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The Taxpayer’s Burden of Proof and Rejected Exemption Certificates

As a general rule, New York imposes sales tax on installations of tangible personal property and services performed upon real property.  That general rule also contains various exceptions and exemptions such as the exception for capital improvements and the exemption for sales to tax exempt organizations.  For taxpayers, the law presumes that all sales are taxable until proven otherwise.  That burden of proving otherwise rests squarely upon the shoulders of the taxpayer.

In order to help taxpayer’s properly exercise the different exceptions and exemptions that exist in the Tax Law, the Department of Taxation and Finance (“Department”) has created various exemption certificates for use in specific circumstances.  For example, the Department considers use of the ST-124, Certificate of Capital Improvement, as evidence that the work to be performed will result in a capital improvement to real property.  The proper use of an exemption certificate not only helps taxpayers understand their sales tax obligations, but can provide important protections in the event of a sales tax audit.  Of course, in order to obtain the full benefit of the proper use of an exemption certificate, taxpayers must strictly comply with the Department’s “how to” regulations.  The “how to” regulations include instructions on the proper preparation and timely receipt of exemption certificates.  Failure to comply can cause an auditor to reject an exemption certificate with the resulting loss of otherwise applicable protections.

A recent sales tax determination shows the dangers taxpayers face when they rely on exemption certificates that do not comply with the Department’s “how to” regulations.  A signage business that manufactures and installs its own products was audited.  The business claimed that some of its sales constituted capital improvements and were therefore not taxable.  The auditor was presented with ST-124s that the signage business obtained from the project owner.  The business relied on the exemption certificates to not charge sales tax to its customer.  The auditor rejected the ST-124s as invalid “because the forms were missing an identification number, were untimely filed and [because] the forms did not adequately describe the work being done by the [business] that would qualify the sales as nontaxable, capital improvements.”  The missing identification number was the project owner’s certificate of authority number.  The business presented no additional proofs to support its claim that the projects constituted capital improvement work.  When the business challenged the audit, the case was decided upon the question of whether or not the ST-124s alone were sufficient to satisfy the business’ burden of proof that the sales were not subject to sales tax as capital improvements.

The Administrative Law Judge agreed with auditor’s rejection of the ST-124s.  The Judge noted that the description of the work on the form as merely “fabrication and installation of signage” did not demonstrate that the work performed was nontaxable capital improvements.  Without additional support, such as contracts and testimony, to describe and help qualify the work as capital improvement, the defective ST-124s were not solely sufficient to satisfy the taxpayers’ burden of proof that the sales were not taxable.

There are a few lessons to be learned from this case.  One is that it is mandatory that contractors accepting exemption certificates make sure that the forms are properly completed, signed, accepted in good faith and received in a timely manner.  By doing so, contractors will be able to enjoy the full benefits and protections afforded by law to taxpayers that properly use exemption certificates.  Another is that contractors must understand that it is their burden to prove that they properly complied with the Tax Law.  Contractors should be prepared to provide additional proofs, such as contracts, invoices and testimony, in the event that an auditor finds any reason, valid or not, to reject an exemption certificate.

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