If an auditor refuses to review additional exemption certificates I gathered during a sales tax audit, can I get them reviewed on appeal?

Plain-English summary

A dealer under a two-year sales and use tax audit said it had tried to give the auditor an additional 353 exemption certificates and corrected ST-10 resale certificates supporting exempt sales to its customers, but that the auditor refused to review that documentation during the audit. On appeal, the dealer asked the Department to actually review the additional certificates and adjust the audit accordingly.

Virginia law puts the burden on a dealer to prove a sale was exempt unless it holds a valid exemption certificate from the buyer at the time of sale -- but the Department has a well-established practice for exactly this kind of situation, where certificate documentation surfaces or gets corrected only after the original sale. Rather than requiring the dealer to somehow prove its customer's tax status from scratch, the Department's standard procedure has the auditor check the customer's own registration and filing history in the Department's databases: if that check confirms the customer was properly registered and filed sales/use tax returns consistent with an exempt purchase (like buying for resale), the auditor removes that transaction from the audit's exceptions list. This "good faith acceptance" framework exists because dealers themselves don't have access to their customers' registration and filing records, so they can't reasonably be expected to independently verify a customer's tax status beyond taking the certificate in good faith.

Because this is the Department's established procedure for exactly this kind of late-supplied documentation, the ruling didn't need to resolve whether the auditor was right to decline reviewing the certificates mid-audit -- it simply directed that the 353 certificates go to the Department's Tobacco Tax Unit audit staff for that standard review now, with the dealer to be given the results and any warranted adjustments, and a fresh 90-day window to appeal again if disagreements remain after the revised assessment.

What this means for you

Dealers who discover missing or incomplete exemption certificates during (or after) an audit

Even if an auditor doesn't accept additional or corrected exemption certificates in the moment, you have a route to get them reviewed: raising it through the Department's administrative appeal process triggers the standard good-faith verification procedure, which checks your customers' own registration and filing history rather than putting the entire burden on your paperwork alone.

Any retailer or wholesaler relying on customer-provided exemption certificates

You're not expected to independently audit your customers' tax compliance -- the "good faith acceptance" standard exists precisely because you don't have access to that information. Keep and be ready to produce whatever certificates you did collect (even if collected late or corrected later), since the Department's own verification process can still clear those transactions.

Businesses facing an unresolved documentation dispute mid-audit

If an auditor declines to review late-submitted documentation, that dispute doesn't have to end there -- appeal, and expect the Department to send the documentation back for its standard review procedure rather than treating the auditor's in-audit refusal as final.

Common questions

Q: What happens if I gather more exemption certificates after an audit has already started?
A: The Department has a standard procedure for this: the auditor checks the customer's own registration and sales/use tax filing history, and if that confirms the exemption, the transaction is removed from the audit's exceptions list.

Q: Am I responsible for verifying my customers' tax compliance before accepting their exemption certificate?
A: No -- dealers don't have access to customers' registration and filing records, which is exactly why the Department applies a good-faith acceptance standard rather than requiring dealers to independently verify customer tax status.

Q: What if the auditor won't review my additional documentation during the audit itself?
A: You can raise it on administrative appeal, as happened here -- the Department directed the documentation back to the audit staff for its standard review process rather than treating the auditor's refusal as the final word.

Q: What happens after the additional certificates are reviewed?
A: The audit staff will meet with the dealer to discuss the results, make any warranted adjustments, and issue a revised audit report and assessment; the dealer then has 90 days from that revised assessment to appeal again if issues remain.

Citations and references

• Va. Code § 58.1-623 A (dealer's burden absent a valid exemption certificate)
• 23 VAC 10-210-280 B (reasonable care/good faith standard)
• P.D. 16-104 (5/25/2016) (registration/filing-history verification procedure)
• Va. Code § 58.1-1821; 23 VAC 10-20-165 (appeal procedure, 90-day window)
• P.D. 97-95; P.D. 11-8; P.D. 21-113 (related prior rulings)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-68

Original ruling text

June 1,2023

Re: § 58.1-1 821 Application: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek the correction of retail sales and use tax assessments issued to * (the “Taxpayer”) for the period January 2018 through December 2019. I apologize for the delay in responding to your appeal.

FACTS

With its administrative appeal, the Taxpayer has provided documentation that consists of exemption certificates to support exempt sales made by the Taxpayer to its customers. The Taxpayer contends that it attempted to provide an additional 353 exemption certificates and corrected ST-10Cs during the audit, but the auditor refused to review the documentation. For this reason, the Taxpayer requests that the Department review the additional exemption certificates and adjust the audit liability accordingly.

DETERMINATION

Pursuant to Virginia Code § 58.1-623 A, “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)1 0-21 0-280 B Virginia Internet Filing and Payment for Businesses and Individuals addresses the cited statute and 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.

When transactions relying on an exemption certificate are afforded greater scrutiny because the dealer failed to receive a valid certificate at the time of sale, the Department’s policy is to determine whether the transaction is exempt in order to avoid collecting the tax when and where it is not due. In order to accomplish this, the Department utilizes a number of inquiry steps. The auditor begins by investigating the tax compliance of the customer by performing a search of the Department’s registration and accounting databases for the customer’s registration status and filing and payment history of sales tax and use tax returns. Once the auditor confirms the customer’s registration and filing history (or lack thereof), the auditor can reasonably conclude whether the purchases made by the customer would be exempt sales for resale (or another exemption) and, if warranted, will remove the sales transactions corresponding to the customer from the audit exceptions list. See Public Document (P.D.) 16-104 (5/25/2016).

The Department takes these additional steps due to the fact that 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. This is the basis for the good faith acceptance policy applied to the giving and receiving of exemption certificates between dealers and their customers. The Department’s audit staff follows these procedures for contested transactions where additional or updated exemption certificate documentation has been provided by the dealer and/or their customers.

Accordingly, the Taxpayer’s exemption certificate documentation will be returned to the Tobacco Unit audit staff for further review. After the review, the audit staff will meet with the Taxpayer to discuss the results of the review. The audit staff will make adjustments, as warranted, and issue a revised audit report and revised assessment to the Taxpayer. If there are remaining contested issues at that time, the Taxpayer will have 90 days from the date of the revised assessment to submit an appeal in accordance with Virginia Code § 58.1-1821 and Title 23 VAC 10-20-165.

If you have any questions regarding the review of documentation, you should contact * in the Department’s Tobacco Tax Unit at . If you have any questions about the appeals process, please contact in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3624.c

Related Documents

97-95

11-8

16-104

21-113