05-169 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Restaurants with locations throughout the United States

Topic

Assessment

Date Issued

12-13-2005

December 13, 2005

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to your letters submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessments issued for the audits of your several business locations in the Commonwealth of Virginia for the periods ranging from October 1998 through October 2001. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a company of restaurants with locations throughout the United States. During the audit period, the Taxpayer maintained locations in Virginia. All locations were audited and are the subject of your protest letter. You have presented several issues for consideration. Each issue will be addressed separately below.

DETERMINATION

Assets

The auditor included in the assessment purchases of assets that were either untaxed or missing invoices. You maintain that these assets should not be subjected to use tax; however, you have not provided any documentation to support your position that the tax either has been paid or does not apply to these assets.

Virginia Code § 58.1-205 1 states, "Any assessment of a tax by the Department shall be deemed prima facie correct." The burden of proving the assessment incorrect is upon the taxpayer. You have failed to meet this burden.

Further, the auditor assessed tax on assets shipped to Virginia upon which the Taxpayer paid another state's tax. You believe the Taxpayer should be given a credit for the use tax that was paid in error.

Virginia Code § 58.1-611 grants a credit against Virginia use tax for a similar tax paid by a person to another state on tangible personal property used by such person in Virginia. The regulation in Title 23 of the Virginia Administrative Code (VAC) 10-210-450 further explains that the credit does not apply to tax erroneously charged or incorrectly paid to another state. In this case, the tax is properly due to Virginia and the assets should not have been taxed by another state. Therefore, the Taxpayer is not entitled to a credit for the tax erroneously paid to other states.

Based on the foregoing, the tax was properly assessed on the assets at issue.

Refund - "To Go" Meals

Locations 4717, 4719, 4721, 4750 and 4756

You assert that the Taxpayer paid tax to a vendor on items of tangible personal property purchased for resale and provided with food items sold on a "to go" basis. The Taxpayer has obtained a letter from the vendor assigning its rights to the refund to the Taxpayer. The Taxpayer seeks a credit in the audit for the tax erroneously paid to its vendor.

Title 23 VAC 10-210-3040 sets forth the requirements for dealers requesting a refund in cases in which the dealer erroneously paid the sales tax. While the Department prefers to refund the tax through the vendor, I will allow for the issuance of the refund directly to the Taxpayer. With respect to the dealer's discount, Va. Code § 58.1-1822 limits the amount of refund to the monies actually paid to the state. Therefore, the Department will issue a refund to the Taxpayer for the tax paid on the items at issue less any dealer discount taken by the vendor. The auditor will contact the Taxpayer to verify the payment and receipt of the tax and issue the refund.

Refund - Complimentary Meals

The Taxpayer filed a refund request regarding Virginia tax paid on complimentary meals. The refund was for the period January 1997 through January 2000. The Taxpayer requested that the refund for the tax paid on complimentary meals be granted as a credit in the audit. A detailed audit was performed on the complimentary meals for the period January 1997 through October 2001 and a credit was allowed.P. D.

Complimentary Meals 1

Title 23 VAC 10-210-930 E states, "A dealer who has collected the tax from a customer but subsequently issues a ticket which is redeemable for a free meal will not be liable for any additional tax on the free meal provided the redeemable ticket was issued to the customer as a result of poor food quality." (Emphasis added.) When a redeemable free meal ticket is issued to a customer as the result of poor service, for public relations purposes or for any reason other than poor quality food, the dealer must report use tax on the cost price of all tangible personal property furnished in providing the free meal at the time the ticket is redeemed.

The meals at issue are classified by the Taxpayer as charitable advertising complimentary meals. The complimentary meals are issued in one of two ways: 1) free meal cards, or 2) free appetizers. When preparing its returns, the Taxpayer reported all of these sales as taxable. You maintain that because no tax was paid by the recipients of the complimentary meals, the tax was erroneously remitted to the Department. You request a refund relevant to the tax paid on 100% of these meals less the cost of goods sold.

Pursuant to Title 23 VAC 10-210-930, the Taxpayer should have remitted use tax on the cost price of the tangible personal property furnished in providing the free meals at the time the free meal tickets were redeemed. The Taxpayer should not have remitted tax to the Department based on the retail selling price of the meals. In order for the Taxpayer to receive a refund with respect to this category of complimentary meals, the Taxpayer must provide documentation showing that tax was remitted based on the retail selling price.

Complimentary Meals 2

Location managers are authorized to issue complimentary meals when customers are unhappy with the quality of a meal. The location manager has the option of issuing a free meal, a free meal card, a free appetizer, or a free appetizer card. You represent that the Taxpayer paid tax on the cost of goods sold of 20% of the meal expense, in addition to paying tax on the remaining 80% of the meal expense. You believe the tax was incorrectly remitted and request a refund of the tax paid on these meals.

The auditor's comments indicate that after having met with representatives of the Taxpayer's accounting firm, it was agreed that this category of complimentary meals should reflect a 65%-35% split between poor quality food and poor quality service, respectively. For audit purposes, the credit was allowed for the 65% of the meals issued for poor quality food. The credit was calculated in this manner based on the accounting firm's representation that the Taxpayer had agreed to these terms. The accounting firm's letter of April 22, 2002 to the auditor states, "that if the split is agreed upon, it will be accepted by [the Taxpayer and its accounting firm] as a final determination of the accuracy of the comp 2 meal refunds submitted to the State of Virginia." Accordingly, based on the accounting firm's representation to the auditor, the credit given is appropriate, and the Taxpayer's request for any additional refund with regard to this category of complimentary meals is denied.

Complimentary Meals 7 and 8

These meals were provided to employees and managers free of charge. Virginia Code § 58.1-609.3 7 provides that the tax does not apply to "meals furnished by restaurants or food service operators to employees as a part of wages." In this instance, the meals were not provided as part of wages. You do not dispute that the tax applies to these meals. You contend that the auditor inflated the price of the meals on which the tax was assessed, and the Taxpayer owes the tax on the cost of these meals.

According to the auditor's comments, the Taxpayer reported the retail value of these meals in its monthly gross sales for some months of the audit period. Then, for each of those months, the Taxpayer took a deduction from gross sales for 100% of the retail value of the meals less cost of goods sold. In accordance with Public Document (P.D.) 01-94 (08/02/01), the auditor disallowed the deductions and assessed the tax on the difference.

In P.D. 01-94, the audit disclosed that the taxpayer deducted as exempt sales the retail value of meals provided free of charge to managers, executives and employees. The tax was assessed on the retail value of these meals and on the value of meals sold to employees by the taxpayer at a 50% discount. The taxpayer contended that the retail value of the meals provided to managers, executives and employees was not taxable because they were furnished to its employees without charge and in accordance with Va. Code § 58.1-609.3 7 and Title 23 VAC 10-210-930. The Tax Commissioner determined that the taxpayer did not present any evidence proving that any of the meals at issue were provided to the employees as part of wages, as required by the statute. Accordingly, the assessment of the tax was upheld on the retail value of the meals.

In this instance, the question of the meals being provided as part of wages is not at issue. The auditor relied upon P.D. 01-94 as the basis for assessing the tax on the retail value of these meals. The decision in P.D. 01-94 to uphold the tax on the retail value of the meals is erroneous. In that instance, as well as in the current case, the tax is due on the cost value of the meals provided free of charge to employees. During the audit period at issue, the Taxpayer correctly paid the tax on the cost value of these meals. Accordingly, the audit will be adjusted to remove the tax on these meals.

Complimentary Meals 12 and 13

You represent that these categories of complimentary meals are sold to the Taxpayer's employees at a reduced price. You maintain that no use tax is due because the sales tax was charged and collected at the time of sale of the discounted meals. You request that all Comp 12 and Comp 13 items be removed from the Miscellaneous Use Tax and Audited Refund Adjustments schedules.

The auditor's comments state that it was unclear whether the sale of these meals was included in the Taxpayer's gross sales for all months of the audit period. The auditor gave clear instructions regarding the documentation that the Taxpayer needed to provide in order for a credit to be considered. The Taxpayer has not provided this documentation to the auditor, nor was this documentation included with its appeal. Accordingly, the Taxpayer's request for refund with regard to Complimentary Meals 11 and 12 is denied.

Sales Sample

To accommodate the Taxpayer's request that the credit for complimentary meals be granted in the audit, the auditor expanded the audit period (for most locations) from the standard 36-month period to 48 months. Additionally, the auditor determined that it would have been too time consuming to develop a one-month sample for each location. Therefore, the decision was made to examine one month for a select number of locations, and to allow the results to represent all locations. The auditor developed a seven-month sample.

You assert that the sample months of March 1997, May 1998, and November 1998 occurred prior to the audit period and cannot be used as sample months for determining the audit liability. You maintain that these sample months are outside the statute of limitations. You contend that the period from January 1997 through November 1998 may only result in an assessment up to the amount of the Taxpayer's approved refund for that period. In light of these contentions, you request that two error factors need to be calculated, one for the period January 1997 through November 1998, using all seven sample months, and one for the period December 1998 through November 2001, using the four sample months within the statute of limitations.

The sampling methodology used in this audit is unusual, and I agree that the methodology is not representative of the audit period. Accordingly, the audit will be returned to the auditor so that two separate samples can be developed.

Expense Sample

Location 4710

Contested Purchases: Line 1: Virginia Code § 58.1-609.5 9 provides, in pertinent part, that "maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only."

Title 23 VAC 10-210-910 A provides that the term "maintenance contract" means "any agreement whereby a person agrees to maintain or repair an item of tangible personal property over a specified period of time for a fee which is determined at the time the agreement is entered into." A maintenance contract may provide for provision of labor only, parts only, or labor and parts.

You maintain that this contested item represents this location's monthly charge for preventative maintenance services, and this charge is for labor only. The information provided on the invoice suggests that the maintenance agreement at issue is for parts and labor. Pursuant to Va. Code § 58.1-609.5 9, the charge at issue is subject to the tax upon one-half of the total charge. Accordingly, the tax assessed on these charges is correct.

Non-Contested Purchases: Line 1: You assert that this charge is for the store's first quarter 1999 charge for quarterly software support; however, the invoice provided in this instance is for the second quarter of 1999. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax assessment does not apply. Accordingly, the tax on this charge is upheld.

Non-Contested Purchases: Line 9: You maintain that this line item should be removed from the exceptions list because the vendor typically charges Virginia sales tax on its invoices. The invoice provided is not for the transaction at issue, and you represent that "the actual invoice is not available." Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, the tax on this charge is upheld.

Location 4796

Contested Purchases: Lines 2. 3, and 4: Title 23 VAC 10-210-3050 A states, "Any person engaged in the business of repairing tangible personal property is required to register and collect and pay the tax. If the dealer performing the repair work does not separately state, itemize or segregate at a fixed or retail price, the parts, materials and supplies sold, the tax will apply to the total charge, including repair labor. You maintain that with regard to these contested purchases, the vendor is a Virginia contractor, and the vendor pays tax on the parts purchased and used in repair jobs.

Pursuant to Title 23 VAC 10-210-3050, the Taxpayer should have been charged sales tax on materials used to make the repairs. In this instance, the Taxpayer was not charged sales tax by its vendor. Pursuant to Title 23 VAC 10-210-3050 and Title 23 VAC 10-210-6030, the Taxpayer is responsible for remitting use tax with regard to these line items. Accordingly, the tax assessed on these purchases is correct.

Location 4719

Contested Purchases: Line 1: You maintain that the transaction at issue is for an advertisement in hotel maps, not for the printing of or purchase of maps. Based on this representation, you contend that the Taxpayer was erroneously assessed tax.

The audit comments indicate that it was unclear from the invoice what the charge represents. The Taxpayer was asked by the auditor to provide additional written documentation supporting its claim with regard to this transaction. The Taxpayer did not provide this documentation to the auditor, nor did it provide any documentation with its appeal to support its claim. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply to this transaction. Accordingly, the tax assessed on this item is upheld.

Location 4721

Contested Purchases: Line 1: You maintain that this transaction represents the Taxpayer's monthly service and parts charge. You further maintain that the vendor pays sales tax on the parts used when purchased. In this instance, the invoice provided does not list a charge for Store 4721. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax assessment does not apply. Accordingly, the tax on this transaction is upheld.

Contested Purchases: Line 2: The transaction at issue is for the purchase of menus by the Taxpayer. The Taxpayer provided its general ledger as proof of the amount charged for the menus and the amount of tax paid. The documentation provided does not reflect that the tax was accrued at the 4.5% rate due at that time. Pursuant to Va. Code § 58.1205 1, the Taxpayer has not met its burden of proving that the tax assessment does not apply. Accordingly, the tax on this purchase is upheld.

Location 4750

Contested Purchases: Lines 2. 3 and 4: You contend that the tax was erroneously assessed on materials used for repairs and on the trip charge. You further maintain that the vendor is a Virginia contractor, and that the vendor pays sales tax on the parts used in repair jobs. Pursuant to Title 23 VAC 10-210-3050, the Taxpayer should have been charged sales tax on materials used to make the repairs. Pursuant to Title 23 VAC 10-210-3050, the Taxpayer is responsible for remitting use tax with regard to charges for materials used in the repair jobs. Accordingly, the tax assessed on the materials is correct.

Location 4756

Non-Contested Purchases: Line 2: You state that the tangible personal property at issue is not charged to an expense account that is being sampled. You note that the actual amount charged to the account being sampled is zero. Upon a review of the documents provided, the Taxpayer's records indicate that the amount at issue is charged to the Taxpayer's employee benefits expense account and tax has not been accrued. Accordingly, the tax on this charge is upheld.

Non-Contested Purchases: Lines 6 and 7: Title 23 VAC 10-210-410 A states, "A contractor is defined as any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, whether such person be a prime contractor or subcontractor. Unless otherwise noted, the law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts." Tangible personal property incorporated in real property construction that loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor.

You assert that the vendor paid Virginia sales tax on the parts used to provide repairs for the Taxpayer, and that the Taxpayer is not liable for use tax. Pursuant to Title 23 VAC 10-210-410, the charges at issue are not subject to the tax because the vendor is a contractor with respect to real property and is the taxable user and consumer of the parts used. Accordingly, the tax with regard to these line items will be removed from the assessment.

Contested Purchases: Line 1: Title 23 VAC 10-210-910 F provides that "[t]he tax applies to charges for extended warranty plans which provide for the provision of repair parts and labor."

You maintain that the transaction at issue is for an extended warranty on a pager system. The invoice provided indicates that the warranty is extended for one year and provides the same coverage as the original warranty. The documentation provided does not indicate the type of coverage provided by the extended warranty, nor does the documentation provided show that the tax has been paid or does not apply. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax assessment does not apply. Accordingly, the tax on this transaction is upheld.

Contested Purchases: Line 2: You contend that the charge at issue is for quarterly software support, and that the transaction does not involve the purchase of any hardware or tangible personal property. The transaction at issue occurred in the second quarter of 1998. The invoice provided is for a transaction that occurred in the third quarter of 1998. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax assessment does not apply. Accordingly, the tax on this transaction is upheld.

CONCLUSION

Based on the foregoing, the audits will be returned to the auditor to address the agreed upon adjustments. With regard to the refund for purchases provided with "to go" items and Complimentary Meals 1, the Taxpayer is given 30 days from the date of this letter to submit the necessary documentation to the auditor. If this documentation is not received within the allotted time, no additional adjustments will be made to the audit report. In that event, a consolidated bill with interest accrued to date will be mailed to the Taxpayer.

The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/53374P

Rulings of the Tax Commissioner