Purpose: This rule explains the conditions under which a buyer may furnish a resale certificate to a seller, and explains the information and language required on both paper and nonpaper certificates. It also provides tax reporting information to persons who purchase articles or service for dual purposes, i.e., for both resale and consumption. This rule also explains the penalty for a buyer's misuse of the resale certificate privilege.

     The amended rule incorporates provisions of chapter 168, Laws of 2003, which enacted portions of the national streamlined sales and use tax agreement (SSTA). This legislation eliminated the good faith requirement when a seller takes a resale certificate from a buyer and provides that there is no signature requirement for certificates taken in a format other than paper.

     Citation of Existing Rules Affected by this Order: Amending WAC 458-20-102 Resale certificates.

     Statutory Authority for Adoption: RCW 82.32.300, 82.32.291, and 82.01.060(2).

      Adopted under notice filed as WSR 04-11-035 on May 12, 2004.

     Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 0, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 0, Amended 1, Repealed 0.

     Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.

     Number of Sections Adopted on the Agency's Own Initiative: New 0, Amended 1, Repealed 0.

     Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.

     Number of Sections Adopted Using Negotiated Rule Making: New 0, Amended 0, Repealed 0;      Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 0, Amended 1, Repealed 0.

     Date Adopted: August 9, 2004.

Russell W. Brubaker

Assistant Director

Legislation and Policy Division

OTS-7165.1

AMENDATORY SECTION(Amending WSR 94-13-031, filed 6/6/94, effective 7/7/94)

WAC 458-20-102   Resale certificates.   (1) Introduction. This ((section)) rule explains the conditions under which a buyer may furnish a resale certificate to a seller, and explains the information and language required on the resale certificate. This ((section)) rule also provides tax reporting information to persons who purchase articles or services for dual purposes (i.e., for both resale and consumption). ((Sellers and buyers should note that amendments to RCW 82.04.470 required changes to the information and language contained on the resale certificate. These changes became effective on July 1, 1993. (See chapter 25, Laws of Washington 1993 sp.s.))) In 2003, the legislature enacted legislation conforming state law to portions of the national Streamlined Sales and Use Tax Agreement (chapter 168, Laws of 2003), which eliminates the good faith requirement when the seller takes from the buyer a resale certificate and also eliminates signature requirements for certificates provided in a format other than paper. These changes apply to resale certificates taken on and after July 1, 2004.

     (2) What is a resale certificate ((use.))? The resale certificate is a document or combination of documents ((which)) that substantiates the wholesale nature of a sale. The resale certificate cannot be used for purchases ((which)) that are not purchases at wholesale, or where a more specific certificate((s)), affidavit((s)), or other documentary evidence is required by statute or other section of chapter 458-20 WAC. While the resale certificate may come in different forms, all resale certificates must satisfy the language and information requirements of RCW 82.04.470.

     (a) What is the scope of a resale certificate? Depending on the statements made on the resale certificate, the resale certificate may authorize the buyer to purchase at wholesale all products or services being purchased from a particular seller, or may authorize only selected products or services to be purchased at wholesale. The provisions of the resale certificate may be limited to a single sales transaction, or may apply to all sales transactions for a period not to exceed four years from the effective date. Whatever its form and/or purpose, the resale certificate must be completed in its entirety((,)) and signed by a person who is authorized to make such a representation on behalf of the buyer.

     (b) Who may issue and sign certificates? The buyer may authorize any person in its employ to issue and sign resale certificates on the buyer's behalf. The buyer is, however, responsible for the information contained on the resale certificate. A resale certificate is not required to be completed by every person ordering or making the actual purchase of articles or services on behalf of the buyer. For example, a construction company ((which)) that authorizes only its bookkeeper to issue resale certificates on its behalf may authorize both the bookkeeper and a job foreman to purchase items under the provisions of the resale certificate. The construction company is not required to provide, nor is the seller required to obtain, a resale certificate signed by each person making purchases on behalf of the construction company.

     (((c))) The buyer is responsible for educating all persons authorized to issue and/or use the resale certificate on the proper use of the buyer's resale certificate privileges.

     (3) Resale certificate renewal. Resale certificates must be renewed at least every four years. In addition, the buyer must renew its resale certificate whenever a change in the ownership of the buyer's business requires a new (("registrations and licenses document.")) tax registration. (See WAC 458-20-101 ((on)) Tax registration and tax reporting.) The buyer may not make purchases under the authority of a resale certificate bearing a tax registration number ((which)) that has been cancelled or revoked by the department of revenue (department).

     ((Sellers who have resale certificates on file without the additional language and information required by the July 1, 1993, amendment to RCW 82.04.470 are required to obtain revised resale certificates for sales made after June 30, 1993. However, the old resale certificates must be retained to substantiate the wholesale nature of sales made prior to July 1, 1993. These "old" certificates must be retained for at least five years from their last effective date. For example, a seller making its last wholesale sale to a particular buyer on April 1, 1991, must retain the "old" resale certificate until March 31, 1996, five years from the last sale subject to the provisions of that resale certificate. (See also WAC 458-20-254 on recordkeeping requirements.)))

     (4) Sales at wholesale. All sales are treated as retail sales unless the seller takes from the buyer a properly executed resale certificate. Resale certificates may only be used for sales at wholesale and may not be used as proof of entitlement to ((other)) retail sales tax exemptions otherwise provided by law((, such as certain sales to Indians (see WAC 458-20-192), interstate motor carriers (see WAC 458-20-174), artistic and cultural organizations (see WAC 458-20-249), etc)).

     (a) When may a buyer issue a resale certificate? The buyer may ((only)) issue a resale certificate only when the property or services purchased are:

     (((a))) (i) For resale in the regular course of the buyer's business without intervening use by the buyer; ((or

     (b))) (ii) To be used as an ingredient or component part of a new article of tangible personal property to be produced for sale; ((or

     (c))) (iii) A chemical to be used in processing an article to be produced for sale (see WAC 458-20-113 on chemicals used in processing); ((or

     (d))) (iv) To be used in processing ferrosilicon ((which)) that is subsequently used in producing magnesium for sale; ((or

     (e))) (v) Provided to consumers as a part of competitive telephone service, as defined in RCW 82.04.065; ((or

     (f))) (vi) Feed, seed, seedlings, fertilizer, spray materials, or agents for enhanced pollination including insects such as bees for use in the federal conservation reserve program or its successor administered by the United States Department of Agriculture; or

     (((g))) (vii) Feed, seed, seedlings, fertilizer, spray materials, or agents for enhanced pollination including insects such as bees for use by a farmer for producing for sale any agricultural product. (See ((also)) WAC ((458-20-122)) 458-20-210 on sales to and by farmers.)

     (b) Required information. All resale certificates, whether paper or nonpaper format, must contain the following information:

     (i) The name and address of the buyer;

     (ii) The uniform business identifier or tax registration number of the buyer, if the buyer is required to be registered with the department;

     (iii) The type of business;

     (iv) The categories of items or services to be purchased at wholesale, unless the buyer is in a business classification that may present a blanket resale certificate as provided by the department by rule;

     (v) The date on which the certificate was provided;

     (vi) A statement that the items or services purchased either are purchased for resale in the regular course of business or are otherwise purchased at wholesale; and

     (vii) A statement that the buyer acknowledges that the buyer is solely responsible for purchasing within the categories specified on the certificate and that misuse of the resale certificate subjects the buyer to a penalty of fifty percent of the tax due, in addition to the tax, interest, and any other penalties imposed by law.

     (c) Additional requirements for paper certificates. In addition to the requirements stated in subsection (4)(b) of this rule, paper certificates must contain the following:

     (i) The name of the individual authorized to sign the certificate, printed in a legible fashion;

     (ii) The signature of the authorized individual; and

     (iii) The name of the seller. RCW 82.04.470.

     (5) Seller's responsibilities for acceptance of resale certificates. When a seller receives and accepts from the buyer a resale certificate at the time of the sale, or has a resale certificate on file at the time of the sale, or obtains a resale certificate from the buyer within a reasonable time after the sale, the seller is relieved of liability for retail sales tax with respect to the sale covered by the resale certificate. The seller may accept a legible fax ((or)), a duplicate copy of an original resale certificate, or a certificate in a format other than paper. ((In all cases, the resale certificate must be accepted in good faith by the seller.)) The resale certificate will be considered to be obtained within a reasonable time of the sale if it is received within one hundred twenty days of the sale or sales in question. However, refer to (((d))) (e) of this subsection in event of an audit situation.

     (a) Timing requirements for single orders with multiple billings. If a single order or contract will result in multiple billings to the buyer, and the appropriate resale certificate was not obtained or on file at the time the order was placed or the contract entered, the resale certificate must be received by the seller within one hundred twenty days after the first billing to be considered obtained within a reasonable time of the sale. For example, a subcontractor entering into a construction contract for which it has not received a resale certificate must obtain the certificate within one hundred twenty days of the initial construction draw request to consider the resale certificate obtained in a reasonable time after the sale, even though the construction project may not be completed at that time and additional draw requests will follow.

     (b) Requirements for resale certificates obtained after reasonable time has passed. If the resale certificate is obtained more than one hundred twenty days after the sale or sales in question, the resale certificate must be specific to the sale or sales. The certificate must specifically identify the sales in question on its face, or be accompanied by other documentation signed by the buyer specifically identifying the sales in question and stating that the provisions of the accompanying resale certificate apply. A nonspecific resale certificate ((which)) that is not obtained within a reasonable period of time is generally not, in and of itself, acceptable proof of the wholesale nature of the sales in question. The resale certificate and/or required documentation must be obtained within the statutory time limitations provided by RCW 82.32.050.

     (c) Examples. The following examples explain the seller's documentary requirements in typical situations when obtaining a resale certificate more than one hundred twenty days after the sale. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.

     (i) Beginning in January of ((1994)) year 1, MN Company regularly makes sales to ABC Inc. In June of ((1994)) the same year, MN discovers ABC has not provided a resale certificate. MN requests a resale certificate from ABC and, as the resale certificate will not be received within one hundred twenty days of many of the past sales transactions, requests that the resale certificate specifically identify those past sales subject to the provisions of the certificate. MN receives a legible fax copy of an original resale certificate from ABC on July 1((, 1994))st of that year. Accompanying the resale certificate is a memo providing a list of the invoice numbers for all past sales transactions through May 15((, 1994))th of that year. This memo also states that the provisions of the resale certificate apply to all past and future sales, including those listed. MN Company has satisfied the requirement that it obtain a resale certificate specific to the sales in question. As the provisions of this resale certificate apply to both past and future sales transactions, the certificate must be renewed no later than December 31((, 1997,))st four years from the date the resale certificate became effective.

     (ii) XYZ Company makes three sales to MP Inc. in October of ((1993)) year 1 and does not charge retail sales tax. In the review of its resale certificate file in April of ((1994)) the following year, XYZ discovers it has not received a resale certificate from MP Inc. and immediately requests a certificate. As the resale certificate will not be received within one hundred twenty days of the sales in question, XYZ requests that MP provide a resale certificate identifying the sales in question. MP provides XYZ with a resale certificate ((which)) that does not identify the sales in question, but simply states "applies to all past purchases." XYZ Company has not satisfied its responsibility to obtain an appropriate resale certificate. As XYZ failed to secure a resale certificate within a reasonable period of time, XYZ must obtain a certificate specifically identifying the sales in question or prove through other facts and circumstances that these sales are wholesale sales. (Refer to (((c))) (d) of this subsection for information on how a seller can prove through other facts and circumstances that a sale is a wholesale sale.) It remains the seller's burden to prove the wholesale nature of the sales made to a buyer if the seller has not obtained a valid resale certificate within one hundred twenty days of the sale.

     (((c))) (d) Seller's liability. If the seller has not obtained an appropriate resale certificate or other acceptable documentary evidence (see subsection (8) of this ((section)) rule), the seller is personally liable for the tax due unless it can sustain the burden of proving through facts and circumstances that the property was sold for one of the purposes set forth in subsection (4)(a) ((through (g))) of this ((section)) rule. The department ((of revenue)) will consider all evidence presented by the seller, including the circumstances of the sales transaction itself, when determining whether the seller has met its burden of proof. This evidence must be presented within the statutory time limitations provided by RCW 82.32.060. It is the seller's responsibility to provide the information necessary to evaluate the facts and circumstances of all sales transactions for which resale certificates are not obtained. Facts and circumstances ((which)) that should be considered include, but are not necessarily limited to, the following:

     (i) The nature of the buyer's business. The items being purchased at wholesale must be consistent with the buyer's business. For example, a buyer having a business name of "Ace Used Cars" would generally not be expected to be in the business of selling furniture((.));

     (ii) The nature of the items sold. The items sold must be of a type ((which)) that would normally be purchased at wholesale by the buyer((.));

     (iii) The quantity and frequency of items sold. The number of items sold and the frequency of sales must indicate that the buyer is purchasing such items at wholesale((.)); and

     (iv) Additional documentation. Other available documents, such as purchase orders and shipping instructions, should be considered in determining whether they support a finding that the sales are sales at wholesale.

     (((d))) (e) Additional time to secure documentation after audit. If in event of an audit ((it is discovered)) the department discovers that the seller has not secured the necessary resale certificates and/or documentation, the seller will generally be allowed thirty days in which to obtain and present appropriate resale certificates and/or documentation, or prove by facts and circumstances the sales in question are wholesale sales. The time allotted to the seller shall commence from the date the auditor initially provides the seller with the results of the auditor's wholesale sales review. The processing of the audit report will not be delayed as a result of the seller's failure within the allotted time to secure and present appropriate documentation, or its inability to prove by facts and circumstances that the sales in question were wholesale sales. The audit report will also not be delayed because the time allotted to the seller expires prior to one hundred twenty days from the date of the sale or sales in question.

     (((e))) (f) Seller's personal liability. If the seller is unable to provide proper documentation, or unable to prove by facts and circumstances that the sales in question are wholesale sales, the seller becomes personally liable for the taxes in question. If the seller is required to make payment to the department, and later is able to present the department with proper documentation or prove by facts and circumstances that the sales in question are wholesale sales, the seller may in writing request a refund of the taxes paid along with the applicable interest. Both the request and the documentation or proof that the sales in question are wholesale sales must be submitted to the department within the statutory time limitations provided by RCW 82.32.060. (See ((also)) WAC 458-20-229.)

     (6) Penalty for improper use. Any buyer who uses a resale certificate to purchase items or services without payment of sales tax and who is not entitled to use the certificate for the purchase ((shall)) will be assessed a penalty of fifty percent of the tax due on the improperly purchased item or service((,)). This penalty is in addition to all other taxes, penalties, and interest due, and can be imposed even if there was no intent to evade the payment of retail sales tax. The penalty ((shall)) will be assessed by the department ((of revenue)) and ((will apply)) applies only to the buyer. ((The penalty applies to purchases made after June 30, 1993, and can apply even if there was no intent to evade the payment of the tax.)) However, see subsection (12) of this ((section)) rule for situations in which the department may waive the penalty.

     Persons who purchase articles or services for dual purposes (i.e., some for their own consumption and some for resale) should refer to subsection (11) of this ((section)) rule to determine whether they may give a resale certificate to the seller.

     (7) Resale certificate - ((required information)) suggested form. While there may be different forms of the resale certificate, all resale certificates must satisfy the language and information requirements provided by RCW 82.04.470. The resale certificate may be in the suggested form shown below, which is available on the department's home page at http://dor.wa.gov, or may be in any other form ((which substantially)) that contains substantially the following information and language, except that certificates provided in a format other than paper are not required to include the printed name of the person authorized to sign the certificate, the signature of the authorized individual, or the name of the seller:

The undersigned buyer hereby certifies that the tangible personal property or services specified below will be purchased for: (a) ((for)) Resale in the regular course of business without intervening use by the buyer, ((or)) (b) ((for)) use as an ingredient or component part of a new article of tangible personal property to be produced for sale, ((or)) (c) ((is)) use as a chemical to be used in processing a new article of tangible personal property to be produced for sale, or (d) ((for)) use as feed, seed, fertilizer, or spray materials in its capacity as a farmer as defined in chapter 82.04 RCW. This certificate shall be considered a part of each order ((which)) that I may ((hereafter)) give to you on or after the effective date of this certificate, unless otherwise specified, and ((shall be)) is valid until revoked by me in writing. This certificate is given with full knowledge that the buyer is solely responsible for purchasing within the categories specified on the certificate, and that misuse of the resale privilege claimed on the certificate is subject to the legally prescribed penalty of fifty percent of the tax due, in addition to the tax, interest, and any other penalties imposed by law.

     (a) ((The 1993 legislative changes to)) Buyer's responsibility to specify products or services purchased at wholesale. RCW 82.04.470 requires the buyer making purchases at wholesale to specify the kinds of products or services subject to the provisions of the resale certificate. A buyer who will purchase some of the items at wholesale, and consume and pay tax on some other items being purchased from the same seller, must use terms specific enough to clearly indicate to the seller what kinds of products or services the buyer is authorized to purchase at wholesale.

     (i) The buyer may list the particular products or services to be purchased at wholesale, or provide general category descriptions of these products or services. The terms used to describe these categories must be descriptive enough to restrict the application of the resale certificate provisions to those products or services ((which)) that the buyer is authorized to purchase at wholesale. The following are examples of terms used to describe categories of products purchased at wholesale, and businesses ((which)) that may be eligible to use such terms on their resale certificates:

     (A) "Hardware" for use by a general merchandise or building material supply store, "computer hardware" for use by a computer retailer((.));

     (B) "Paint" or "painting supplies" for use by a general merchandise or paint retailer, "automotive paint" for use by an automotive repair shop((.)); and

     (C) "Building materials" or "subcontract work" for use by prime contractors performing residential home construction, "wiring" or "lighting fixtures" for use by an electrical contractor.

     (ii) The buyer must remit retail sales tax on any taxable product or service not listed on the resale certificate provided to the seller. If the buyer gave a resale certificate to the seller and later used an item listed on the certificate, or if the seller failed to collect the sales tax on items not listed on the certificate, the buyer must remit the deferred sales or use tax due directly to the department.

     (iii) RCW 82.08.050 provides that each seller shall collect from the buyer the full amount of retail sales tax due on each retail sale. If the department finds that the seller has engaged in a consistent pattern of failing to properly charge sales tax on items not purchased at wholesale (i.e., not listed on the resale certificate), it may hold the seller liable for ((such)) the uncollected sales tax. ((However, a seller accepting a resale certificate in good faith is not required to verify that the buyer has properly listed only those items the buyer is authorized to purchase at wholesale.))

     (iv) Persons having specific questions regarding the use of terms to describe products or services purchased at wholesale may submit ((such)) their questions to the department ((of revenue)) for ruling. The department may be contacted on the internet at http://dor.wa.gov/ or by writing:

     Department of Revenue

     Taxpayer Services

     P.O. Box 47478

     Olympia, WA 98504-7478

     (b) Blanket resale certificates. A buyer who will purchase at wholesale all of the products or services being purchased from a particular seller will not be required to specifically describe the items or item categories on the resale certificate. If the certificate form provides for a description of the products or services being purchased at wholesale (as does the suggested form provided ((above)) in this rule), the buyer may specify "all products and/or services" (or make a similar designation). A resale certificate completed in this manner is often described as a blanket resale certificate.

     The resale certificate used by the buyer must, in all cases, be completed in its entirety. A resale certificate in which the section for the description of the items being purchased at wholesale is left blank by the buyer will not be considered a properly executed resale certificate.

     (c) Resale certificates for single transactions. If the resale certificate is used for a single transaction, the language and information required of a resale certificate may be written or stamped upon a purchase order or invoice. The language contained in a "single use" resale certificate should be modified to delete any reference to subsequent orders or purchases.

     (d) Examples. The following examples explain the proper use of types of resale certificates in typical situations. These examples should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances.

     (i) ABC is an automobile repair shop purchasing automobile parts for resale and tools for its own use from DE Supply. ABC must provide DE Supply with a resale certificate limiting the certificate's application to automobile part purchases. However, should ABC withdraw parts from inventory to install in its own tow truck, deferred retail sales tax or use tax must be remitted directly to the department ((of revenue)). The buyer has the responsibility to report deferred retail sales tax or use tax upon any item put to its own use, including items for which it gave a resale certificate and later used for its own use.

     (ii) X Company is a retailer selling lumber, hardware, tools, automotive parts, and household appliances. X Company regularly purchases lumber, hardware, and tools from Z Distributing. While these products are generally purchased for resale, X Company ((may)) occasionally withdraws some of these products from inventory for its own use. X Company may provide Z Distributing with a resale certificate specifying "all products purchased" are purchased at wholesale. However, whenever X Company removes any product from inventory to put to its own use, deferred retail sales tax or use tax must be remitted to the department ((of revenue)).

     (iii) TM Company is a manufacturer of electric motors. When making purchases from its suppliers, TM issues a paper purchase order. This purchase order contains ((substantially all the language and)) the information required of a resale certificate and a signature of the person ordering the items on behalf of TM. This purchase order includes a box ((which)) that, if marked, indicates to the supplier that all or certain designated items purchased are being purchased at wholesale.

     When the box indicating the purchases are being made at wholesale is marked, the purchase order can be accepted as a resale certificate. ((A resale certificate is not required to be in any particular form, it must simply contain substantially all the required information and language contained in the suggested resale certificate form described above.)) As TM Company's purchase orders are being accepted as resale certificates, they must be retained by the seller for at least five years. (See ((also)) WAC 458-20-254 ((on)) Recordkeeping ((requirements)).)

     (8) Other documentary evidence. Other documentary evidence may be used by the seller and buyer in lieu of the resale certificate form described ((above)) in this rule. However, this documentary evidence must collectively contain the information and language generally required of a resale certificate. The conditions and restrictions applicable to the use of resale certificates apply equally to other documentary evidence used in lieu of the ((above-mentioned)) resale certificate form in this rule. The following are examples of documentary evidence ((which)) that will be accepted to show that sales were at wholesale:

     (a) Combination of documentary evidence. A combination of documentation kept on file, such as a membership card or application, and a sales invoice or "certificate" taken at the point of sale with the purchases listed, provided:

     (i) The documentation kept on file contains all information ((generally)) required on a resale certificate, including, for paper certificates, the names and signatures of all persons authorized to make purchases at wholesale; and

     (ii) The sales invoice or "certificate" taken at the point of sale must contain the following:

     (A) Language certifying the purchase is made at wholesale, with acknowledgement of the penalties for the misuse of resale certificate privileges, as generally required of a resale certificate; and

     (B) The name and registration number of the buyer/business, and, if a paper certificate, an authorized signature.

     (b) Contracts of sale. A contract of sale ((which)) that within the body of the contract provides the language and information generally required of a resale certificate. The contract of sale must specify the products or services subject to the resale certificate privileges.

     (c) Other preapproved documentary evidence. Any other documentary evidence ((which)) that has been approved in advance and in writing by the department ((of revenue)).

     (9) Sales to nonresident buyers. If the buyer is a nonresident who is not engaged in business in this state, but buys articles here for the purpose of resale in the regular course of business outside this state, the seller must take from ((such a)) the buyer a resale certificate as described ((above)) in this rule. The seller may accept a resale certificate from ((a)) an unregistered nonresident buyer with the registration number information omitted, provided the balance of the resale certificate is completed in its entirety. The resale certificate should contain a statement that the items are being purchased for resale outside Washington.

     (10) Sales to farmers. Farmers selling agricultural products only at wholesale are not required to register with the department ((of revenue)). (See ((also)) WAC 458-20-101 ((on)) Tax registration and tax reporting.) When making wholesale sales to farmers (including farmers operating in other states), the seller must take from the farmer a resale certificate as described ((above)) in this rule. Farmers not required to be registered with the department ((of revenue)) may provide, and the seller may accept, resale certificates with the registration number information omitted, provided the balance of the certificates are completed in full. Persons making sales to farmers should also refer to WAC ((458-20-122)) 458-20-210 (Sales of tangible personal property for farming -- Sales of agricultural products by farmers).

     (11) Purchases for dual purposes. A buyer normally engaged in both consuming and reselling certain types of tangible personal property, and not able to determine at the time of purchase whether the particular property purchased will be consumed or resold, must purchase according to the general nature of his or her business. RCW 82.08.130. If the buyer principally consumes the articles in question, the buyer should not give a resale certificate for any part of the purchase. If the buyer principally resells the articles, the buyer may issue a resale certificate for the entire purchase. For the purposes of this subsection, the term "principally" means greater than fifty percent.

     (a) Deferred sales tax liability. If the buyer gives a resale certificate for all purchases and thereafter consumes some of the articles purchased, the buyer must set up in his or her books of account the value of the article used and remit to the department ((of revenue)) the applicable deferred sales tax. The deferred sales tax liability should be reported under the use tax classification on the buyer's excise tax return.

     (i) Buyers making purchases for dual purposes under the provisions of a resale certificate must remit deferred sales tax on all products or services they consume. If the buyer fails to make a good faith effort to remit this tax liability, the penalty for the misuse of resale certificate privileges may be assessed. This penalty will apply to the unremitted portion of the deferred sales tax liability.

     A buyer will generally be considered to be making a good faith effort to report its deferred sales tax liability if the buyer discovers a minimum of eighty percent of the tax liability within one hundred twenty days of purchase, and remits the full amount of the discovered tax liability upon the next excise tax return. However, if the buyer does not satisfy this eighty percent threshold and can show by other facts and circumstances that it made a good faith effort to report the tax liability, the penalty will not be assessed. Likewise, if the department can show by other facts and circumstances that the buyer did not make a good faith effort in remitting its tax liability the penalty will be assessed, even if the eighty percent threshold is satisfied.

     (ii) ((Example.)) The following example illustrates the use of a resale certificate for dual-use purchases. This example should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances. BC Contracting operates both as a prime contractor and speculative builder of residential homes. BC Contracting purchases building materials from Seller D ((which)) that are principally incorporated into projects upon which BC acts as a prime contractor. BC provides Seller D with a resale certificate and purchases all building materials at wholesale. BC must remit deferred sales tax upon all building materials incorporated into the speculative projects to be considered to be properly using its resale certificate privileges. The failure to make a good faith effort to identify and remit this tax liability may result in the assessment of the fifty percent penalty for the misuse of resale certificate privileges.

     (b) Tax paid at source deduction. If the buyer has not given a resale certificate, but has paid retail sales tax on all ((purchases of such)) articles of tangible personal property and subsequently resells a portion ((thereof)) of the articles, the buyer must collect the retail sales tax from its retail customers as provided by law. When reporting these sales on the excise tax return, the buyer may then claim a deduction in the amount the buyer paid for the property ((thus)) resold.

     (i) This deduction may be claimed under the retail sales tax classification only. It must be identified as a "taxable amount for tax paid at source" deduction on the deduction detail worksheet, which must be filed with the excise tax return. Failure to properly identify the deduction may result in the disallowance of the deduction. When completing the local sales tax portion of the tax return, the deduction must be computed at the local sales tax rate paid to the seller, and credited to the seller's tax location code.

     (ii) ((Example.)) The following example illustrates the tax paid at source deduction. This example should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances. Seller A is located in Spokane, Washington and purchases equipment parts for dual purposes from a supplier located in Seattle, Washington. Seller A does not issue a resale certificate for the purchase, and remits retail sales tax to the supplier at the Seattle tax rate. A portion of these parts are sold to Customer B, with retail sales tax collected at the Spokane tax rate. Seller A must report the amount of the sale to Customer B on its excise tax return, compute the local sales tax liability at the Spokane rate, and code this liability to the location code for Spokane (3210). Seller A would claim the tax paid at source deduction for the cost of the parts resold to Customer B, compute the local sales tax credit at the Seattle rate, and code this deduction amount to the location code for Seattle (1726).

     (iii) Claim for deduction will be allowed only if the taxpayer keeps and preserves records in support ((thereof which)) of the deduction that show the names of the persons from whom such articles were purchased, the date of the purchase, the type of articles, the amount of the purchase and the amount of tax ((which)) that was paid.

     (iv) Should the buyer resell the articles at wholesale, or under other situations where retail sales tax is not to be collected, the claim for the tax paid at source deduction on a particular excise tax return may result in a credit. In such cases, the department will issue a credit notice ((which)) that may be used against future tax liabilities. However, a taxpayer may request in writing a refund ((will be issued upon written request)) from the department.

     (12) Waiver of penalty for resale certificate misuse. The department may waive the penalty imposed for resale certificate misuse upon finding that the use of the certificate to purchase items or services by a person not entitled to use the certificate for that purpose was due to circumstances beyond the control of the buyer. However, the use of a resale certificate to purchase items or services for personal use outside of the business ((shall)) does not qualify for the waiver or cancellation of the penalty. The penalty will not be waived merely because the buyer was not aware of either the proper use of the resale certificate or the penalty. In all cases the burden of proving the facts is upon the buyer.

     (a) Considerations for waiver. Situations under which a waiver of the penalty will be considered by the department include, but are not necessarily limited to, the following:

     (i) The resale certificate was properly used to purchase products or services for dual purposes; or the buyer was eligible to issue the resale certificate; and the buyer made a good faith effort to discover all of its deferred sales tax liability within one hundred twenty days of purchase; and the buyer remitted the discovered tax liability upon the next excise tax return. (Refer to subsection (11)(a)(i) of this ((section)) rule for an explanation of what constitutes "good faith effort.")

     (ii) The certificate was issued and/or purchases were made without the knowledge of the buyer, and had no connection with the buyer's business activities. However, the penalty for the misuse of resale certificate privileges may be applied to the person actually issuing and/or using the resale certificate without knowledge of the buyer.

     (b) One-time waiver of penalty for inadvertent or unintentional resale certificate misuse. The penalty prescribed for the misuse of the resale certificate may be waived or cancelled on a one time only basis if such misuse was inadvertent or unintentional, and the item was purchased for use within the business. If the department ((of revenue)) does grant a one time waiver of the penalty, the buyer ((shall)) will be provided written notification at that time.

     (c) Examples. The following are examples of typical situations where the fifty percent penalty for the misuse of resale privileges will or will not be assessed. These examples should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances.

     (i) ABC Manufacturing purchases electrical wiring and tools from X Supply. The electrical wiring is purchased for dual purposes, i.e., for resale and for consumption, with more than fifty percent of the wiring purchases becoming a component of items ((which)) that ABC manufactures for sale. ABC Manufacturing issues a resale certificate to X Supply specifying "electrical wiring" as the category of items purchased for resale. ABC regularly reviews its purchases and remits deferred sales tax upon the ((consumed)) wiring it uses as a consumer.

     ABC is subsequently audited by the department ((of revenue)) and it is discovered that ABC Manufacturing failed to remit deferred sales tax upon three purchases of wiring for consumption. The unreported tax liability attributable to these three purchases is less than five percent of the total deferred sales tax liability for wiring purchases made from X Supply. It is also determined that the failure to remit deferred sales tax upon these purchases was merely an oversight. The fifty percent penalty for the misuse of resale certificate privileges does not apply, even though ABC failed to remit deferred sales tax on these purchases. The resale certificate was properly issued, and ABC remitted to the department more than eighty percent of the deferred sales tax liability for wiring purchases from X Supply.

     (ii) During a routine audit examination of a jewelry store, the department ((of revenue)) discovers that a dentist has provided a resale certificate for the purchase of a necklace. This resale certificate indicates that in addition to operating a dentistry practice, the dentist also sells jewelry. ((There is no indication that the jewelry store did not accept the resale certificate in good faith.)) The resale certificate contains the information required under RCW 82.04.470.

     Upon further investigation, the department ((of revenue)) finds that the dentist is not engaged in selling jewelry. ((As the jewelry store accepted the resale certificate in good faith,)) The department will look to the dentist for payment of the applicable retail sales tax. In addition, the dentist will be assessed the fifty percent penalty for the misuse of resale certificate privileges. The penalty will not be waived or cancelled as the dentist misused the resale certificate privileges to purchase a necklace for personal use.

     (iii) During a routine audit examination of a computer dealer, it is discovered that a resale certificate was obtained from a bookkeeping service. The resale certificate was completed in its entirety and accepted ((in good faith)) by the dealer. Upon further investigation it is discovered that the bookkeeping service had no knowledge of the resale certificate, and had made no payment to the computer dealer. The employee who signed the resale certificate had purchased the computer for personal use, and had personally made payment to the computer dealer.

     The fifty percent penalty for the misuse of the resale certificate privileges will be waived for the bookkeeping service. The bookkeeping service had no knowledge of the purchase or unauthorized use of the resale certificate. However, the department ((of revenue)) will look to the employee for payment of the taxes and the fifty percent penalty for the misuse of resale certificate privileges.

     (iv) During an audit examination it is discovered that XYZ Corporation, a duplicating company, purchased copying equipment for its own use. XYZ Corporation issued a resale certificate to the seller despite the fact that XYZ does not sell copying equipment. XYZ also failed to remit either the deferred sales or use tax to the department ((of revenue)). As a result of a previous investigation by the department ((of revenue)), XYZ had been informed in writing that retail sales and/or use tax applied to all such purchases. The fifty percent penalty for the misuse of resale certificate privileges will be assessed. XYZ was not eligible to provide a resale certificate for the purchase of copying equipment, and had previously been so informed. The penalty will apply to the unremitted deferred sales tax liability.

     (v) AZ Construction issued a resale certificate to a building material supplier for the purchase of "pins" and "loads." The "pins" are fasteners ((which)) that become a component part of the finished structure. The "load" is a powder charge ((which)) that is used to drive the "pin" into the materials being fastened together. AZ Construction is informed during the course of an audit examination that ((AZ Construction)) it is considered the consumer of the "loads" and may not issue a resale certificate for ((the)) its purchase thereof. AZ Construction indicates that it was unaware that a resale certificate could not be issued for the purchase of "loads," and there is no indication that AZ Construction had previously been so informed.

     The failure to be aware of the proper use of the resale certificate is not generally grounds for waiving the fifty percent penalty for the misuse of resale certificate privileges. However, AZ Construction does qualify for the "one time only" waiver of the penalty as the misuse of the resale certificate privilege was unintentional and the "loads" were purchased for use within the business.

[Statutory Authority: RCW 82.32.300. 94-13-031, § 458-20-102, filed 6/6/94, effective 7/7/94; 86-09-058 (Order ET 86-7), § 458-20-102, filed 4/17/86; 83-07-034 (Order ET 83-17), § 458-20-102, filed 3/15/83; Order ET 70-3, § 458-20-102 (Rule 102), filed 5/29/70, effective 7/1/70.]

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