06-46 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Assessed tax on management fees and other miscellaneous sales

Topic

Exemptions

Date Issued

04-11-2006

April 11, 2006

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

Dear *****:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period October 1998 through September 2001. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a food service management company that contracts with a variety of entities for cafeteria and vending machine management. As a result of the Department's audit, the Taxpayer was assessed tax on management fees and other miscellaneous sales.

DETERMINATION

Exempt Sales

The Taxpayer contends that certain transactions included in the audit assessment are tax-exempt sales.

In the first instance, the Taxpayer contends that the transactions at issue are exempt because the customer holds a direct payment permit. Virginia Code § 58.1-624 provides the Tax Commissioner the authority to issue a direct payment permit to "a manufacturer, mine operator, or public service corporation . . . or any person who stores tangible personal property in this Commonwealth for use both inside and outside this Commonwealth." The Taxpayer has since obtained a direct payment permit from its customer. The Taxpayer has failed to prove that the transactions at issue were billed directly to customer. The auditor's records indicate that these items were billed to individuals and not to the customer.

In the second instance, the Taxpayer contends that the transactions at issue are exempt because they represent charges for laundry and dry cleaning services. Virginia Code § 58.1-609.5 1 provides a sales and use tax exemption for "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . ." Again, the Taxpayer has failed to prove that the transactions at issue were for laundry and dry cleaning services. The auditor's records indicate that these sales were for catering.

Virginia Code § 58.1-205 provides that a tax assessment issued by the Department is deemed prima facie correct. The burden is upon the taxpayer to prove otherwise. The Taxpayer has not met this burden. Accordingly, the portion of the assessment relating to exempt sales is correct.

Management Fees

The customer, under contractual agreement, pays a fixed management fee to the Taxpayer. In connection with this contract, the Taxpayer is required to provide a quality food service operation for the customer. The prices at which items will be sold as well as the menu selection are subject to approval by the customer; however, the Taxpayer bears the risk of profit and loss in the operation. The Taxpayer collects all sales tax on sales of food to the customer's employees, visitors, etc., and remits that tax to the Department.

In order to determine whether a particular transaction, which involves both rendering a service and providing tangible personal property, constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. See Title 23 of the Virginia Administrative Code 10-210-4040.

A review of the food service contracts signed between the Taxpayer and the customer indicates that there is no transfer of food to the customer for a consideration. In fact, the Taxpayer holds title to all food procured for subsequent sale to the ultimate consumer (the customer's employees, visitors, and other consumers). Based upon the terms of the contract, the "true object" sought by the customer is to obtain the professional services of the Taxpayer to operate its food service facility. In consideration thereof, the customer pays a management fee. As such, the management fees are exempt charges in connection with the provision of a service as set out in Va. Code § 58.1-609.5 1. Accordingly, the management fees will be removed from the assessment.

CONCLUSION

Based on this determination, the management fees will be removed form the assessment. The other contested items will remain in the assessment. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the assessment is paid within 30 days from the date of the updated bill.

The Code of Virginia sections and regulation 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/48125.i

Rulings of the Tax Commissioner