An auditor disallowed my resale exemption certificates because they weren't on file at the time of the sale, or were undated or backdated -- can I still use them to remove sales from my assessment, and can I get the penalty waived?

Plain-English summary

A resale exemption certificate is only as good as the paperwork behind it -- and the timing and completeness of that paperwork matter a lot more once a sale is already under audit. This ruling walks through why three different customer certificates all failed for a fabric manufacturer and distributor.

Virginia law puts the burden of proving a sale exempt on the dealer, unless the dealer took a valid certificate from the customer at the time of the sale (Va. Code § 58.1-623 A). A certificate has to be signed, dated, and identify the customer's registration number and the type of property covered (§ 58.1-623 B); one that's "incomplete, invalid, infirm or inconsistent on its face is never acceptable" (23 VAC 10-210-280 A). Critically, the Department has a long-standing policy (P.D. 01-36) that when a dealer only produces certificates AFTER an audit has already started, the Department scrutinizes them more closely -- because the dealer didn't actually rely on the certificate at the time of the original sale. And a certificate dated after the sale it supposedly covers can't be treated as accepted in good faith for that earlier transaction (citing a string of prior rulings: P.D. 98-29, 04-75, 10-201, 17-114).

Applying that framework here: Customer 1's certificate was simply never produced -- the taxpayer offered only the customer's own claim that it didn't owe tax, with no supporting documentation. Customer 2's certificate, produced with the appeal, was dated January 2019 -- after the audit period had already ended -- so it couldn't retroactively cover the earlier sales, and Customer 2 also wasn't registered with the Department at the time of the purchase. Customer 3's certificate had no date on it at all, which by itself makes it noncompliant with § 58.1-623 B, and Customer 3 likewise wasn't registered at the time of purchase. All three sales stayed in the assessment.

The taxpayer also fought the penalty, but lost that too. Penalty on audit deficiencies is mandatory under Va. Code § 58.1-635, generally waived only if a dealer's compliance ratio meets set thresholds (85% for sales tax, 60% for use tax, on a second-generation audit) -- and here the taxpayer's use tax compliance ratio was 0%, plus it hadn't remitted all the sales tax it had actually collected. On top of the regular penalty, a 20% tax amnesty penalty applied because part of the audit period fell within the 60-75 day window of Virginia's 2017 Tax Amnesty Program (through April 2017), which the taxpayer never used to resolve its liability for that period.

What this means for you

Any dealer relying on a customer's resale exemption certificate

Get the certificate BEFORE or AT the time of the sale, not after. A certificate obtained only once an audit is already underway gets much closer scrutiny precisely because you didn't actually rely on it when you made the exempt sale.

Anyone producing a resale certificate for the first time during an appeal

Make sure it's dated, complete, and that the customer was actually registered with the Department at the time of the original purchase -- a certificate with no date, or dated after the sales it's meant to cover, won't retroactively make those earlier sales exempt.

Dealers facing an audit penalty

The penalty on audit deficiencies is mandatory, not discretionary, and is generally only waived if your compliance ratios clear specific thresholds (85% sales tax / 60% use tax on a second-generation audit). A low or 0% compliance ratio, or failing to remit tax you actually collected, will sink a penalty-waiver argument.

Dealers with unresolved liabilities from Virginia's 2017 Tax Amnesty period

If part of your audit period falls in the amnesty-eligible window (through April 2017) and you didn't use the amnesty program to resolve it, expect an additional 20% amnesty penalty layered on top of the regular audit penalty and interest.

Common questions

Q: My customer never gave me a resale certificate at the time of sale, but produced one later during the audit or my appeal -- does that fix the problem?
A: It can help, but the Department reviews such certificates much more strictly than ones on file at the time of sale, since you didn't actually rely on them when making the sale. A certificate that's undated, or dated after the sales it's supposed to cover, generally won't work.

Q: Does it matter if my customer was actually registered with Virginia to make exempt purchases at the time of the sale?
A: Yes -- the Department checks its own registration records. A certificate from a customer who wasn't registered at the time of the transaction won't support the exemption, even if a certificate exists.

Q: Can I get the audit penalty waived?
A: Only if your compliance ratio meets the Department's thresholds (generally 85% for sales tax, 60% for use tax on a second-generation audit) and you remitted all tax you actually collected. A low compliance ratio and unremitted collected tax will defeat a waiver request.

Q: What's the 20% amnesty penalty, and can it still apply years later?
A: Virginia ran a Tax Amnesty Program in 2017 covering delinquent liabilities through roughly April 2017. If part of your audit period falls in that window and you didn't participate, an additional 20% amnesty penalty applies on top of regular penalty and interest, even if the audit itself happens years afterward.

Citations and references

• Va. Code § 58.1-623 A (burden of proving an exempt sale is on the dealer unless a valid certificate was taken)
• Va. Code § 58.1-623 B (exemption certificate must be signed, dated, and show registration number and property type)
• 23 VAC 10-210-280 A (an incomplete, invalid, infirm, or inconsistent certificate is never acceptable)
• 23 VAC 10-210-280 B (reasonable care standard; certificate can't cover property outside its exact wording)
• P.D. 01-36 (4/11/2001) (certificates produced only after an audit begins get closer scrutiny)
• P.D. 98-29 (2/20/1998), P.D. 04-75 (8/25/2004), P.D. 10-201 (8/31/2010), P.D. 17-114 (6/29/2017) (a certificate dated after the sale can't be deemed accepted in good faith for that sale)
• Va. Code § 58.1-635 (penalty on audit deficiencies is mandatory)
• 23 VAC 10-210-2032 (penalty application generally based on the dealer's compliance ratio)
• P.D. 17-156 (9/5/2017) (Guidelines for the Virginia Tax Amnesty Program; 20% penalty on unpaid amnesty-eligible liabilities)

Subject

Exemptions: Resale Certificates - Standard of Review, Date Requirement; Administration :Audit - Penalty, Compliance Ratio

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-69

Original ruling text

April 13, 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 for the period September 2015 through July 2018. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a manufacturer and distributer of various fabrics. As a result of the Department’s audit, the Taxpayer was assessed sales tax on untaxed sales to customers where the auditor determined the resale exemption certificates were not on file at the time of the transaction. The Taxpayer appeals, contending that the sales transactions were to exempt customers and should be removed from the audit. The Taxpayer also disputes the assessed penalties.

DETERMINATION

Exemption Certificates

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”.

In accordance with Public Document (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.

The Department has well settled policy regarding the date of an exemption certificate. If the exemption certificate is dated after the sales transaction, it cannot be deemed to have been accepted in good faith for transactions occurring before its receipt. In such instances, an exemption claim is subject to greater scrutiny. See P.D. 98-29 (2/20/1998), P.D. 04-75 (8/25/2004), P.D. 10-201 (8/31/2010) and P.D. 17-114 (6/29/2017).

In accordance with the aforementioned policies, the exemption certificates furnished by the Taxpayer have been reviewed and the use of the certificate for the sales in question evaluated. Certificates for each customer listed below were not on file at the time of the audit.

* (Customer 1)

According to the Taxpayer, Customer 1 claims that it does not have to pay sales tax. The Taxpayer, however, has provided no additional documentation to support a finding that Customer 1 is eligible to make purchases of tangible personal property exempt of the Virginia sales tax.

* (Customer 2)

The Taxpayer provided a copy of the exemption certificate from Customer 2 with the appeal. The exemption certificate is dated January 2019, which is after the conclusion of the audit period, and therefore cannot be deemed to have been accepted in good faith for transactions occurring before its receipt. Further, after a review of the Department’s records, Customer 2 was not registered at the time of the purchase recorded on the exceptions list.

* (Customer 3)

The Taxpayer provided an exemption certificate from Customer 3 with the appeal. However, the certificate is not dated, and therefore does not comply with the requirements of Virginia Code § 58.1-623 B. In addition, the Department’s records do not show that Customer 3 was registered at the time of the purchase recorded on the exceptions list.

Under these circumstances, the Taxpayer has failed to show these exemption certificates were accepted in good faith and further examination of these the information provided reveals the certificates could not have been valid at the time of the transactions.

Penalty

Virginia Code §58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 provides that the application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer’s compliance ratio. In second generation audits, the penalty will generally be applied unless the taxpayer’s compliance ratios meet or exceed 85% for sales tax and 60% for use tax. In this second generation audit, the Taxpayer’s use tax compliance ratio was 0%. The Taxpayer is required to remit all sales tax collected to the Department. Upon examination of the tax payable account, it was determined the Taxpayer did not remit all tax collected to the Department. Thus, penalty was properly applied.

Amnesty Penalty

The 2017 General Assembly enacted legislation establishing a Tax Amnesty program, spanning a 60-75 day period that was administered by the Department. The Guidelines for the Virginia Tax Amnesty Program are addressed in P.D. 17-156 (9/5/2017). Taxpayers with delinquent returns for amnesty-eligible periods qualified for amnesty benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties. The amnesty-eligible periods for ongoing field audits is the month of April 2017 and prior. Since the audit period includes months prior to April 2017, the amnesty penalty must be assessed.

CONCLUSION

After review of the above authorities and the documentation provided by the Taxpayer, I find no basis to remove the sales to the customers at issue from the audit or grant relief for the penalties assessed. Accordingly, the audit assessment is upheld in its entirety. 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 of the date of the bill.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1993.A

Related Documents

01-36

98-29

04-75

10-201

17-114

17-156