I manufacture personalized debit and credit cards and ship them directly to cardholders on a dealer's instructions, and the dealer gave me a resale certificate after the fact -- can I get a refund of the sales tax I already collected and remitted?

Plain-English summary

A manufacturer of personalized debit and credit cards sold its cards to a dealer, collecting and remitting sales tax on those sales. At the dealer's direction, the manufacturer shipped the finished cards directly to cardholders rather than to the dealer itself. The dealer eventually gave the manufacturer a Virginia resale exemption certificate -- but dated well after the transactions at issue. The manufacturer sought a refund of the sales tax collected for July 2017 through March 2020 (a related refund for May-June 2017 had already been granted and then clawed back on review).

Not an exempt interstate sale -- the dealer took constructive possession in Virginia. The interstate commerce exemption (Va. Code § 58.1-609.10 4; 23 VAC 10-210-780) requires title or possession to pass to the purchaser OUTSIDE Virginia. The Department's auditor treated this case as identical to P.D. 93-217, where a Virginia credit card manufacturer shipped cards directly to an out-of-state bank's cardholders -- and the bank was deemed to have taken constructive possession of the cards in Virginia (where they were mailed FROM), making the sale taxable. Here, though, there's an added wrinkle: the dealer wasn't administering the cards itself -- it was reselling them to an end credit card issuer or financial institution. Even so, the dealer still took constructive possession in Virginia, so the interstate exemption doesn't apply.

But that same wrinkle opens the door to the RESALE exemption instead. Because the dealer was reselling the cards (not the end user), the manufacturer's sales TO THE DEALER could still qualify as exempt sales for resale under Va. Code § 58.1-602. A sale for resale is exempt -- but only if the dealer properly documents that with a resale exemption certificate (Form ST-10).

The catch: the certificate came in too late for automatic acceptance. All sales are presumed taxable until a valid exemption certificate is on file (Va. Code § 58.1-623 A). The dealer's certificate here is dated well after the sales occurred -- meaning it can't be treated as accepted in good faith, and instead triggers the Department's "greater scrutiny" review (the same doctrine already established in this corpus's P.D. 25-81). Under greater scrutiny, the Department doesn't just take a late certificate at face value; it independently checks whether the DEALER was actually a registered, tax-filing business during the periods at issue before treating any of the sales as exempt.

What happens next. Because the original audit only evaluated the interstate-commerce question and never ran a full greater-scrutiny review of the dealer's resale certificate, the Department is sending the refund claim back to audit staff to complete that review -- determining which specific sales to the dealer qualify for the resale exemption. If that review finds an overpayment, a refund with interest will follow; the manufacturer retains its normal 90-day appeal rights if it disagrees with the revised audit.

What this means for you

Manufacturers or dealers who ship products directly to a customer's own end customers

Shipping directly to a third party at your customer's direction generally means YOUR CUSTOMER (not the final recipient) is treated as taking constructive possession in Virginia -- defeating the interstate commerce exemption, even with an extra layer of resale in the chain.

Businesses receiving a resale exemption certificate well after the sale

A late certificate doesn't automatically fail, but it loses "good faith" protection and faces greater scrutiny -- the Department will investigate whether your customer was actually a registered, filing dealer for the periods covered, not just accept the paper.

Anyone whose refund claim only addressed one exemption theory

If your case involves multiple possible exemptions (like interstate commerce AND resale here), make sure the audit actually evaluates each one -- an incomplete review on one theory doesn't resolve your claim on an alternative theory that was never properly examined.

Common questions

Q: I ship my product directly to my customer's own customers -- does that qualify as an exempt interstate sale?
A: Not automatically. If your direct customer is the one directing the shipment, Virginia generally treats THAT customer as taking constructive possession here in Virginia, which defeats the interstate exemption -- even if the goods end up out of state.

Q: My customer gave me a resale certificate months or years after our sales -- is it useless?
A: Not necessarily, but it loses automatic "good faith" protection and gets "greater scrutiny" -- the Department will check whether your customer was actually registered and filing sales/use tax returns during the relevant periods before accepting the exemption.

Q: What is "greater scrutiny" for exemption certificates?
A: A closer review the Department applies when a certificate wasn't accepted in good faith at the time of sale -- it investigates the purchaser's own registration and filing history to confirm the exemption is legitimate, rather than accepting the certificate at face value.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-609.10 4 -- interstate delivery exemption
• 23 VAC 10-210-780 -- interstate/foreign commerce sale occurs only when title or possession passes outside Virginia
• Va. Code § 58.1-602 -- defines "retail sale" to exclude sales for resale
• Va. Code § 58.1-623 A -- sales presumed taxable unless a valid exemption certificate is taken; burden on the dealer
• 23 VAC 10-210-280 A -- an incomplete, invalid, infirm, or inconsistent certificate is never acceptable

Prior rulings the Department relied on (described here, not linked): P.D. 93-217 (11/2/1993) (near-identical facts -- a credit card manufacturer mailing cards directly to an out-of-state bank's cardholders; the bank took constructive possession in Virginia); 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), and P.D. 22-69 (4/13/2022) (late exemption certificates face greater scrutiny); P.D. 16-104 (5/25/2016) (greater-scrutiny verification steps); P.D. 17-98 (6/12/2017) (refund claim procedures). This ruling applies the same "greater scrutiny" framework already detailed in this corpus's P.D. 25-81.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-88

Original ruling text

September 17, 2024

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 dispute the denial of the retail sales and use tax refund claim submitted to the Department for the period July 2017 through March 2020. This will also reply to your application for correction for the assessment of retail sales and use tax for the period May 2017 through June 2017. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a manufacturer of personalized debit and credit cards, sold its products to and collected and remitted sales tax from a dealer. At the direction of the dealer, the debit and credit cards were mailed to cardholders. The dealer provided the Taxpayer with a Virginia resale exemption certificate after the date of the transactions at issue. Based on this certificate, the Taxpayer submitted a refund request for sales tax it collected and remitted during the periods of May 2017 and June 2017 and the period of July 2017 through March 2020.

A refund was issued for the May 2017 and June 2017 periods. Under review, the Department concluded that the transactions at issue do not constitute sales in interstate commerce. The Department’s auditor denied the refund for the remaining periods and issued an assessment to recover the previously issued refund. The Taxpayer paid the assessment and filed an application for correction contesting the denial of the refund claim because the transactions qualified for the resale exemption.

DETERMINATION

Interstate Exemption

Virginia Code § 58.1-609.10 4 provides an exemption from the retail sales and use tax for:

Delivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth. Delivery of goods destined for foreign export to a factor or export agent shall be deemed to be delivery of goods for use or consumption outside of the Commonwealth.

Title 23 of the Virginia Administrative Code (VAC) 10-210-780 interprets Virginia Code § 58.1-609.10 4. Specifically, this regulation provides that a “sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.”

The auditor considered the facts in this case to be identical to those in Public Document (P.D.) 93-217 (11/2/1993). In this ruling, a Virginia credit card manufacturer was directed by an out-of-state bank to send the cards purchased by the bank directly to its cardholders in the other state. Because the cards were sent directly to the out-of-state cardholders, the purchasing bank was considered to have taken constructive possession of the cards in Virginia making the transactions subject to Virginia retail sales and use tax.

This case, though similar, is not exactly the same as P.D. 93-217. In this case, an extra intermediary step has been added. While the Taxpayer ships the cards directly to cardholders, the dealer does not administer the use of the cards. Instead, the cards are being provided on behalf of the dealer’s customer, presumably a financial institution or other credit card issuer. As such, though the dealer took constructive possession of the cards in Virginia, it was reselling the cards to the end credit card issuer. Thus, while the auditor correctly determined the transactions were not eligible for the exemption for interstate commerce, the Taxpayer could still be permitted to claim a resale exemption.

Resale Exemption

Virginia Code § 58.1-602 defines a “retail sale” to be “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...” As such, a sale of tangible personal property for resale is exempt from sales and use tax. A purchaser must provide a resale exemption certificate to the dealer in order to exonerate such dealer from the responsibility for collecting and remitting sales tax. The Department has prescribed Form ST-10 as the certificate of exemption for dealers to use when making purchases of tangible personal property for resale purposes only.

In this case, a credit card issuer orders personalized credit cards from the dealer who contracts with the Taxpayer to manufacture the cards. The Taxpayer then ships the cards directly to the issuer’s cardholders. The Taxpayer invoices the dealer for the cards it manufactures, and the dealer subsequently invoices the financial institution or other credit card issuer. As such, the Taxpayer states that its sales are to the dealer, who resells them to the financial institution. Therefore, it asserts sales to the dealer should have been exempt from sales tax.

Exemption Certificates

Virginia Code § 58.1-623 A sets out that all transactions involving the sale or lease of tangible personal property are subject to the tax until the contrary is established. Under this statute, “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 VAC 10-210-280 A further explains, in part, that “a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.”

The Taxpayer obtained a resale exemption certificate from the dealer that is dated April 15, 2020. An exemption certificate 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), P.D. 17-114 (6/29/2017), and P.D. 22-69 (4/13/2022). Exemption certificates are acceptable only if the Department is able to confirm that a purchaser’s use of the certificate is valid and proper for the specific transaction. See P.D. 98-29.

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. To accomplish this, the Department utilizes a number of inquiry steps. The auditor begins by investigating the tax compliance of the purchaser by performing a search of the Department’s registration and accounting databases for the purchaser’s registration status and filing and payment history of sales tax and use tax returns. Once a registration and filing history (or lack thereof) is confirmed, the auditor can reasonably conclude whether the purchases made by the purchaser would be exempt for resale (or another exemption) and, if warranted, will remove the sales transactions corresponding to the purchaser from the audit exceptions list. See P.D. 16-104 (5/25/2016). The dealer in this case had a use account with the Department during the periods at issue.

CONCLUSION

While the auditor evaluated the refund request with regard to the interstate exemption, a full evaluation of the validity of the dealer’s resale exemption certificate under the Department’s greater scrutiny policy was not completed. Accordingly, the refund request will be returned to the audit staff to more closely evaluate the validity of the certificate in order to determine which of the Taxpayer sales to the dealer were exempt for resale for the period at issue. Audit staff may need to contact the Taxpayer to request specific records for review and arrange a mutually agreed upon time for such review.

Audit staff will conduct a full review of the exemption certificate under the Department’s greater scrutiny procedures, 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. If the Taxpayer disagrees with the revised audit, it may submit an appeal within 90 days of the updated audit report in accordance with Virginia Code § 58.1-1821.

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 Department’s Office of Tax Policy, Appeals and Rulings, at or email at **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3860.B

Related Documents

98-29

93-217

04-75

10-201

16-104

17-98

17-114

22-69