I accepted resale exemption certificates from my distributors even though their listed business type didn't exactly match what they bought -- do I still qualify for the resale exemption?

Plain-English summary

A multi-level-marketing (MLM) company sold anti-aging personal care products and nutritional supplements through a network of independent distributors. When a Virginia distributor was itself registered to collect sales tax AND gave the company a valid resale exemption certificate, the company sold to that distributor tax-free, letting the distributor collect tax on its own downstream sale. Otherwise, the company collected and remitted the tax itself.

On audit, the Department assessed additional tax on sales to five distributors whose resale certificates the auditor considered invalid for the products actually purchased. The taxpayer appealed as to all five, arguing it had accepted each certificate in good faith.

A complete certificate doesn't have to name the exact type of product. Virginia Code § 58.1-623 A makes every sale presumptively taxable, and the seller bears the burden of showing otherwise unless it takes a valid exemption certificate from the buyer. Under § 58.1-623 B and 23 VAC 10-210-280, a certificate must be signed, dated, and show the buyer's name, address, and registration number, describing the general character of the property covered -- but as P.D. 12-68 established, the customer's listed business type doesn't need to be an exact match to the product sold. A dealer only needs to be able to reasonably conclude, from the certificate and the surrounding facts, that the goods were bought for resale.

Four of five customers had valid, usable certificates. For Customers 2, 3, 4, and 5, the taxpayer produced signed, dated Form ST-10 certificates with the resale box checked. Even though the customers' listed business types (a health/wellness/cosmetics dealer, a hair salon, and dealers of personal care items and general merchandise) weren't identical to "personal care products and nutritional supplements," the Tax Commissioner found a dealer could reasonably conclude the products were for resale in each case. For Customer 3, the certificate predated the actual transactions, but that timing didn't matter because the customer's own line of business (a personal care service) still supported the reasonable-reliance conclusion. All four customers' sales were removed from the audit.

No certificate at all meant no good-faith defense. For Customer 1, the taxpayer never produced a Form ST-10 certificate. Without any certificate on file at the time of the transactions, there was no basis to conclude the seller had exercised the reasonable care and good faith the law requires, so those sales stayed in the audit.

Result: a partial win, plus a refund. The assessment was revised to remove the sales tied to four of the five contested customers. Because the taxpayer had already paid the assessment in full, the Department ordered a refund of the overpaid tax, plus interest under Va. Code § 58.1-1833 A.

What this means for you

For MLM and direct-sales companies selling through independent distributors

If your distributor network includes some distributors who are themselves registered dealers, you can sell to them tax-free on a resale basis -- but only if you actually obtain, and keep on file, a complete and properly executed exemption certificate (in Virginia, a Form ST-10) from each one before or at the time of the sale. If the Department later can't find a certificate for a customer, no amount of after-the-fact good-faith argument will save that sale from the audit.

For any seller accepting resale certificates from customers whose listed business type doesn't exactly match the product

You don't need the customer's stated line of business to be an identical match to what they're buying from you. What matters is whether a dealer exercising reasonable care and judgment could look at the certificate and the customer's business and reasonably conclude the goods were being purchased for resale. A health-and-wellness products dealer, a hair salon, or a general-merchandise reseller buying personal care products and supplements can all pass that test, even though none of them describes itself as a "personal care products distributor."

For anyone appealing a sales tax assessment over resale certificates

Keep your certificates organized by customer and be ready to show they are signed, dated, and contain the buyer's name, address, and registration number. A certificate that predates the transactions in question is not automatically defective -- what matters is whether the certificate was valid and on file, and whether the customer's business supports treating the purchase as a resale.

Common questions

Q: What happens if I never got a resale certificate at all from a customer?
A: You lose that argument. Without a certificate on file, there's no basis to conclude the certificate was accepted in good faith or that reasonable care was exercised -- the sales stay in the audit, as happened here for Customer 1.

Q: Does the certificate have to say "personal care products" or otherwise exactly describe what I sold?
A: No. Following P.D. 12-68, the customer's listed business type just needs to support a reasonable conclusion that the goods were for resale; it doesn't have to be an exact match to the class of items sold.

Q: Does it matter if the certificate is dated before the transactions it's supposed to cover?
A: Not necessarily. In this ruling, Customer 3's certificate predated the actual sales by about a year, but because the certificate was otherwise valid and the customer's line of business was consistent with reselling the products, the sales were still removed from the audit.

Q: What are the minimum requirements for a valid Virginia resale certificate?
A: Under Va. Code § 58.1-623 B, it must be signed, bear the buyer's name and address, show the buyer's certificate of registration number (if any), and indicate the general character of the property being purchased for resale.

Citations and references

• Va. Code § 58.1-623 A (all sales presumed taxable; the dealer bears the burden of proving otherwise absent a valid exemption certificate)
• Va. Code § 58.1-623 B (requirements for a valid exemption certificate, and its effect of relieving the seller of tax liability)
• 23 VAC 10-210-280 A and B (an incomplete or facially inconsistent certificate is never acceptable; dealers must exercise reasonable care and judgment, and a certificate cannot be stretched beyond its exact wording)
• P.D. 13-35 (3/18/2013) (dealers must review certificates for completeness and confirm the class of items sold falls within the certificate's scope)
• P.D. 12-68 (5/3/2012) (a dealer selling gold pens to a hotel customer could reasonably rely on a resale certificate even though "hotel" wasn't an exact match to the item sold)
• Va. Code § 58.1-1833 A (interest owed on refunds of overpaid tax)

Subject

Multi-level Marketer: Exemption: Resale Certificates - Good faith acceptance and Reasonable Care

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-75

Original ruling text

May 25, 2021

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

Dear *:

This is in response to your letter on behalf of * (the “Taxpayer”) in which you seek the correction of the retail sales and use tax assessment for the period April 2014 through March 2017. I note that the assessment is paid in full. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a multi-level marketing firm that sells anti-aging personal care products and nutritional supplements through a network of independent distributors located in Virginia, the United States and worldwide. In situations where a distributor in Virginia is registered to collect and remit retail sales and use tax to the Department and presents a valid exemption certificate, the Taxpayer allows the distributor to collect and remit the sales tax after the distributor’s sale to its customer. In all other cases, the Taxpayer collects and remits the sales tax on behalf of its distributors. As a result of the Department’s audit, the Taxpayer was assessed sales tax on untaxed sales to distributors where the auditor determined the resale exemption certificates were not valid for the types of products sold. The Taxpayer appeals, contending that the exemption certificates were accepted in good faith and the sales should be removed from the audit

DETERMINATION

Virginia Code § 58.1-623 A provides that:

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 or 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 then, states, in 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 Virginia Code § 58.1-623 and states that “a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.” Title 23 VAC 10-210-280 B then states that “[r]easonable care and judgement 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 items of tangible personal property not covered by the exact wording of the certificate”.

Public Document (P.D.) 13-35 (3/18/2013) addresses the use by dealers of reasonable care and judgement with respect to exemption certificates. Dealers are expected to review certificates for completeness and to verify that the class of items being sold falls within the scope of the wording of the exemptions certificate.

In P.D. 12-68 (5/3/2012), the taxpayer was a commercial printer. The audit of the taxpayer’s sales and use tax records resulted in the assessment of sales tax on untaxed retail sales of various materials for which an exemption certificate was obtained. The taxpayer maintained that the contested sales should not be included in the audit because it acted properly in accordance with the law and regulations in accepting the exemption certificates. In one such instance, the taxpayer’s customer purchased gold pens from the taxpayer. The taxpayer provided its customer’s Form ST-10 with its appeal and the resale block on the exemption certificate is checked. The kind of business listed for the customer is a hotel. The resale exemption certificate was accepted by the taxpayer for the exempt sale of pens. Based upon an examination of the exemption certificate, the Department determined that a dealer could reasonably conclude that the items purchased were for resale as claimed on the exemption certificate. Therefore, while a dealer is required to have an understanding that the class of items being sold falls within the scope of the wording of the exemption certificate, it is not required for the kind of business listed for the customer to be exclusively related to the class of item being sold.

Keeping this in mind in addition to the cited authorities, the exemption certificates furnished by the Taxpayer have been reviewed and the use of the certificate for the sales in question evaluated. Each customer listed below purchased various personal care products and nutritional supplements from the Taxpayer. In addition, with the exception of Customer 1 as discussed below, each exemption certificate is appropriately dated, signed by and bears the name and address of the customer along with the certificate of registration number in accordance with the requirements of Virginia Code § 58.1-623 B.

* (“Customer 1”)

The Taxpayer has not provided its customer’s Form ST-10. The absence of such certificates at the moment of the transaction indicates that such certificates were not accepted in good faith or that the Taxpayer did not exercise reasonable care or judgement. Therefore, there is no basis to remove the contested sales as related to this customer from the audit.

* (“Customer 2”)

The Taxpayer provided its customer’s Form ST-10, dated August 20, 2010, with the resale exemption block checked. The kind of business listed for this customer is a dealer of health, wellness and cosmetic products. Based on an examination of the exemption certificate, a dealer could reasonably conclude that the items purchased were for resale as claimed on the exemption certificate. Accordingly, the contested sales as related to this customer will be removed from the audit.

* (“Customer 3”)

The Taxpayer provided its customer’s Form ST-10, dated October 3, 2014 with the resale exemption block checked. The kind of business listed for this customer is a hair salon. The date of the subject transactions for this customer were in 2015, after the date of the exemption certificate. Based on an examination of the exemption certificate and the customers engaging in a personal care business, a dealer could reasonably conclude that the personal care products and nutritional supplements purchased were for resale as claimed on the exemption certificate. Accordingly, the contested sales as related to this customer will be removed from the audit.

* (“Customer 4”)

The Taxpayer provided its customer’s Form ST-10, dated July 11, 2007 with the resale exemption block checked. The kind of business listed for this customer is a dealer engaged in the resale of personal care items, vitamins and general merchandise. Based on an examination of the exemption certificate, a dealer could reasonably conclude that the items purchased were for resale as claimed on the exemption certificate. Accordingly, the contested sales as related to this customer will be removed from the audit.

* (“Customer 5”)

The Taxpayer provided its customer’s Form ST-10, dated July 20, 2007 with the resale exemption block checked. The kind of business listed for this customer is a dealer engaged in the resale of personal care items, vitamins and general merchandise. Based on an examination of the exemption certificate, a dealer could reasonably conclude that the items purchased were for resale as claimed on the exemption certificate. Accordingly, the contested sales as related to this customer will be removed from the audit.

CONCLUSION

The assessment will be revised in accordance with this determination. Because the assessment has been paid, a refund of the overpaid amount of tax and interest will be refunded as soon as practical. Interest on such overpayment will be issued in accordance with Virginia Code § 58.1-1833 A.

The Code of Virginia section, regulation, and public documents 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 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/1517.A

Related Documents

12-68

13-35