in the Department’s Office of Tax Policy, Appeals and Rulings, at **.

Sincerely,

Craig M. Burns

Tax Commissioner

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