Rulings of the Tax Commissioner

June 23, 2023

Re:    § 58.1-1821 Appeal: Retail Sales and Use Tax
    
Dear *****:

This will respond to your letter in which you seek correction of the retail sales and use tax assessments issued to *****. (the “Taxpayer”) for the period September 2012 through August 2018. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, an event venue in Virginia, included tangible personal property, such as tables and chairs, as a part of its venue rentals. The Taxpayer charged one lump sum amount for rental of the venue and any tangible personal property. 

During the Department’s audit, the Taxpayer did not provide any records, so assessments were issued based on the best available information. The Taxpayer appealed and the Department issued Public Document (P.D.) 20-28 (2/7/2020), determining that the assessments were properly issued. The Taxpayer was allowed one final opportunity to provide the necessary records. Subsequently, the Taxpayer provided additional information and the Department revised the assessments based upon the new information received. 

The Taxpayer now appeals the revised assessments, alleging its transactions are not subject to Virginia’s retail sales and use tax because the provision of space is not taxable and any tangible personal property included in the transactions is not the true object of the transactions. In the alternative, the Taxpayer believes the assessment should be reduced because only a portion of the transactions are taxable, and the Taxpayer should only be liable for tax after it began operating in January 2016. 

DETERMINATION

Accommodations

The Taxpayer first argues the auditor concluded that its transactions resulted from the sales of rooms, lodgings, or accommodations. Virginia Code § 58.1-603 4 imposes the retail sales tax on “the gross proceeds derived from the sale or charge for rooms, lodgings or accommodations furnished to transients as set out in the definition of ‘retail sale’ in Virginia Code § 58.1-602.”  The Department has interpreted the definitions of “retail sale,” “accommodations,” and “transient” found in Virginia Code § 58.1-602 to require an overnight stay for tax to apply to the rental of venue space without the transfer of tangible personal property. See P.D. 87-69 (2/27/1987), P.D. 89-257 (9/25/1989) P.D.95-158 (6/16/1995), P.D. 98-85 (5/7/1998), and P.D. 02-38 (4/1/2002). 

While cabins were located on the property, a different entity was operating them as overnight accommodations. Thus, the evidence provided shows the Taxpayer was not providing overnight stays at its venue.

Rental of Real Property

The Taxpayer further argues that it did not provide tangible personal property as part of its fee for the rental of its venue space. Virginia Code § 58.1-603 imposes the retail sales tax on the sale or rental of tangible personal property in Virginia. The tax is imposed on the gross proceeds derived from a lease or rental of tangible personal property. “Gross proceeds” includes the total amount charged for tangible personal property. See Virginia Code § 58.1-602. 

The Department’s policy has been that, when a dealer charges one lump sum amount for both taxable and nontaxable items in a transaction, the tax is applied to the entire transaction. See P.D. 94-142 (4/29/1994), P.D. 95-223 (8/29/1995), P.D. 09-2 (2/4/2009), and P.D. 20-177 (10/06/2020). Conversely, the Department has ruled that fees charged for the use of real property, for which an overnight stay was not provided, were not taxable provided that no tangible personal property was included in the total amount charged. See P.D. 87-69, P.D. 98-85, P.D. 02-38, and P.D. 12-82 (5/11/2012).

Although the Taxpayer correctly argues that the rental of the venue alone would not be subject to the tax, the rental contracts indicate that its transactions included the provision of tangible personal property, such as tables and chairs. The Taxpayer explains that the tables and chairs are made available for customers if they wish, but the tables and chairs were not used for all the events held at the venue. As indicated above, however, the tax applies based on what is included in the fee or charge, not what is used or not used.

True Object Test

The Taxpayer argues that its transactions are still not subject to tax pursuant to the true object test described in Title 23 of the Virginia Administrative Code 10-210-4040. In accordance with the regulation, the true object test is applied in order to determine whether a particular transaction involving both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale. The test is not applicable to the Taxpayer’s situation because the transactions do not involve the provision of a service. Accordingly, the tax was correctly applied to the total lump sum charge. 

Audit Period

The Taxpayer has filed no sales and use tax returns for the initial audit period. Based on an investigation, which included research on the Taxpayer’s social media pages, audit staff concluded the business could have been conducting business as early as 2008 and initiated a six-year audit as permitted under Virginia Code § 58.1-634. However, the Taxpayer, a corporate entity established in August 2015, asserts that it did not begin operations until January 2016, and does not appear to be a successor entity liable for the tax of another. As a separate and distinct business entity, the Taxpayer cannot be held liable for any tax incurred before it was created and began operations. 

CONCLUSION

Based on the above analysis, this audit will be returned to the auditor to make a determination on when the Taxpayer began operations and to adjust the assessments by removing any liability incurred before that time. The auditor will issue a revised bill for the corrected tax liability, applicable penalty, and interest accrued to date. The Taxpayer will be given 60 days from the bill date to pay the assessment to avoid the accrual of additional interest and possible collection action. 

The Code of Virginia sections, regulation, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****, or via email at *****@tax.virginia.gov.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/3665-C