I have exemption certificates from my customers, but they're either in a slightly different business name or dated after the sale -- can I still get my sales tax refund?

Plain-English summary

A manufacturer of medical devices and equipment sought a refund for the period January 2018 through July 2020, contending it had erroneously remitted sales tax on transactions it believed were exempt. To support the refund claim, it submitted exemption certificates from two customers. The Department denied the refund in full, finding the certificates invalid; the taxpayer appealed.

All sales are taxable until proven otherwise -- but a good, timely certificate shifts that burden. Under Va. Code § 58.1-623 A, every sale is presumed taxable. A properly completed exemption certificate, taken at the time of sale, shifts responsibility for the tax to the customer under § 58.1-623 B. But a certificate that's incomplete, invalid, or facially inconsistent is NEVER acceptable (23 VAC 10-210-280 A), and reasonable care must be used to avoid accepting false or bad-faith certificates (23 VAC 10-210-280 B). Critically, the "good faith acceptance" protection only applies when a VALID certificate was actually received and kept AT THE TIME of sale, producible at audit -- a certificate obtained later means good faith acceptance never happened for that sale, and the dealer becomes liable for the tax that wasn't collected.

When a certificate is missing or late, the Department applies "greater scrutiny." Because a dealer generally can't check its customers' own registration or filing history, the Department steps in during an audit: it searches its own records for the customer's registration number and sales/use tax filing history to independently determine whether the purchase would actually have qualified for exemption. Only if the Department can confirm the customer's use of the certificate was valid and proper for that specific transaction will the exemption be allowed.

Customer 1: a name mismatch the Department couldn't resolve. The exemption certificate on file named a different business than the actual purchaser. The taxpayer argued the named entity and the purchaser were really the same business under different trade names, pointing to state corporate filings. But when the Department searched its own records, it could NOT independently verify that the named entity (or its related businesses) was entitled to use that exemption certificate for this specific purchaser. Because the Department couldn't confirm the relationship and eligibility itself, the refund for Customer 1 was denied.

Customer 2: certificates dated after the sales, but a plausible manufacturing exemption. Two certificates were provided for Customer 2 -- both dated AFTER the sales in the refund claim. Because a certificate obtained after the transaction can't reflect good-faith acceptance at the time of sale, this exemption claim is automatically subject to greater scrutiny. But here, the underlying facts looked promising: Customer 2 is itself a manufacturer of disposable medical devices, and one certificate covered materials/equipment used directly in manufacturing under Va. Code § 58.1-609.3 2 (iii). The problem was that audit staff had never actually PERFORMED the greater-scrutiny check (searching Customer 2's own registration and filing history) -- so instead of a final denial, the Department sent this piece back to audit staff to do that verification.

Result. The refund claim goes back to audit staff to run the Department's greater-scrutiny procedures on Customer 2 specifically. If that review finds an overpayment, a refund plus interest will be issued; if it finds an underpayment, any new assessment is still bound by Virginia's ordinary statute of limitations.

What this means for you

Any Virginia dealer relying on customer exemption certificates

Get a complete, properly named exemption certificate from your customer AT THE TIME OF SALE, not afterward -- a certificate obtained later can't establish good-faith acceptance for that transaction and puts your exemption claim under the Department's own "greater scrutiny" review instead of the normal good-faith protection.

Dealers dealing with customers that operate under trade names or related-entity structures

If your customer's exemption certificate names a different (but related) entity than your actual purchaser, be ready to show the Department can independently verify the relationship and the named entity's eligibility -- your own documentation of the relationship (like trade-name filings) isn't enough on its own if the Department's records search can't confirm it.

Businesses filing refund claims based on late-obtained exemption certificates

A late certificate isn't automatically fatal -- if the underlying transaction genuinely looks exempt (like a manufacturing sale to another manufacturer), ask the Department to run its greater-scrutiny verification (checking the customer's registration and filing history) rather than accepting an outright denial.

Common questions

Q: My customer's exemption certificate has a different but related business name than the actual purchaser -- is that automatically invalid?
A: Not automatically, but the Department must be able to independently verify the relationship and the named entity's eligibility through its own records. If it can't confirm that, the exemption will be denied even if you have your own proof of the relationship.

Q: I got my customer's exemption certificate after the sale, not before -- have I lost the exemption?
A: A late certificate means you can't claim good-faith acceptance for that sale, and the claim is subject to greater scrutiny -- but it's not automatically denied. The Department can still verify eligibility itself using the customer's registration and filing history.

Q: What does the Department's "greater scrutiny" process actually involve?
A: The Department searches its own registration and accounting databases for the customer's registration status and sales/use tax filing and payment history, to independently determine whether the customer's purchases would qualify for the claimed exemption.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-623 A -- all sales are presumed taxable until the contrary is established
• Va. Code § 58.1-623 B -- a valid exemption certificate relieves the dealer of liability for the tax
• 23 VAC 10-210-280 A -- an incomplete, invalid, infirm, or facially inconsistent certificate is never acceptable
• 23 VAC 10-210-280 B -- reasonable care and judgment standard for accepting exemption certificates
• Va. Code § 58.1-609.11 -- administrative nonprofit exemption process
• Va. Code § 58.1-609.3 2 (iii) / § 58.1-609.6 3 -- manufacturing and publication-production exemptions cited in Customer 2's certificates
• Va. Code § 58.1-634 -- statute of limitations on Department assessments

Case law: International Paper Company v. Virginia Department of Taxation, CL-2009-360, Circuit Court of Fairfax County (7/29/2010), also issued as P.D. 10-258 (10/25/2010) -- establishes the reasonable-care/good-faith standard for accepting a certificate at the time of sale.

Prior rulings the Department relied on (described here, not linked): P.D. 98-29 (2/20/1998), P.D. 04-75 (8/25/2004), P.D. 10-201 (8/31/2010), P.D. 16-1 (2/2/2016), P.D. 20-57 (7/28/2020), and P.D. 23-99 (8/17/2023) -- reiterating that a certificate must be received at the time of sale for good-faith protection; P.D. 12-68 (5/3/2012) -- an entity's legal name vs. trade name on a certificate was acceptable where the Department could independently verify the customer's eligibility; P.D. 17-114 (6/29/2017) and P.D. 22-69 (4/13/2022) -- a certificate dated after the sale triggers greater scrutiny; P.D. 16-104 (5/25/2016) -- describing the Department's registration/filing-history verification steps; P.D. 17-98 (6/12/2017) -- Guidelines for Retail Sales and Use Tax Refund Claim Procedures. This ruling gives this corpus's fullest explanation yet of the "greater scrutiny" doctrine referenced more briefly in P.D. 25-81's late-certificate discussion.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-77

Original ruling text

August 21, 2024

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

Dear *:

This will reply to your letter submitted on behalf of * (the “Taxpayer”) in which you dispute the denial of a retail sales and use tax refund for the period January 2018 through July 2020. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a manufacturer of medical devices and equipment, submitted a refund claim for the taxable period at issue contending that it had erroneously remitted tax on exempt sales. To support its claim, the Taxpayer submitted exemption certificates from several customers involved in transactions on which sales tax was remitted, but not collected. The refund claim was reviewed and denied in full because the exemption certificates provided by customers were not valid. The Taxpayer filed an application for correction, asserting that the certificates support the allowance of the exemption.

DETERMINATION

Exemption Certificates

Virginia Code § 58.1-623 A provides “[a]ll sales or leases are subject to the tax until the contrary is established.” 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 provides 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 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.”

The reasonable care and judgement standard is addressed in International Paper Company v. Virginia Department of Taxation , CL-2009-360, Circuit Court of Fairfax County, July 29, 2010, also issued as Public Document (P.D.) 10-258 (10/25/2010). The Court held that a dealer could satisfy the good faith and reasonable care and judgment standards in taking a certificate to the effect that the acceptance is exempt if:

Upon a facial examination of the certificate, a dealer could reasonably conclude that the items purchased could potentially be used for any of the exempt purposes claimed on the certificate of exemption; or

Based upon the actual dealer’s knowledge of the business of its purchaser, the dealer could reasonably determine in good faith that the specific purchaser intended to use the items purchased for one or more of the exempt purposes claimed on the certificate of exemption.

The standard addressed in International Paper Company is applicable only when a valid certificate is received and retained at the time of sale and can be produced by the dealer at the time of an audit. The absence of a valid exemption certificate at the time of a sales transaction indicates that the certificate was not accepted in good faith. This longstanding policy has been reiterated in numerous determinations. For example, see P.D. 98-29 (2/20/1998), P.D. 04-75 (8/25/2004), P.D. 10-201 (8/31/2010), P.D. 16-1 (2/2/2016), P.D. 20-57 (7/28/2020), and P.D. 23-99 (8/17/2023).

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. Under audit, the dealer has the responsibility to prove the transaction is exempt. In addition, the Department applies “greater scrutiny” to determine whether the transaction is exempt. The Department may perform a search of its records to determine if the customer has a registration number, a sales and use tax return filing history, or other records indicating a particular purchaser may be exempt. Once this search is performed, the Department can reasonably conclude whether the purchase made by the customer would qualify for an 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. Exemption certificates are acceptable only if the Department can confirm that a purchaser’s use of the certificate was valid and proper for a specific transaction identified during an audit.

The exemption certificates furnished by the Taxpayer during the audit where received after the sales transactions at issue and have been reviewed and their use evaluated. Each customer listed below purchased medical equipment from the Taxpayer. Virginia Code § 58.1-609.11 was enacted to create an administrative process enabling the Department to issue sales tax exempt status to qualifying nonprofit organizations in lieu of requesting exemptions from the legislature.

* (Customer 1)

The Taxpayer claims that the equipment it sold to * (the “Purchaser”) was covered by the exemption certificate provided by Customer 1. Because the name on the exemption certificate did not match, the auditor concluded that the certificate was completed incorrectly and disallowed the exemption. An exemption certificate for nonprofits was issued by *** (Business A). It is unclear what the relationship is between Customer 1, Business A, and the Purchaser.

The Taxpayer has provided a Certificate of Trade Name and certificate from the State Corporation Commission of Virginia that shows that * (Business B) is operating as Customer 1. As such, it contends that the exemption certificate applies to the Purchaser.

In 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. In this case, the Department searched its records, but was unable to verify that Customer 1 was entitled to use the exemption certificate.

* (Customer 2)

The Taxpayer contends that the exemption certificate provided by Customer 2 confirmed that the medical equipment that it sold was exempt. Several exemption certificates were submitted for Customer 2 in regard to the refund request. The first, dated October 19, 2020, was for the purchase of industrial materials used directly in processing, manufacturing, refining, mining or converting products for sale or resale and for equipment, materials or supplies used directly in the production of a publication for sale of free distribution pursuant to Virginia Code § 58.1-609.3 2 (iii) and § 58.1-609.6 3 respectively. The second exemption certificate, dated February 22, 2021, exempted the Taxpayer from collecting sales tax from Customer 2 pursuant to the manufacturing exemption only. The Taxpayer’s refund claim was for transactions that occurred between January 2018 and July 2020, before any of the exemption certificates were issued.

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. 17-114 (6/29/2017) and P.D. 22-69 (4/13/2022). Exemption certificates are acceptable only if the Department can confirm that the customer’s use of the certificate is valid and proper for the specific transaction. See P.D. 98-29. It appears that the Taxpayer may qualify for the manufacturing exemption because Customer 2 is a manufacturer of disposable medical devices.

Under such circumstances, the Department utilizes a number of inquiry steps to determine whether the transactions at issue are exempt. The Department’s 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 P.D. 16-104 (5/25/2016).

CONCLUSION

The exemption certificate issued to the Taxpayer by Customer 1 did not fulfill the certificate requirements because the name on the certificate did not match the name of the Purchaser. An exemption certificate was, however, issued to Business A. It appears that Customer 1, Business A, Business B, and the Purchaser are all related. The exemption certificate used by Business A does not include all of its related businesses. Accordingly, the refund request for Customer 1 is denied.

The sales to Customer 2 occurred before either of the exemption certificates were issued and it cannot be confirmed whether the medical equipment it purchased were used directly in the manufacturing process. The audit staff, however, did not review Customer 2’s registration status and filing and payment history of sales tax and use tax returns. As such, the exemption claim was not strictly scrutinized.

In accordance with this determination, the refund request will be returned to the audit staff to perform the Department’s greater scrutiny procedures. If additional information is required from the Taxpayer, audit staff will set up a mutually agreed upon time for such information to be provided. Audit staff will review the Taxpayer's documents, make adjustments as appropriate, and issue an updated audit report. If the audit results in an overpayment, a refund will be issued along with any refund interest in accordance with the Guidelines for Retail Sales and Use Tax Refund Claim Procedures , published as P.D. 17-98 (6/12/2017). If the audit results in an underpayment, the Department will only be permitted to issue assessments within the statute of limitations provided under Virginia Code § 58.1-634.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) or email at **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3808.B

Related Documents

98-29

04-75

10-201

10-258

12-68

16-1

17-98

17-114

20-57

22-69

23-99