Tax Type
Retail Sales and Use Tax
Description
Mixed real and tangible property lease; Restaurant
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
03-14-1994
March 14, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter in which you seek correction of a retail sales and use tax assessment for **************(the "Taxpayer").
FACTS
The Taxpayer is an operator of seafood restaurants. It has both company owned stores and independent locations under licensing agreements. The independent locations are responsible for their own management. They are required to purchase their products from the Taxpayer and are charged a 10% "license and rental fee" on purchases.
The company owned stores are formed as wholly owned subsidiaries of the Taxpayer. They are built and furnished by the Taxpayer and leased to the subsidiary which operates them. The Taxpayer also charges the company owned stores the same 10% fee for internal bookkeeping purposes to cover the cost of managing these locations. There are no formal contracts between the Taxpayer and the subsidiaries, nor any written contracts concerning the fee.
The Taxpayer has two company owned stores in Virginia -- the first in ***********opened in ***********("Location #1") and the second**************(Location #2). An second in audit of the Taxpayer for the period January, 1987 through September, 1990 produced an assessment for the Taxpayer's failure to remit the tax on that part of the fee attributable to the rental of tangible personal property. The Taxpayer concedes that a portion of the fee is attributable to the rental of tangible personal property. However, the Taxpayer contends that the valuation method used by the auditor 1) does not take into account that a portion of the fee is for the management of the locations and 2) should be based upon original costs as opposed to depreciation expense to arrive at a more reasonable and equitable value.
DETERMINATION
First, the Taxpayer contends that the fee charged each month to the company owned stores represents a management fee and a rental fee. However, the Taxpayer has provided no evidence to support this contention.
The Taxpayer has provided a copy of its agreement with its independent locations which provides in part that the Taxpayer "shall provide the initial equipment and furnishings for the operation of the restaurant" and "[t]he operator agrees to pay a sum equal to ten percent (10%) of his weekly purchases or food items as license fee and rental for the premises and contents." The Taxpayer provides no management services to these locations, nor is any portion of the license and rental fee attributable to such services.
Va. Code §58.1-618(C) provides:
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- In the case of the lease of tangible personal property, if the consideration given or reported by the dealer, in the judgement of the Tax Commissioner, does not represent the true or actual consideration, then the Tax Commissioner is authorized to fix the same and assess and collect the tax...The assessment so made shall be deemed prima facie correct.
As the Taxpayer has stated that the fee charged the company owned stores is the same as that provided its independent locations, I must conclude that the fee represents the charge for the lease of real and tangible personal property only. I can find no basis to support the Taxpayer's position that 5% of the 10% license and rental fee is for management of the businesses.
The Taxpayer also contends the valuation method used by the auditor is not reasonable. I would agree with the Taxpayer that a valuation method using the historical costs for the land, building, improvements, and equipment would be reasonable. The Taxpayer has provided a schedule of the costs attributable to real property and tangible personal property. This would result in a reduction in the percentage applicable to gross proceeds from 38% for both locations to 21% for Location #1 and 16% for Location #2.
Accordingly, the audit will be returned to the********* District Office to be revised in accordance with the determination reached in this letter. You will shortly receive a revised audit report and bill reflecting these revisions and the computation of interest accrued to date. The bill must be paid in full within 30 days to avoid additional interest and collection actions.
If you have any other questions, please do not hesitate to contact the department.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/5862B
Rulings of the Tax Commissioner