My company got assessed sales tax because we couldn't produce a valid exemption certificate at the time of an audit -- can we still fix it with certificates or invoices we gather afterward?

Plain-English summary

This ruling explains what happens when a business gets audited for missing exemption certificates and then tries to fix the problem after the fact -- and it's a partial win, showing both what works and what doesn't.

A manufacturer and distributor of automotive lifts was audited for the period April 2013 through March 2016. The audit found untaxed sales to three customers for which the company couldn't produce valid exemption certificates at the time, resulting in an assessment. The company appealed, arguing valid certificates existed for all three.

For two of the customers, the invoices were in their own names, but the exemption certificates the company later produced were in the name of a parent company that had acquired both customers. Normally a mismatched name would be a problem, but the Department applies "greater scrutiny" in exactly this situation -- when a dealer failed to get a valid certificate at the time of sale, the Department will independently check its own registration and filing records to see whether the exemption was actually valid, since dealers themselves don't have access to their customers' registration histories. Here, the Department confirmed the parent company really had acquired both customers and that its certificate was valid, so both customers' sales qualified for the resale exemption despite the name mismatch on the invoices.

For the third customer, the company produced an exemption certificate dated December 13, 2013 -- but of the two disputed invoices, one was dated August 20, 2013 (before the certificate) and the other March 3, 2014 (after it). Only the invoice dated on or after the certificate's own date qualified for the exemption; the earlier invoice remained taxable, because a certificate can't retroactively exempt a sale that happened before the certificate existed.

What this means for you

Businesses that get flagged in an audit for missing exemption certificates

All you have to lose isn't necessarily lost -- the Department applies "greater scrutiny" and may independently verify whether a customer was actually entitled to an exemption, even using records the certificate itself doesn't show, before assessing tax on that transaction.

Businesses whose customers change names or get acquired mid-relationship

An exemption certificate that names a parent company (rather than the specific subsidiary shown on your invoices) isn't automatically invalid -- if the Department can independently confirm the subsidiary was in fact acquired by that parent and the certificate is otherwise valid, the mismatch alone won't defeat the exemption. Still, the safer practice going forward is to conform your invoices to the certificate's name, or get a fresh certificate in the current customer's name.

Accountants and tax professionals

Remember the date rule: an exemption certificate obtained after an audit only covers invoices dated ON OR AFTER the certificate's own date. It cannot retroactively exempt earlier transactions, no matter how clearly the customer would otherwise qualify.

Common questions

Q: We couldn't produce a valid exemption certificate during an audit -- can we still fix this afterward?
A: Sometimes. The Department applies "greater scrutiny," including checking its own registration and filing records, to determine whether the transaction actually qualified for exemption, even without a certificate that was perfect at the time of sale.

Q: Our customer's invoices are under one name, but the exemption certificate we have is under its parent company's name -- is that a problem?
A: Not automatically. If the Department can independently confirm the parent company acquired the named customer and the certificate is otherwise valid, the exemption can still apply -- though you should still try to align invoice names and certificates going forward.

Q: Can a certificate we get today cover a sale we made years ago?
A: No. A certificate only covers sales made on or after the date of the certificate itself; earlier invoices remain taxable even if the same exemption would otherwise apply.

Citations and references

• Va. Code § 58.1-623 A (sales are taxable until the contrary is established; the dealer bears the burden absent a certificate)
• Va. Code § 58.1-623 B (a valid certificate relieves the dealer of tax liability unless the Department later gives notice the certificate is no longer acceptable)
• Title 23 VAC 10-210-280 A (an incomplete, invalid, infirm, or facially inconsistent certificate is never acceptable)
• Title 23 VAC 10-210-280 B (reasonable care is required; a certificate only covers property within its exact wording)
• P.D. 12-68 (5/3/2012) (an exemption certificate listing an entity's legal name, where the invoice used a trading-as name, was accepted because the Department could independently verify the exemption)

Subject

Exemption : Certificates - Greater Scrutiny Test

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-45

Original ruling text

March 15, 2022

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 April 2013 through March 2016.

FACTS

The Taxpayer is a manufacturer and distributor of automotive lifts. The Department’s audit uncovered untaxed transactions with three customers for which appropriate exemption certificates could not be produced, which resulted in the issuance of an assessment. The Taxpayer appeals, contending valid exemption certificates were provided for the three customers at issue and the related transactions should be removed from the assessment.

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.”

When a dealer fails to receive a valid certificate at the time of sale, the “good faith acceptance” privilege is invalidated and the dealer becomes subject to the tax that was not applied to the transaction. While the dealer has the responsibility to prove the transaction is exempt, the Department also applies “greater scrutiny” to determine whether the transaction is exempt in order to avoid collecting tax when it is not due. In doing so, the Department may perform a search of its records to determine if the customer has a registration, as well as a sales and use tax return filing history. Once this search is performed, the Department can reasonably conclude whether the purchase made by the customer would qualify for an exemption, in this case a resale exemption. The Department takes these additional steps because dealers do not have access to the registration and filing histories of their customers and, therefore, cannot reasonably be expected to provide such scrutiny regarding the acceptance of exemption certificates.

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.

* (Customer 1) and *** (Customer 2)

Both Customer 1 and Customer 2 were owned by * (the “Parent Company”). Following the conclusion of the audit, the Taxpayer provided invoices bearing the names of Customers 1 and 2 and exemption certificates bearing the Parent Company’s name. The Taxpayer explained that both Customers 1 and 2 had been existing customers prior to being acquired by Parent Company.

In Public Document (P.D.) 12-68 (5/3/2012), the Department accepted an exemption certificate that listed an entity’s legal name as the purchaser, while the trading-as name was the customer’s name. The Department deemed this exemption certificate acceptable because the Department was able to independently verify the customer was entitled to claim the exemption.

After reviewing documentation from both the Taxpayer, Customers 1 and 2, and the entity in question, the Department has confirmed that both customers had been acquired by the entity and that Parent Company’s exemption certificate was valid. Accordingly, Customers 1 and 2 were eligible to make purchases from the Taxpayer exempt from the tax.

* (Customer 3)

Invoice * (Invoice 1) and invoice *** (Invoice 2) from Customer 3 were included as exceptions in the audit as the Taxpayer was not able to provide a valid exemption certificate. Following the conclusion of the audit, the Taxpayer provided an exemption certificate dated December 13, 2013. Invoice 1 is dated August 20, 2013. Invoice 2 is dated March 3, 2014. Only invoices dated on or after December 13, 2013 are eligible for the exemption.

CONCLUSION

Based on this determination, the audit will be returned to the appropriate field audit staff to remove the transactions relating to Customers 1 and 2 as well as Invoice 2 from Customer 3. A revised audit report will be issued to the Taxpayer. Further, because the assessment has been paid in full, a refund for overpayment may be necessary. If so, the Department will issue a refund for overpayment with appropriate interest.

In the future, the Taxpayer should conform the name on its invoices to that of the exemption certificate, or acquire a new exemption certificate. For example, in order for invoices to be eligible for the Parent Company’s exemption, they must indicate the Parent Company as the customer.

The Code of Virginia sections, regulations, and public document 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 response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1900.A

Related Documents

12-68