A franchisee of restaurants with several Virginia locations (taxpayer) failed to provide sufficient documentation to verify exempt sales under audit. As a result, the taxpayer was assessed sales tax on sales reported as exempt on its sales tax returns. The taxpayer contested the audit assessment and requested more time to assemble the exemption documentation and submit it to the Department of Taxation for review.
The Virginia Tax Commissioner issued an opinion stating that the taxpayer should exercise reasonable care and judgment when accepting exemption certificates from customers to ensure that sales are properly made exempt of the tax. The taxpayer should be able to reasonably conclude that meals purchased could be used for any of the exempt purposes claimed on the certificate of exemption. The taxpayer must also make sure that the required information is provided on the exemption certificates and retain the exemption certificates provided by customers in or order to support the exempt sales.
The taxpayer should also be able to provide sufficient information that allows the auditor to verify the exempt sale and connects the sale to the exemption certificate provided by the customer. If an auditor does not have sufficient information from the taxpayer that allows the auditor to sufficiently identify the sale and connect it to the exemption certificate on file, as well as determine that the taxpayer complied with the good faith acceptance provision, the sale will be subject to the tax.
The Tax Commissioner granted the taxpayer 60 additional days to submit additional information to the appropriate field audit staff for review, including exemption certificates and other information to connect the exempt sales to the exemption certificates provided.
This is a great reminder to sellers who make exempt sales to do their due diligence when accepting, inspecting, documenting and retaining exemption certificates in order to support exempt sales under audit. (Document 20-132, Virginia Tax Commissioner, August 11, 2020)