03-42 | Virginia Tax

Tax Type

Consumer Use Tax

Retail Sales and Use Tax

Description

Chesapeake Hospital Authority d/b/a Chesapeake General Hospital

Topic

Court Case

Exemptions

Taxable Income

Date Issued

01-01-2003

see date

FIRST JUDICIAL CIRCUIT
OF VIRGINIA

Judges 307 ALBEMARLE DRIVE, SUITS 400A

V. THOMAS FOREHAND, JR. CHESAPEAKE, VIRGINIA 23322-5580
S. BERNARD GOODWYN 757-382-3050
FREDERICK H. CREEMORE FAX NOS. 757-382-3080 / 757-382-3090
BRUCE H. KUSHNER

June 15, 2000
see date

James A. Leftwich, Jr., Esquire
Basnight, Kinser, Telefeyan, Leftwich, and Nuckolls
308 Cedar Lakes Drive
Chesapeake, Virginia 23322

Sydney E. Rab, Esquire
Assistant Attorney General
900 East Main Street
Richmond, Virginia 23219

RE: Chesapeake Hospital Authority d/b/a Chesapeake General Hospital
Commonwealth of Virginia
In Law No. 99-43

Gentlemen,

This suit arises from a tax assessment made, on March 31, 1997, on Chesapeake Hospital Authority for its operations, between December 1, 1993 and November 30, 1996, of Chesapeake General Hospital. Specifically, the assessment was made on the dietary transfers within the hospital. A dietary transfer is the accounting term used by the hospital in order to track transfers of food, including labor to prepare said food, from its food operations department to other departments. The Virginia Department of Taxation assessed $21,264.69, with interest of $4,113.22, for a total of $25,377.91. This suit involves a motion for judgment by the Hospital seeking return of the monies assessed and an order affirming that it is exempt from such assessments.

The Hospital's food operations department is engaged in the purchase arid preparation of food materials. Food is sold to Hospital staff and visitors far consumption on the hospital campus, for "carry-out" purposes, and provides general catering services. Sales taxes are levied and paid on the aforementioned functions, and such are not in dispute in the instant action. The food operations department, however, also provides food, without charge to attendees, for staff meetings, physician meetings, Hospital Authority meetings, and other occasional meetings that are held from time to time. It is this act of providing food to meetings of the sort listed that is directly at issue in this case.

There is no question that the Commonwealth may levy a use tax. Virginia Code § 58.1-604 imposes such a tax on "the use or consumption of tangible personal property in [the] Commonwealth..." Therefore, any entity that consumes tangible personal property or completely uses property to exhaustion is liable for the tax. Food items have been determined to be tangible personal property subject to use taxation. Attorney General Opinion 67-70 (May 14, 1970).

As a general point then, the Hospital would be liable for the use tax on dietary transfers unless an exception exists to remove liability. The Hospital points to three exceptions that they argue removes the hospital from use tax coverage. Code § 58.1-609.1(4) provides that sales and use taxes do not apply to tangible personal property "for use or consumption by the Commonwealth [or] any political subdivision of the Commonwealth." The Hospital is a political sub-division of the Commonwealth, created by the General Assembly in 1966. Va. Acts of Assembly, Chapter 271 (March 31, 1966). See Also Va. Acts of Assembly Chapter 396 (1987) (amendments to authority of the Hospital). The Hospital further claims that Code § 58.1.609.7 (4) grants a exemption from use and sales tax for "tangible personal property... [used or consumed]... by a nonprofit hospital..." As a nonprofit hospital, the Hospital claims this section of the code provides it protection from use taxation. Finally, the Hospital claims that under Virginia Regulation 630-10-64(C), any food service operator that provides meals and drinks to employees is exempt from use tax on those meals and drinks. The Hospital claims that the dietary transfers at issue fit into the meaning of this regulation, affording an exemption.

The issue of the Hospital's liability for the use tax was first determined by the Department of Taxation in a March 31, 1997 assessment. The Hospital then appealed the assessment to the Tax Commissioner for the Commonwealth of Virginia. After review, the Tax Commissioner denied the appeal and upheld the assessment. Then, pursuant to Virginia Code § 58.1-1825, the Hospital appealed the decision to this Court for determination.

The standard that this Court employs in determining the issues of this case is that related to an appeal from an administrative body. Specifically, the holdings of the Tax Commissioner are to be viewed as "prima facie correct." Virginia Dept, of Taxation v. Blanks Oil, 255 Va. 242 (1998). A presumption of validity therefore attaches to the Commissioner's ruling, and the burden is on the taxpayer to prove the ruling is contrary to law or that the Commissioner abused his discretion and acted unreasonably. Commonwealth v. Wellmore Coal, 228 Va. 149 (1984). Plainly, a Court should not overturn the Commissioner's decision unless the assessment is contrary to law, was a abuse of discretion, or was the product of arbitrary, capricious, or unreasonable behavior. Virginia Dept. of Taxation v. Lucky Stores 217 Va. 121 (1976).

The Court finds that the assessment was not the product of any unreasonable behavior by the Department of Taxation. The Department did not act in an arbitrary or capricious manner in its assessment. The Court would not be within its power to overturn the assessment on this basis. However, the Court has examined the assessment in light of the standard of being contrary to law. The Court carefully examined the Hospital's arguments for exemptions to the use tax and makes it's holding based upon those exemptions being a matter of law.

The Hospital argues that an exception is provided to it by Virginia Code § 58.1-609.1(4), in that a use tax does not apply to tangible personal property consumed "by the Commonwealth [or] any political subdivision of the Commonwealth." As a political entity of the Commonwealth, the Hospital claims it is such a political subdivision to be afforded immunity. Therefore, the basis of this claim requires elaboration and analysis.

As mentioned, food is tangible property in the Commonwealth. Attorney General Opinion 67-70 (May 14, 1970). The facts further established that the food at issue here is the personal property of the Hospital. The Hospital purchases food in raw material form and exclusively prepares those materials into final food products, giving the Hospital sufficient dominion and control over the food to confer tangible personal property status. See Admn-Rul, VA Taxpayer, 203-023, Rulings of Commissioner, P.D. 96-153 (June 24, 1996) (holding that a state agency did not exercise sufficient control over catered food as to confer ownership rights, necessary for a exemption).

A principal issue is whether the Hospital consumes the food when it performs a dietary transfer. The Department of Taxation asserts two arguments in support of their belief that the dietary transfers at issue do not qualify as being consumed by a political subdivision. First, multiple administrative holdings have been issued concerning catered meals to state agencies. The Attorney General concluded, in an opinion, that catered, by third parties, banquets for state agencies were subject to use taxes. Attorney General Opinion 67-70, 271 (May 14, 1970). An administrative holding held that catered meals, by a private caterer, to tax-exempt entities did not remove the requirement of sales tax. VA Taxpayer, 203-023, Rulings of Commissioner, P.D, 96-153 (June 24, 1996). Finally, the Department of Taxation points to Section 1.2 of Regulation 630-10-45 of the Virginia Taxpayer Regulations (1997) that states "[c]harges for meals, catered events, lodging, and other accommodations...are subject to the tax when paid by the state or local government." Taken as a whole, these holdings and regulations are argued to support that when a government agency provides food (not related to an official function of the agency) that food is subject to taxation.

However, the Court is not persuaded by the Department of Taxation's arguments concerning these opinions, regulations and cases. Rather, the Court is persuaded by the Hospital's arguments on the cases enough to hold that the Hospital carried their burden on this issue. The Hospital argues that the cited support is distinguishable from the facts of the present cast. The dietary transfers at issue here involve food that the Hospital does not contract out to third parties for, but rather exclusively produces in-house. There is no question that if the Hospital contracted out for the food provided, there would be a taxation issue. However, by producing it in-house, the precedent authority cited is not applicable to provide a requirement for taxation.

The second issue concerns an argument that the dietary transfers consumed should not be exempt because the consumers of the food are not directly related to the Hospital's main function. The Department of Taxation asserts that the primary function of the Hospital is to provide for the health care of patients, and to a lesser extent of the citizens of Chesapeake. The dietary transfers at issue are those meals provided to a myriad of departments, including physicians, volunteers, and Hospital Authority members. By virtue of transfers to these classes of individuals, the Hospital loses its exemption. See Tax Commissioner's Determination 11-4-87 (holding that feeding inmates at a jail would be exempt, but not feeding guests at a County event); Public Document, 94-378, (December 30, 1994) (holding that catered meals furnished to employees and committee members working in meetings at nonprofit hospitals are not exempt): and Public Document 84-277 (November 7, 1984) (holding that school lunches served to students are exempt, but not feeding University departments at receptions),

The Hospital strongly argues that again the facts establish that the class of consumers of the dietary transfers are directly related to the administration and function of the Hospital's main business. The dietary transfers are provided to functions that are essential to the Hospital's ability to carry out its primary mission of providing quality health care. For instance, meals provided to volunteers are not the type that involves a banquet setting or an awards dinner. Such meals are provided to volunteers who are actively donating their time in a function directly involved with promoting health care. Feeding volunteers who are working uncompensated to assist patients is an act calculated to promote health care. Further example, feeding Hospital Authority members, who are meeting to discuss and conduct Hospital business, is further calculated to promote health care. The Hospital Authority is not meeting in a setting of a banquet, awards, or social setting. The Authority is meeting solely and exclusively to conduct the business and operation of the Hospital. Since such meetings occur after-hours and at meal times, if the Authority was not fed by the Hospital, a strong argument could be made that the efficiency of the Authority would be diminished. Essentially, these examples point out the argument that in order to promote health care, the promoter need not be a medical staff member providing medical therapy. They could be a volunteer promoting good will of patients or a Hospital Authority member reviewing and approving hospital treatment procedures.

The Court considered the arguments of the Hospital, and the Department of Taxation, carefully in regards to this issue. After extensive review, the Court concludes that the Hospital has carried its burden on this issue. The Court finds that indeed the dietary transfers at issue are the type that are made directly related to the primary issue of the Hospital's main purpose. The Court believes the evidence and the record do indeed support that the dietary transfers provided to entities such as physicians on duty, volunteers at selected functions, and Hospital Authority members are provided with the intent, and the result, to promote the better efficiency of those groups promoting health..
The Court further finds that such groups do indeed provide a significant function in providing health care. If the Hospital provided dietary transfers for an awards banquet or a social event, those would be subject to taxation. Providing dietary transfers to groups engaged in Hospital business is providing dietary transfers to promote the better delivery of health care.

The Court thus holds that the Hospital has carried its burden of proof in proving an exemption as a matter of law. The Court believes the Hospital has shown that it is exempt from the use taxation at issue in this case by virtue of Virginia Code § 58.1-609.1(4). The Court notes that the Department of Taxation has not acted arbitrarily or in a capricious manner, but rather the Hospital is exempt as a matter of law. The previous determination of the Tax Commissioner, while given significant weight by this Court, was simply contrary to established law.

Accordingly, the Court requests a proper order be drafted, circulated and presented to this Court for entry reflecting the holdings set forth in this opinion letter.

- - - - Very truly yours,

- - - - Frederick H. Creekmore

Rulings of the Tax Commissioner