Introduction: When a taxpayer is under audit, the audit review may reveal that sales/use tax was incorrectly paid by that taxpayer to its vendor on items exempt from tax. In such a situation, the taxpayer normally would supply the appropriate documentation to its vendor and seek a refund. The vendor could then apply for an abatement of tax. However, if the overpayment of tax was discovered at a time beyond the vendor's statute of limitations for seeking an abatement, the Department has in the past allowed an audit adjustment referred to as a "vendor credit" in situations where the Department and the taxpayer had agreed to extend the statute of limitations for the audit. The Department is discontinuing that practice for the reasons discussed below and pursuant to the transitional rules explained herein.

Issue: If a taxpayer under audit by the Department of Revenue agrees to extend the statute of limitations for making an assessment pursuant to G.L. c. 62C, § 27, may a taxpayer seek a "vendor credit" for sales/use tax paid on exempt items that would otherwise be outside its vendor's statute of limitations for an abatement under G.L. c. 62C, § 37?

Directive: Taxpayers under audit by the Department will no longer be granted a "vendor credit" adjustment for sales/use tax paid on tax exempt items against amounts of additional tax liability which may be assessed in the pending audit. Taxpayers that have paid sales/use tax on exempt items should seek a refund from the vendor to whom they paid the tax. The vendor may request an abatement by filing Form CA-6 with the Department's Customer Service Bureau within the time limitations contained in G.L. c. 62C, § 37. An agreed upon extension of the statute of limitations for making an assessment against a taxpayer under audit pursuant to G.L. c. 62C, § 27, does not extend the time period in G.L. c. 62C, § 37, during which its vendor must file an abatement claim for sales/use taxes collected from that taxpayer.

Discussion:

The Commissioner of Revenue will prospectively discontinue the practice whereby tax credits (so-called "vendor credits") are allowed to taxpayers under audit for substantiated overpayments of Massachusetts sales/use taxes that are otherwise outside the statute of limitations for abatements contained in G.L. c. 62C, § 37. The interests of uniform administration of the tax laws of the Commonwealth require all taxpayers to protect their claims for overpaid taxes in the same manner, i.e., by filing an application for abatement, pursuant to G.L c. 62C, § 37 and 830 CMR 62C.37.1.

Effective Date: Vendor credits will not be available to any taxpayers under audit with respect to any sales or use tax paid to a vendor on or after January 1, 2000. Properly substantiated vendor credits in pending audits will be allowed for sales/use tax paid to a vendor prior to January 1, 2000, providing the taxpayer has agreed to extend the statute of limitations for making an assessment pursuant to G.L. c. 62C, § 27.

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:DMS:ecl

December 23, 2002

DD 02-17