Despite Valid Resale Certificate, Rhode Island Vendor Liable for Tax, Interest, and Penalties
The Rhode Island Division of Taxation (“Division”) recently ruled that a vendor that had accepted a valid resale certificate was nonetheless subject to taxes, interest, and penalties from the transaction based on the timing of its acceptance of the resale certificate from its customer. While it is doubtful that the legislature would have intended this result, unless and until the decision is overturned by the courts, if a seller does not receive an exemption certificate at the time of sale or within 90 days thereof, it may be prudent for the seller not to request it from the customer until the Division asks for it on audit. In re: Taxpayer, R.I. Dept. of Rev., Div. of Tax, Administrative Hearing Decision, No. 2022-20, 2022 WL 17969832 (Dec. 22, 2022).
The Facts: A limited liability company based in Rhode Island (“Vendor”) sells various goods and services. It invoiced a Rhode Island company (“Customer”) for goods and services on August 31, 2016, and remitted sales tax to the Division on September 19, 2016.
The Customer later provided Vendor with a Rhode Island Resale Certificate dated December 16, 2016. Vendor generated a credit memo for the Customer for the tax it previously collected and claimed a tax credit for the sales tax on its Rhode Island returns. After reviewing Vendor’s sales tax returns, the Division issued notices asserting that Vendor owed the sales tax as well as interest and negligence penalties. The Hearing Officer accepted that Vendor’s sales to Customer were for resale.
Rhode Island adopted the streamlined sales and use tax agreement (“SSUTA”). The state statute provides that a seller is relieved of tax if it obtains a fully completed exemption certificate within 90 days of the date of the sale. Another provision states that if the seller has not so obtained an exemption certificate, it may within 120 days of a request for substantiation by the Division either obtain a properly completed exemption certificate or prove that the transaction was not subject to tax.
The Decision: The transaction was held taxable by the Hearing Officer simply because of when the resale certificate was obtained. The Hearing Officer first ruled that the resale certificate did not come within the first exemption to taxability because it was not received by Vendor at the time of sale or within 90 days of the sale (it was received on December 16, 2016, which is 107 days after the August 31, 2016, sale). The Hearing Officer then determined that the second exemption (which provides sellers 120 days to provide a resale certificate or other proof of nontaxability) did not apply since it only applies when a resale certificate is not received and the tax department requests proof of nontaxability. Here, Vendor did in fact receive a resale certificate and, according to the Hearing Officer, the second exemption was therefore inapplicable. The Hearing Officer then determined that, in addition to tax being due, Vendor owed interest on the tax plus negligence penalties.
It is hard to believe that a legislature would have intended such a harsh result. If Vendor had not accepted the resale certificate in December 2016 but, instead, waited for the Division to request proof that the transaction was exempt from tax, then the transaction would have been nontaxable. However, merely because of the timing of receipt of the certificate, Vendor is held liable not only for tax and interest but also penalties. For now, sellers in Rhode Island, and perhaps other SSUTA states, should be careful if they do not receive an exemption certificate at the time of sale or within 90 days of the sale.
This article is one in a series of articles written for the January 2023 edition of The BR State + Local Tax Spotlight.