Tax Type
Retail Sales and Use Tax
Description
Catered food sales to government and nonprofit organizations, Catering labor
Topic
Statute of Limitations
Taxability of Persons and Transactions
Date Issued
07-31-2000
July 31, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of a retail sales and use tax audit assessment issued to ***** (the "Taxpayer"), for the period July 1994 through June 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a catering business and was assessed tax on sales of catering services and purchases provided in connection with such services. The Taxpayer disputes the tax and raises a number of issues.
The issues will be addressed individually.
DETERMINATION
Statute of Limitations
A portion of the assessment relates to the periods July 1994 through November 1994, which you contend are outside the three-year statute of limitations for assessments. You cite Code of Virginia § 58.1-634 to support your contention that the tax has been erroneously assessed for these periods.
Code of Virginia § 58.1-634 provides that sales and use taxes shall be imposed within three years from the date that such taxes became due and payable. The tax may be assessed within six years in the case of false or fraudulent returns filed with the intent to evade payment of the taxes. There is no issue of fraud in this case, and the Taxpayer filed sales tax returns and reported the tax for every month of the audit period. Because the tax was assessed on January 9, 1998, the periods of July 1994 through November 1994 are outside the three-year limitations period for assessments and will be removed from the audit.
Sampling and Availability of Records
You contend the assessment is erroneous based on the auditor's failure to review actual records and the resulting sampling method used to estimate the assessment. You submit that the actual records were available during the review period, and the auditor should make an adjustment to the assessment based on these records.
The auditor applied the sampling method using the limited information provided during the audit, and the assessment was estimated based on such information. At the conclusion of the audit, the auditor issued a letter dated October 3, 1997 to the Taxpayer and requested additional information necessary to make any adjustments. The auditor did not receive the requested information by the stated deadline of October 17, 1997, and the tax was assessed based on the available information.
In order to make any adjustments to the assessment, the auditor will revisit the Taxpayer to review the additional records. If the Taxpayer prefers that the auditor perform a detailed audit, the necessary records must be provided for the entire audit period. This includes sales and purchase invoices for each period of the audit. If complete records are not available, the auditor will make any adjustments, if warranted, using a sampling method reflective of the available information.
Tax Application to Sales of Catered Food
You dispute the application of the tax to sales of catering as taxable services. It is your position that such sales constitute sales of tangible personal property.
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 provides that charges for services are generally exempt from the sales and use tax. However, services provided in connection with the sale of tangible personal property are taxable. Food in and of itself constitutes tangible personal property. However, the provision of catered food involves the element of preparation which is a service. Because preparation services must be performed in order to provide catered food, the sale of such constitutes a taxable service in accordance with the regulation.
This is consistent with the department's regulation regarding meals. According to 23 VAC 10-210-930, retail sales of meals by restaurants, hotels, motels, clubs, caterers, cafes and others are taxable. In these instances, certain services are provided in connection with the provision of food and, therefore, a taxable service is rendered. I have enclosed a sampling of rulings in which the department has consistently held sales of catered meals to be taxable services.
Sales to Nonprofit Organizations and Governments
It is your belief that sales of catered food to exempt nonprofit organizations and government entities constitute sales of tangible personal property eligible for exemption.
The department's regulation 23 VAC 10-210-1071 provides that exemptions granted to nonprofit organizations typically apply to the use or consumption of tangible personal property by an organization. When the exemption is limited to use or consumption of tangible personal property, the organization must pay the tax on purchases of meals and lodging, which are considered taxable services. In limited situations, the General Assembly has granted broader exemptions to certain organizations that exempt taxable services, e.g., Code of Virginia § 58.1-609.4(4).
As explained previously, the sale of catered food is considered the sale of a service. Unless a nonprofit organization has been granted an exemption for its purchases of taxable services by the General Assembly, the organization is required to pay the tax on such purchases. Therefore, the Taxpayer must charge the tax on sales of catering food to nonprofit organizations that have not been granted an exemption that includes the purchase of taxable services.
With respect to the sale of catered food to government entities, the department has consistently held sales of meals to governments for consumption by individuals to be taxable. Such sales are exempt when sold to governments for consumption by them or for use in the provision of their services. For example, the Tax Commissioner, in Public Document (P.D.) 87-245 (11/4/87), found sales of food sold to a local government to be exempt because the food was served to inmates housed in a jail facility operated by the local government. The ruling makes a distinction between food purchases for consumption by jail inmates and food purchases for consumption by individuals at a government-sponsored social event.
The department's policy is consistent with a Virginia Attorney General's opinion which addressed the application of the government exemption to catered meals purchased by the state with public funds and consumed by guests attending a conference hosted by the state. (Att'y Gen. Ann. Rep.: 1969-1970 at 291, copy enclosed). The Attorney General concluded that the consumption of meals by banquet guests did not sufficiently reflect use by the Commonwealth over the food to warrant exemption. The opinion was affirmed by an informal opinion of the Attorney General dated January 11, 1993, copy enclosed.
Labor Associated with Catered Meals
You contend that the sales tax should not apply to separately stated labor charges for personnel serving at a catered event.
It has been established that the provision of catered food is considered the sale of a taxable service. As provided in P.D. 89-167 (5/22/89), the issue of personnel labor provided in conjunction with catering services was addressed in detail. The ruling explained that "sales price" as defined in 23 VAC 10-210-4000 (formerly VR 630-10-95) means "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale." Therefore, the Taxpayer's charges for labor in connection with the provision of the catering services are subject to the tax. The department also addressed the issue in P.D. 88-147 (6/20/88) and P.D. 93-33 (2/24/93).
Leased Equipment for Rental to Customers
You take exception to the tax assessed on equipment leased by the Taxpayer for rental to its customers in conjunction with the provision of catered food. You disagree with the analysis of this issue in P.D. 89-167, which held that the purchase or lease of equipment for preparing and serving meals may not be purchased under the resale exemption, as such equipment is used by the caterer in the provision of the meals. It is your belief that P.D. 89-167 is in error because it does not address the exemption for leased property under Code of Virginia § 58.1-609.10(3).
Code of Virginia § 58.1-609.10(3) provides an exemption for tangible personal property for future use by a person for taxable lease or rental as an established business or part of an established business, or incidental or germane to such business, including a simultaneous purchase and taxable leaseback.
The above lease exemption is not available to the Taxpayer as a caterer because the Taxpayer contracts to provide services and property to its customer as a total package. In fulfilling the customer's request for equipment, the Taxpayer engages in a lease of the equipment which is incorporated into the presentation of the total package. The Taxpayer is therefore considered the user or consumer and must pay the tax on the lease of the equipment provided in connection with the provision of the catering services.
Conclusion
The Taxpayer as a caterer is engaged in the provision of prepared food which is a taxable service. Purchases of tangible personal property that are used or provided in connection with the provision of the catering services are subject to the sales tax at the time of purchase. The total charge from the Taxpayer to the customer is subject to the sales tax under the definition of "sales price" in 23 VAC 10-210-4000. In addition, the department addressed the application of the sales tax to caterers in Tax Bulletin 92-10 (11/4/92), copy enclosed.
The department's policy regarding caterers is well established and has been consistently applied. Therefore, I do not see the need for a conference to discuss the issues.
The audit file will be returned to the audit staff to make the adjustments regarding the statute of limitations issue. The auditor will contact the Taxpayer within 30 days of the date of this letter in regard to the review of records. If you have questions concerning the policy set forth in this letter, you may contact ********** in the Office of Tax Policy at **********. Inquiries concerning the audit adjustments and review of the records should be directed to ********** in the Office of Compliance at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13634J
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of a retail sales and use tax audit assessment issued to ***** (the "Taxpayer"), for the period July 1994 through June 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a catering business and was assessed tax on sales of catering services and purchases provided in connection with such services. The Taxpayer disputes the tax and raises a number of issues.
The issues will be addressed individually.
DETERMINATION
Statute of Limitations
A portion of the assessment relates to the periods July 1994 through November 1994, which you contend are outside the three-year statute of limitations for assessments. You cite Code of Virginia § 58.1-634 to support your contention that the tax has been erroneously assessed for these periods.
Code of Virginia § 58.1-634 provides that sales and use taxes shall be imposed within three years from the date that such taxes became due and payable. The tax may be assessed within six years in the case of false or fraudulent returns filed with the intent to evade payment of the taxes. There is no issue of fraud in this case, and the Taxpayer filed sales tax returns and reported the tax for every month of the audit period. Because the tax was assessed on January 9, 1998, the periods of July 1994 through November 1994 are outside the three-year limitations period for assessments and will be removed from the audit.
Sampling and Availability of Records
You contend the assessment is erroneous based on the auditor's failure to review actual records and the resulting sampling method used to estimate the assessment. You submit that the actual records were available during the review period, and the auditor should make an adjustment to the assessment based on these records.
The auditor applied the sampling method using the limited information provided during the audit, and the assessment was estimated based on such information. At the conclusion of the audit, the auditor issued a letter dated October 3, 1997 to the Taxpayer and requested additional information necessary to make any adjustments. The auditor did not receive the requested information by the stated deadline of October 17, 1997, and the tax was assessed based on the available information.
In order to make any adjustments to the assessment, the auditor will revisit the Taxpayer to review the additional records. If the Taxpayer prefers that the auditor perform a detailed audit, the necessary records must be provided for the entire audit period. This includes sales and purchase invoices for each period of the audit. If complete records are not available, the auditor will make any adjustments, if warranted, using a sampling method reflective of the available information.
Tax Application to Sales of Catered Food
You dispute the application of the tax to sales of catering as taxable services. It is your position that such sales constitute sales of tangible personal property.
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 provides that charges for services are generally exempt from the sales and use tax. However, services provided in connection with the sale of tangible personal property are taxable. Food in and of itself constitutes tangible personal property. However, the provision of catered food involves the element of preparation which is a service. Because preparation services must be performed in order to provide catered food, the sale of such constitutes a taxable service in accordance with the regulation.
This is consistent with the department's regulation regarding meals. According to 23 VAC 10-210-930, retail sales of meals by restaurants, hotels, motels, clubs, caterers, cafes and others are taxable. In these instances, certain services are provided in connection with the provision of food and, therefore, a taxable service is rendered. I have enclosed a sampling of rulings in which the department has consistently held sales of catered meals to be taxable services.
Sales to Nonprofit Organizations and Governments
It is your belief that sales of catered food to exempt nonprofit organizations and government entities constitute sales of tangible personal property eligible for exemption.
The department's regulation 23 VAC 10-210-1071 provides that exemptions granted to nonprofit organizations typically apply to the use or consumption of tangible personal property by an organization. When the exemption is limited to use or consumption of tangible personal property, the organization must pay the tax on purchases of meals and lodging, which are considered taxable services. In limited situations, the General Assembly has granted broader exemptions to certain organizations that exempt taxable services, e.g., Code of Virginia § 58.1-609.4(4).
As explained previously, the sale of catered food is considered the sale of a service. Unless a nonprofit organization has been granted an exemption for its purchases of taxable services by the General Assembly, the organization is required to pay the tax on such purchases. Therefore, the Taxpayer must charge the tax on sales of catering food to nonprofit organizations that have not been granted an exemption that includes the purchase of taxable services.
With respect to the sale of catered food to government entities, the department has consistently held sales of meals to governments for consumption by individuals to be taxable. Such sales are exempt when sold to governments for consumption by them or for use in the provision of their services. For example, the Tax Commissioner, in Public Document (P.D.) 87-245 (11/4/87), found sales of food sold to a local government to be exempt because the food was served to inmates housed in a jail facility operated by the local government. The ruling makes a distinction between food purchases for consumption by jail inmates and food purchases for consumption by individuals at a government-sponsored social event.
The department's policy is consistent with a Virginia Attorney General's opinion which addressed the application of the government exemption to catered meals purchased by the state with public funds and consumed by guests attending a conference hosted by the state. (Att'y Gen. Ann. Rep.: 1969-1970 at 291, copy enclosed). The Attorney General concluded that the consumption of meals by banquet guests did not sufficiently reflect use by the Commonwealth over the food to warrant exemption. The opinion was affirmed by an informal opinion of the Attorney General dated January 11, 1993, copy enclosed.
Labor Associated with Catered Meals
You contend that the sales tax should not apply to separately stated labor charges for personnel serving at a catered event.
It has been established that the provision of catered food is considered the sale of a taxable service. As provided in P.D. 89-167 (5/22/89), the issue of personnel labor provided in conjunction with catering services was addressed in detail. The ruling explained that "sales price" as defined in 23 VAC 10-210-4000 (formerly VR 630-10-95) means "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale." Therefore, the Taxpayer's charges for labor in connection with the provision of the catering services are subject to the tax. The department also addressed the issue in P.D. 88-147 (6/20/88) and P.D. 93-33 (2/24/93).
Leased Equipment for Rental to Customers
You take exception to the tax assessed on equipment leased by the Taxpayer for rental to its customers in conjunction with the provision of catered food. You disagree with the analysis of this issue in P.D. 89-167, which held that the purchase or lease of equipment for preparing and serving meals may not be purchased under the resale exemption, as such equipment is used by the caterer in the provision of the meals. It is your belief that P.D. 89-167 is in error because it does not address the exemption for leased property under Code of Virginia § 58.1-609.10(3).
Code of Virginia § 58.1-609.10(3) provides an exemption for tangible personal property for future use by a person for taxable lease or rental as an established business or part of an established business, or incidental or germane to such business, including a simultaneous purchase and taxable leaseback.
The above lease exemption is not available to the Taxpayer as a caterer because the Taxpayer contracts to provide services and property to its customer as a total package. In fulfilling the customer's request for equipment, the Taxpayer engages in a lease of the equipment which is incorporated into the presentation of the total package. The Taxpayer is therefore considered the user or consumer and must pay the tax on the lease of the equipment provided in connection with the provision of the catering services.
Conclusion
The Taxpayer as a caterer is engaged in the provision of prepared food which is a taxable service. Purchases of tangible personal property that are used or provided in connection with the provision of the catering services are subject to the sales tax at the time of purchase. The total charge from the Taxpayer to the customer is subject to the sales tax under the definition of "sales price" in 23 VAC 10-210-4000. In addition, the department addressed the application of the sales tax to caterers in Tax Bulletin 92-10 (11/4/92), copy enclosed.
The department's policy regarding caterers is well established and has been consistently applied. Therefore, I do not see the need for a conference to discuss the issues.
The audit file will be returned to the audit staff to make the adjustments regarding the statute of limitations issue. The auditor will contact the Taxpayer within 30 days of the date of this letter in regard to the review of records. If you have questions concerning the policy set forth in this letter, you may contact ********** in the Office of Tax Policy at **********. Inquiries concerning the audit adjustments and review of the records should be directed to ********** in the Office of Compliance at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13634J
Rulings of the Tax Commissioner