A distributor's records show my business bought cigarettes tax-exempt for resale, but I claim a former business partner used my information to open a fraudulent account -- am I still on the hook for the sales tax assessment?

Plain-English summary

The Department runs a compliance program that cross-checks cigarette distributor records against retailers' reported sales tax, to catch cigarettes purchased tax-exempt for resale that were never actually reported as taxable sales downstream. That program flagged a retailer whose distributor records showed it had purchased cigarettes tax-exempt for resale during a roughly one-year period, without any matching sales tax collected and remitted on those cigarettes. The Department sent the retailer a summary of its findings and gave it 14 days to provide documentation showing either that the purchases legitimately qualified for the resale exemption, or that the resulting sales tax actually had been collected and remitted. The retailer didn't respond in time, and the assessment was issued.

On appeal, the retailer claimed it wasn't responsible at all -- it said a former business partner had used its business information to secretly open a fraudulent account with the distributor, that it never actually made these purchases, and that none of the distributor's records even showed its name on the account. After receiving the assessment, the retailer closed all its accounts with the distributor and filed a police report.

Virginia law makes clear that all sales are presumed taxable unless the dealer proves otherwise -- typically with a valid resale exemption certificate -- and requires dealers to keep detailed records (daily sales, purchase invoices, exemption certificates, inventory) for three years. When adequate records aren't available, the Department may reconstruct a dealer's liability using the best information available -- here, the distributor's own sales records, which specifically identified the retailer as the purchaser of the tax-exempt cigarettes. Despite the retailer's fraud claim, it never produced documentation contradicting the distributor's records or otherwise substantiating that the disputed purchases were fraudulent. The Tax Commissioner explained that the Department has no authority to investigate, arbitrate, or resolve a civil or criminal dispute between the retailer and its alleged former business partner -- its role is limited to determining tax liability based on the sales tax records actually available, which named the retailer as the purchaser of record. The assessment was upheld, consistent with the Department's treatment of similar business-identity-theft claims in several earlier rulings.

What this means for you

Cigarette retailers and wholesale dealers subject to the Department's compliance cross-check program

Make sure your resale exemption certificates and purchase/sales records are complete, valid, and consistently maintained -- a distributor's own records naming you as the purchaser will generally control absent contrary documentation you can produce.

Any business claiming it's a victim of business identity theft in a tax dispute

Report the fraud to law enforcement immediately (as this taxpayer did), but understand that alone doesn't resolve your Virginia tax liability -- the Department isn't authorized to investigate or adjudicate the underlying fraud claim, and will look to whatever documented purchase/sales records exist. Get concrete evidence (distributor account records showing someone else's signature/authorization, evidence you never had access to the account, etc.) to actually rebut the assessment.

Businesses that receive a Department compliance-program notice with a short response window

Respond within the deadline given, even with partial documentation or a request for more time -- missing a short response window (here, 14 days) before an assessment issues makes it much harder to unwind later, even with a sympathetic underlying story.

Common questions

Q: A distributor's records show my business bought products tax-exempt for resale that I say I never actually purchased -- who does the Department believe?
A: Absent documentation from you contradicting it, the Department generally relies on the distributor's own sales records identifying the purchaser, since it's the best information actually available to reconstruct the transaction.

Q: Can I avoid a sales tax assessment by claiming my business identity was stolen and used to make the disputed purchases?
A: Not without supporting documentation. The Department has no authority to investigate or resolve a civil/criminal fraud dispute between you and another party -- it can only apply the tax records that exist, so you need independent evidence (not just an assertion) to overcome the presumption that the purchaser of record is responsible.

Q: What should I do if I believe someone used my business's identity to make purchases I'm now being taxed on?
A: File a police report and gather whatever documentation you can (account opening records, signatures, correspondence) showing you didn't authorize the account or purchases -- and provide that documentation to the Department promptly, within whatever response window it gives you, rather than waiting until after an assessment issues.

Citations and references

• Public Document 18-184 (10/30/2018), P.D. 20-140 (8/18/2020), and P.D. 20-172 (9/29/2020) -- prior Department determinations addressing the same business-identity-theft defense in similar cigarette-purchase assessment disputes, all reaching the same result

Subject

Purchases/Sales of Cigarettes : Business Fraud, ID Theft

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-90

Original ruling text

July 13, 2021

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 of July 2015 through July 2016. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a retailer of cigarettes. 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 retailer or wholesale dealer. As a result of the compliance program, the Taxpayer was issued an assessment for tax and interest on untaxed cigarettes purchased from * (the “Distributor”). The assessment is based on sales information provided by the Distributor, identifying the Taxpayer’s purchase 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 September 1, 2017, 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 sales tax assessment and claims no responsibility for the purchase of cigarettes from the Distributor. The Taxpayer claims it is a victim of a scam perpetrated by a former business partner in which the former business partner used the Taxpayer’s information to open a fraudulent business. The Taxpayer claims it never made purchases for the business and none of the records from the Distributor shows its name on the account. After receiving the assessment from the Department, the Taxpayer closed all accounts with the Distributor and filed a police report.

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 a “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]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.”

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."

The record keeping requirement is further explained in Title 23 VAC 10-210-470 as follows:

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include…a daily record of all cash and credit sales, including sales under any type of financing or installment plan in use. A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase...a record of all deductions and exemptions claimed in filing sales or use tax returns., including exemption and resale certificates, returned or repossessed goods, and bad debts…a record of all tangible property used or consumed in the conduct of the business… a true and complete inventory of the stock on hand and its value, taken at least once each year. Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation.

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.

In this instance, the documentation provided by the Distributor showed that the Taxpayer purchased cigarettes exempt of the tax for resale. The cigarette sales records provided by the Distributor showed that the Taxpayer made cigarette purchases totaling $* exempt of the tax that are not supported by any resale exemption or tax reporting documentation.

The assessment is calculated on the cost price of the cigarettes based on the sales documentation provided by the Distributors, as this was the best information available. A notice was sent to the Taxpayer on September 1, 2017 of the Department’s findings regarding the Taxpayer’s exempt purchases of cigarettes, and a request for documentation was made to substantiate the exempt resale of such cigarettes. While the Taxpayer denies responsibility for the purchase of such cigarettes, the information provided by the Distributor shows that the contested cigarette purchases were made exempt of the tax for resale under the Taxpayer’s business account with the Distributor. Lacking supporting documentation that the contested cigarettes were purchased fraudulently, I find that the audit assessment is correct.

The Taxpayer claims its personal information was used by the Taxpayer’s former business partner to establish a fraudulent business. However, the Department is not authorized to address, arbitrate or settle civil or criminal disputes between parties. In this instance, the Taxpayer is the purchaser of record regarding the cigarettes at issue based on the Distributor’s sales documentation. This determination is consistent with previous determinations regarding business identity theft including Public Documents 18-184 (10/30/2018), 20-140 (8/18/2020), and 20-172 (9/29/2020). Accordingly, I find the Department properly assessed the retail sales and use tax to the Taxpayer on the cigarette purchases. Based on the facts of this case, the Taxpayer remains responsible for the assessment as issued by the Department.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter. If the Taxpayer has questions concerning payment of the assessment or bill, the Taxpayer may contact the Delinquent Collections Unit at 804-367-8045.

The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s web * Johnson in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1498L

Related Documents

18-184

20-140

20-172