When can a Virginia dealer avoid sales tax on sales it treated as exempt, and how are exemption certificates for meals sold to nonprofits, churches, and governments handled?

Plain-English summary

The taxpayer is a franchisee operating buffet dining restaurants at several Virginia locations. During a sales-tax audit it could not produce enough documentation to verify which of its sales were taxable and which were exempt, so the auditor assessed tax on the sales the taxpayer had reported as exempt. On appeal the taxpayer said it had the required documentation and asked for time to assemble it. The Commissioner granted 60 more days and, in doing so, laid out how exemption certificates work.

The good-faith / reasonable-care standard. Under Va. Code § 58.1-623 A, every sale is taxable until the contrary is established, and the burden is on the dealer — unless the dealer takes an exemption certificate from the buyer. A certificate must meet the content requirements of § 58.1-623 B (buyer's name, address, registration number, and the general character of the property), and everyone involved must use reasonable care and judgment (23 VAC 10-210-280). Under the International Paper decision (P.D. 10-258), a dealer accepts a certificate in good faith if, on a facial examination, it could reasonably conclude the items could be used for the claimed exempt purpose, or if it reasonably knew the buyer's business fit the exemption.

Certificates obtained after the audit get "greater scrutiny." Following P.D. 01-36, when a dealer gathers certificates only after an audit — rather than relying on them at the time of sale — the Department examines them more closely and accepts them only if it can confirm the buyer's use was valid for the specific transaction. An incomplete, undated, or invalid certificate is never acceptable (P.D. 11-8): for example, an undated certificate gives no way to tell it was accepted at or before the sale.

Meals sold to nonprofits, churches, and governments. Effective April 22, 2016 (Virginia Tax Bulletin 16-3), qualifying government entities (§ 58.1-609.1(4)), nonprofit churches (§ 58.1-609.10 16), and nonprofit organizations (§ 58.1-609.11) may use an exemption certificate to buy food, prepared meals, catering, and related services exempt of tax. The Department applies a bright-line "use and consumption" test: the meals must further the entity's function or mission; the charge must be billed to and paid from the entity's own account (not cash or an individual's account); and the entity must control to whom, when, and how the food is served. (Churches using a self-issued ST-13A certificate and federal government entities need not meet this test.)

Because the taxpayer had not connected its exempt sales to valid certificates, the tax stood — but it could still remove sales from the audit within the 60-day window by supplying the certificates and tying them to specific transactions.

What this means for you

If you make exempt sales, collect a complete, dated, valid exemption certificate at the time of the sale and keep it on file — that is what shifts the tax risk off you (§ 58.1-623). Scrambling to assemble certificates after an audit is far weaker: the Department applies "greater scrutiny" and will accept them only if it can independently confirm the buyer's exempt use for the exact sale. Restaurants and caterers selling to nonprofits, churches, and governments should also build a record that satisfies the bright-line test — especially proof that the exempt entity paid from its own account and controlled the meal — because an auditor who can't connect a sale to a qualifying certificate will tax it.

Common questions

Q: Who owes the tax when a "exempt" sale turns out to be undocumented?
A: The dealer. Sales are taxable until proven otherwise (§ 58.1-623 A), and without a valid exemption certificate the dealer is liable for the uncollected tax.

Q: Can I fix an audit by collecting exemption certificates afterward?
A: Sometimes, but they face "greater scrutiny." The Department accepts post-audit certificates only if it can confirm the buyer's use was valid for the specific transaction; undated or incomplete certificates are rejected.

Q: How can a nonprofit or church buy meals tax-free?
A: Using an exemption certificate under § 58.1-609.1(4), § 58.1-609.10 16, or § 58.1-609.11, and (except for ST-13A churches and federal entities) meeting the bright-line test: the meal furthers the entity's mission, is paid from the entity's account, and is controlled by the entity.

Citations and references

• Va. Code § 58.1-603 — imposition of the retail sales tax on sellers of tangible personal property
• Va. Code § 58.1-623 A and B — sales taxable until the contrary is established; good-faith acceptance and required contents of an exemption certificate
• Va. Code § 58.1-609.1(4), § 58.1-609.10 16, § 58.1-609.11 — exemptions for government entities, nonprofit churches, and nonprofit organizations
• 23 VAC 10-210-280 — reasonable care and judgment; a certificate incomplete or invalid on its face is never acceptable
• International Paper Co. v. Virginia Dep't of Taxation (P.D. 10-258, 10/25/2010); P.D. 01-36 (post-audit greater scrutiny); P.D. 11-8 (incomplete certificates); Virginia Tax Bulletin 16-3 (meals to exempt entities)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-132

Original ruling text

August 11, 2020

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 October 2013 through September 2016. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a franchisee of buffet dining restaurants with several Virginia locations. During the Department’s audit, the Taxpayer did not provide sufficient documentation to verify taxable and exempt sales. As a result, the auditor assessed the sales tax on sales reported as exempt on the Taxpayer’s sales tax returns submitted to the Department. The Taxpayer contests the inclusion of these sales in the audit and states in its appeal that it has the required documentation. The Taxpayer requests more time to assemble the documents and submit them to the Department for review.

DETERMINATION

Exemption Certificates

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 § 58.1-623 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.

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A further explains:

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 certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

Pursuant to Virginia Code § 58.1-623 B, an exemption certificate must be signed by and bear the name and address of the taxpayer; indicate the number of the certificate of registration, if any, issued to the taxpayer; and indicate the general character of the tangible personal property sold, distributed, leased, or stored, or to be sold, distributed, leased, or stored in Virginia. Title 23 VAC 10-2010-280 B requires that reasonable 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.

The reasonable care and judgment standard is addressed in International Paper Company v. Virginia Department of Taxation , CL-2009-360, Circuit Court of Fairfax County, July 29, 2010. See Public Document (P.D.) 10-258 (10/25/2010). The Court held that a dealer could satisfy the good faith and reasonable care and judgment standards in taking a certificate to the effect that the property purchased is exempt if:

Upon a facial examination of the certificate, a dealer could reasonably conclude that the items purchased could potentially be used for any of the exempt purposes claimed on the certificate of exemption; or

Based upon the actual dealer’s knowledge of the business of its purchaser, the dealer could reasonably determine in good faith that the specific purchaser intended to use the items purchased for one or more of the exempt purposes claimed on the certificate of exemption.

In accordance with P.D. 01-36 (4/11/2001), when a dealer is afforded the opportunity to secure exemption certificates to support untaxed sales after the performance of an audit, the Department’s longstanding 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. P.D. 11-8 (1/20/2011) states that vendors cannot accept incomplete exemption certificates in good faith. A valid exemption certificate must include a date and indicate the specific exemption claimed by the purchaser, for example. In cases where the claim for exemption is subject to greater scrutiny by the Department, the exemption certificate will be accepted only if the Department can confirm that the customer’s use of the certificate was valid and proper for the specific sales transaction reviewed in the audit. For example, an undated exemption certificate does not allow an auditor to determine if the seller properly accepted the certificate prior to or at the time of an exempt sale. Thus, there is no evidence that the certificate was accepted in good faith by the seller.

After considering the authorities cited above and based on a review of the audit, I will grant the Taxpayer an additional 60 days from the date of this letter to gather documentation to submit for review. All documentation required to prove sales made to purchasers were tax exempt should be submitted at the same time within the 60-day period. The documentation submitted by the Taxpayer will be reviewed by the appropriate field audit staff to determine whether these transactions should be included in the audit. If the Taxpayer accepted exemption certificates in good faith from a purchaser, using reasonable care and judgment, then the Taxpayer will not be held liable by the Department for failing to collect the sales tax on the transaction. The Taxpayer must also provide sufficient information to connect the exempt sales to purchasers’ exemption certificates the Taxpayer has on file.

Going forward, the Taxpayer should exercise reasonable care and judgment when accepting exemption certificates from its customers to insure that sales are properly made exempt of the tax. The Taxpayer also must be certain that the required information, as stated in Virginia Code § 58.1-623, is provided on the exemption certificate. The Taxpayer is also required to retain exemption certificates provided by its customers to support the exempt sales made. See P.D. 16-199 (10/14/2016).

Meals Purchased by Nonprofit Organizations, Churches and Governments

Effective April 22, 2016, the Department changed its policy regarding the sale of meals and catering to nonprofit organizations, churches and government entities. Virginia Tax Bulletin 16-3 (5/2/2016) states that state and local government entities, nonprofit organizations and nonprofit churches may use a Retail Sales and Use Tax Certificate of Exemption issued pursuant to Virginia Code §§ 58.1-609.1(4) (government entities), 58.1-609.10 16 (nonprofit churches) and 58.1-609.11 (nonprofit organizations) to make exempt purchases of food, meals and any services provided in connection with the sale of food and meals.

The Department will use a bright-line test to determine whether a qualifying organization’s purchase of food or other tangible personal property, prepared meals, catering or related services satisfies the statutory “use and consumption” requirement when the purchase is for consumption by individuals. Under this test, nonprofit organizations, nonprofit churches and governmental entities must demonstrate the following:

The provision of the applicable prepared meals, catering or services furthers a function, mission, service or purpose of the nonprofit or governmental entity; and

The charge for the food, meals or catering service is billed to and paid for by the entity claiming exemption from the tax with payment drawn from the entity’s account, rather than using cash or an individual’s account; and

The entity claiming the exemption determines to whom, when and how the meals or food are served and consumed.

Churches using a self-issued ST-13A exemption certificate and federal government entities are not required to satisfy the new use and consumption test in order to purchase meals, catering, and related services exempt of the tax. Churches using the limited exemption certificate must satisfy the requirements set forth in Virginia Code § 58.1-609.10 16 to qualify for exemption.

In light of these authorities, the Taxpayer must exercise reasonable care and judgment in accepting exemption certificates and be able to reasonably conclude that meals purchased could be used for any of the exempt purposes claimed on the certificate of exemption. The Taxpayer should also be able to provide sufficient information that allows the auditor to verify the exempt sale and connects the sale to the exemption certificate provided by the entity. Going forward, the Taxpayer should implement a recordation method that complies with the policies stated above. If an auditor does not have sufficient information from the Taxpayer that allows the auditor to sufficiently identify the sale and connect it to the exemption certificate on file, as well as determine that the Taxpayer complied with the good faith acceptance provision, then the sale at issue is subject to the tax.

CONCLUSION

Based upon this determination, the Taxpayer will have 60 days from the date of this letter to submit additional information to the appropriate field audit staff for review, including exemption certificates and other information to connect the exempt sales to the exemption certificates provided. After the revision of the audit is complete, the Taxpayer will be issued a revised audit report and revised bill, with interest accrued to date. No further interest will accrue provided the outstanding bill is paid within 60 days of the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections, the regulations, public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1469H

Related Documents

01-36

10-258

11-8

16-68

16-199

17-221

20-129