In a decision that serves as a reminder of both the consequences and limitations of resale certificates, a New York State Administrative Law Judge has held that an apparel wholesaler and distributor proved that its sales qualified for the sale for resale exclusion under the New York sales tax law, notwithstanding the absence of fully completed New York State resale certificates. Matter of San Mar Corp., DTA No. 822993 (N.Y.S. Div. of Tax Appeals, Apr. 14, 2011).

San Mar’s Business. San Mar is a clothing wholesaler and distributor based in the State of Washington, with sales representatives in many states, including New York. San Mar specializes in selling apparel that can be imprinted or embroidered with logos and designs. The vast majority of San Mar’s customers were either (i) decorators that put the logos or designs on the San Mar’s products, who then resold the decorated products to their own customers, or (ii) promotional products distributors that typically sold a wide variety of decorated products, such as apparel, pens, and mugs. For those customers, San Mar usually shipped the apparel orders to a third-party decorator hired by the promotional products distributor, who in turn shipped the decorated product directly to that distributor’s end-user customer. San Mar sold only to customers within its “distribution channel” (typically, the decorators and promotional products distributors), and not to retail customers, and it had procedures in place to insure that potential customers were in fact resellers and not end-users. This was consistent with the company’s goal of not competing with its own customers.

Department’s Audit. The Department commenced a sales tax audit of San Mar, and a one-month test period was selected involving approximately 200 customer sales. On audit, San Mar was required to establish that it made sales for resale to these customers. It furnished the auditor with various New York State Resale Certificates (Form ST-120), many of which were rejected because of such deficiencies as discrepancies involving the purchaser’s name or missing information about the purchaser, including the failure to include a New York State Sales Tax Certificate of Authority number or a non-New York sales tax registration number. Some resale certificates were rejected because there was no check mark in the box located next to the statement affirming that the purchaser agrees to remit use tax if it consumes the property it purchased. In some instances for out-of-state purchasers, New York State Resale Certificates could not be provided, and San Mar did not have taxpayer identification numbers for those purchasers.

Proof at the Hearing. At the administrative hearing, San Mar provided testimony and documentation regarding the nature of its wholesale business, including its internal procedures to insure that it only sold to resellers. This included copies of San Mar’s product catalogs that were customized to show the name and identifying information of its customers, rather than its own name, in order to show that it was not marketing to endusers. Specifically with regard to the incomplete or missing ST-120s, the vendor furnished a variety of evidence to address the missing or incomplete information that the properly completed resale certificates would have included. Among the items submitted into evidence were such things as customers’ non-New York identification numbers, multijurisdictional resale certificates, specific out-of-state retail or exemption certificates, and customer affidavits.

Although not all of its arguments are completely spelled out in the decision, the Department did take the position that it was not obligated to accept any document (such as multijurisdictional resale certificates or an affidavit) other than a timely and properly completed New York State Resale Certificate. The ALJ ruled in favor of the taxpayer.

The ALJ first summarized the nature and purpose of resale certificates as follows: Under the sales tax law, the burden of proving that a transaction is nontaxable is on the vendor. The Department prescribes certain documents, including resale certificates, which when properly and timely completed satisfy the vendor’s burden of proving nontaxability and relieve it of the obligation to collect and remit sales tax on that transaction. However, as the ALJ pointed out, the presumption of taxability is not irrebuttable. A vendor’s failure to receive a properly completed resale certificate means only that the vendor cannot rely solely on that resale certificate, but must prove that the transaction was in fact for resale, obviously a more difficult task.

In light of these principles, and after considering the evidence, the ALJ concluded that the vendor met its burden of proving that the disputed sales were in fact nontaxable sales for resale. He first concluded that San Mar had established that it was engaged in wholesaling and distributing, and not in making retail sales, and noted that the company showed that it went to great effort to avoid selling to end-users. According to the ALJ, this proof “at a minimum” gave rise to a reasonable inference that the vendor was not engaged in making retail sales.

However, the ALJ recognized that it remained possible that at least some of the sales in question were isolated retail sales, which meant specific proof regarding the transactions was necessary. The ALJ accepted the vendor’s additional proof (discussed above) which, when coupled with the other evidence regarding San Mars’ business, he found sufficient to meet its burden of proving nontaxability.

Additional Insights. The ALJ’s decision makes clear that the Department has the right to reject incomplete resale certificates on audit, but that the taxpayer still retains the right to prove that its sales are not taxable even in the absence of properly completed New York State Resale Certificates. In substantial part, the decision is based on the specific facts of the case regarding evidence of the taxpayer’s business and of the purchasers in question. Notwithstanding the taxpayer’s victory, the ALJ’s decision is a reminder of the importance of obtaining resale certificates, in order to avoid having to go through the level of proof that was furnished in this case.

The Department took the position at the hearing that the judge should give little weight to the affidavits furnished by San Mar’s customers, inasmuch as they had an ongoing business relationship with the taxpayer. The ALJ noted that any concern regarding impartiality was offset by the fact that the customer affidavits in question explicitly admitted that the customer made sales of the San Mar products that were purchased, potentially opening that customer to liability for sales tax due, but not paid, on those sales.

As we went to press, it remained unclear whether the Department intends to file an exception with the Tribunal, and, of course, ALJ determinations are not precedential.

One interesting issue that was not addressed was the vendor’s argument that requiring a non-New York customer that had its purchases shipped into New York to provide a New York taxpayer identification number violated the Commerce Clause of the U.S. Constitution. The ALJ declined to rule on this constitutional issue since he concluded that all of the disputed sales were nontaxable.