07-143 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Taxpayer is in the airline food service industry

Topic

Assessment

Exemptions

Date Issued

09-12-2007

September 12, 2007

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

Dear *****:

This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period September 2000 through August 2003. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is in the airline food service industry. In addition to providing food services to its customers, the Taxpayer also provides services related to the cleaning of aircraft and airline-owned equipment. The Taxpayer operates out of three locations in ***** ("Location A"), ***** ("Location B"), and ***** ("Location C"). The Taxpayer maintains that it was incorrectly assessed tax on transactions that did not involve the sale of Taxpayer-owned tangible personal property or food. The Taxpayer also contests the assessment of compliance penalty and amnesty penalty for two of its locations.

DETERMINATION

Contested Transactions

The Taxpayer contends that it was assessed tax on transactions that reflect nontaxable service transactions where no sale of food or other tangible personal property occurred. The Taxpayer maintains that these transactions occurred with respect to airline-owned equipment and supplies.

Virginia Code § 58.1-603 provides, in pertinent part, that the sales tax is imposed "upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth."

Virginia Code § 58.1-602 defines the term "sales price" as:

- the total amount for which tangible property or services are sold, including services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.

In Public Document (P.D.) 85-148 (7/25/85), the taxpayer was engaged in providing food services to airlines at various Virginia airports. The taxpayer was assessed tax for its failure to collect the tax on charges for certain services performed in connection with the sale of food. The separately stated charges included in the audit were for washing and sanitizing airline-owned dining service equipment, delivering meals and airline-owned equipment to the aircraft, packing and handling liquor kits, the removal and disposal of garbage from aircraft, cleaning of trash and removal of equipment from inbound terminating flights (strip charges), and port fees (charged by airport authorities for the right to do business in a location). It was determined that the charges for washing and sanitizing airline-owned dining service equipment, removing and disposing of garbage from aircraft, and removing equipment and trash from inbound terminating flights were all services provided independent from the sale of tangible personal property. These services were not subject to the tax when separately stated from the sale of tangible personal property on the customer's invoice because they were rendered with respect to customer-owned property. Charges for packing and handling airline liquor kits were subject to the tax when tangible personal property, such as alcoholic beverages, mixers, fruit slices, ice or cups, was sold to the taxpayer's customers.

In this instance, the Taxpayer provides a variety of services to its customers. Some of the services are provided in connection with the sale of tangible personal property and are taxable. Other services are provided independent from the sale of tangible personal property and are exempt from the tax when separately stated on the customer's invoice.

Location A

Exceptions List (Pages 1, 5, 7, 10, 11 and 12) - These transactions represent services provided with respect to airline-owned property and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these exceptions will be removed from the audit.

Exceptions List (Pages 6 and 13) - These transactions represent charges for FAA mandated security checks used to ensure the safety and integrity of all items brought onto the aircraft by the Taxpayer. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Location B

Exceptions List (Pages 3, 5, 6, 42, 43, 33, 44 and 46) - These transactions represent services provided with respect to the washing or cleaning and loading of airline-owned equipment and supplies and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property that is sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 4, 18, 19 and 34) - These transactions represent services provided with respect to the assembly and delivery of beverage and orange juice carts and are separately stated on the customer's invoice. The carts, beverages and orange juice are airline-owned. These services are not provided in connection with food sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 7 and 11) - These transactions represent services provided with respect to the assembly and delivery of airline-owned linen, silverware, plastic spoons and paper products and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 9, 10, 12, 23, 26 and 27) - These transactions represent services provided with respect to the assembly and delivery of airline-owned supply kits containing sweeteners, stir sticks and powdered creamer and are separately stated on the customer's invoice. These services are not provided in connection with food sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 14, 15, 16, 17 and 39) - These transactions represent services provided with respect to the removal of soiled airline-owned equipment, the delivery of airline-owned equipment, the removal and replacement of catering related products, and the removal of trash and other equipment. It is unclear from the description provided whether the catering-related products and other equipment are owned by the Taxpayer or by the Taxpayer's customer. Additionally, the description does not give specific details about what encompasses "catering-related products" and "other equipment". Without a clear understanding of the type of property at issue, these services will be held taxable unless the Taxpayer can provide a more specific description of the property and can demonstrate that the catering-related products and the other equipment are airline-owned.

Exceptions List (Page 18) - These transactions represent services provided with respect to the packing of airline-owned cookies and are separately stated on the customer's invoice. These services are not provided in connection with food sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 36 and 37) - These transactions represent the delivery of food to the aircraft. Based on the information provided, these transactions will be removed from the audit.

Exceptions List (Pages 20, 21 and 24) - These transactions represent services provided with respect to the assembly of liquor and wine drawers using airline-owned equipment and supplies and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 28, 30 and 33) - These transactions represent services provided with respect to the assembly and setup of all airline-owned equipment needed for flight and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Page 22) - This transaction relates to labor charges incurred for completing beverage forms. You represent that this paperwork assists the airlines in tracking the usage of airline-owned beverages and supplies. This function allows airlines to determine the proper quantity of beverages and supplies to purchase from its third party vendor. These services are not provided in connection with the sale of food or tangible personal property by the Taxpayer. Accordingly, these transactions will be removed from the audit.

Exceptions List (Pages 31, 32, 40 and 41) - These transactions represent services provided with respect to the washing and setup of airline-owned china. It is unclear from the description provided whether the Taxpayer sells food to its customers with regard to the washing and setup of the china. Accordingly, these transactions will be held taxable unless the Taxpayer can demonstrate that these services are provided independent from the sale of food or tangible personal property by the Taxpayer to its customers.

Location C

Exceptions List (Pages 2, 6, 18, 28, 30 and 31) - These transactions represent services provided with respect to the washing or cleaning and loading of airline-owned equipment and supplies and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 3, 21 and 22) - These transactions represent services provided with respect to the delivery and loading of airline-owned equipment and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 4, 15, 16, 17, 19 and 20) - These transactions represent services provided with respect to the assembly and delivery of airline-owned beverages, newspapers, snacks and amenity kits and are separately stated on the customer's invoice. These services are not provided in connection with food sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 5, 9, 10, 13 and 14) - These transactions represent services provided with respect to the assembly of liquor and wine drawers using airline-owned equipment and supplies and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 7, 25, 26 and 27) - These transactions represent charges for FAA mandated security checks used to ensure the safety and integrity of all items brought onto the aircraft by the Taxpayer. These services are not provided in connection with the food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Page 11) - This transaction relates to labor charges incurred for completing beverage forms. You represent that this paperwork assists the airlines in tracking the usage of airline-owned beverages and supplies. This function allows airlines to determine the proper quantity of beverages and supplies to purchase from its third party vendor. These services are not provided in connection with the sale of food. Accordingly, these transactions will be removed from the audit.

Exceptions List (Page 12) - These transactions represent services provided with respect to the assembly and delivery of airline-owned supply kits containing sugar, stir sticks, towelettes and other supplies and are separately stated on the customer's invoice. These services are not provided in connection with food or tangible personal property sold by the Taxpayer to its customers. Accordingly, these transactions are exempt service transactions and will be removed from the audit.

Exceptions List (Pages 23 and 24) - These transactions represent services provided with respect to the storage and packing of airline-owned equipment, china, beverages and other miscellaneous items. It is unclear from the description provided whether the Taxpayer sells food to its customers with regard to the storage and package of the china. Accordingly, these transactions will be held taxable unless the Taxpayer can demonstrate that these services are provided independent from the sale of food by the Taxpayer to its customers.

*******

The Taxpayer represents that these transactions are likely exempted by a treaty or some other international obligation. The Taxpayer has not provided any specific law, treaty or international obligation that would support an exemption for these transactions from the retail sales and use tax. The Taxpayer is given the opportunity to provide specific documentation supporting its contention. Upon receipt, I will review the documentation and make a determination as to whether the assessment is correct. If no additional documentation is forthcoming, the exceptions related to this item will remain in the audit.

Compliance Penalty - Locations A and B

The Taxpayer maintains that the compliance penalty applied to the audits for these locations should be abated. The Taxpayer contends that the audits of Locations A and B are first generation audits, and the Department's policy of penalty waiver for first generation audits applies.

In P.D. 97-253 (6/6/97), the audit showed that the Taxpayer had merged with another company previously audited by the Department. It was determined that for the purposes of the application of the audit penalty, the next audit of the Taxpayer would be considered a third generation audit because the two companies, which combined to form the Taxpayer, had been audited on two prior occasions by the Department.

Title 23 of the Virginia Administrative Code 10-210-2032 A 2 provides that for second-generation audits, "Penalty will generally be applied unless the Taxpayer's compliance ratios meet or exceed 85% for sales tax and 60% for use tax."

In this instance, the Taxpayer acquired another company, a business that had been previously audited by the Department. Pursuant to P.D. 97-253, for purposes of applying the audit penalty in the audits at issue, the audits were properly classified as secondgeneration audits. Location A has a sales tax compliance ratio of 80% and a use tax compliance ratio of 48%. Location B has a sales tax compliance ratio of 86% and a use tax compliance ratio of 0%. Because the Location A compliance ratios and the Location B use tax compliance ratio do not meet the requirements stated in the regulation, the audit penalty was properly assessed. However, should the adjustments to the audits result in compliance ratios that meet or exceed the regulatory requirements, the compliance penalty will be removed from the audit.

Amnesty Penalty - Locations A and B

Virginia Code § 58.1-1840 specifically authorizes the Tax Commissioner to establish tax amnesty guidelines, and specifically states that these guidelines, in addition to the statute, are to be used to administer the program and to determine the eligibility of taxpayers for the Virginia Tax Amnesty Program. According to the Guidelines, a taxpayer registered for the retail sales tax would be eligible to participate in the Virginia Tax Amnesty Program for the period April 2003 and prior. The audit periods for Locations A and B are September 2000 through April 2003 and September 2000 through August 2003, respectively.

Because the Taxpayer's compliance ratios did not meet the statutory requirements for a second audit, the auditor properly assessed the amnesty penalty. However, in light of my determination, the Taxpayer's compliance and amnesty penalties will be reviewed. If the Taxpayer's compliance ratios meet or exceed the statutory requirements after the audit adjustments are made, the compliance and Amnesty penalties will be abated.

CONCLUSION

The audit will be returned to the audit staff to make the adjustments consistent with this determination. The Taxpayer is given 45 days from the date of this letter to provide to the auditor the additional documentation needed to demonstrate that certain transactions are exempt from the tax. If not received in the allotted time, those transactions will remain taxable. Once the adjustments have been made, the Taxpayer will receive a revised audit and a revised bill with interest accrued to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest charges.

The Code of Virginia sections, regulation and public documents cited 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 response, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/55522P

Rulings of the Tax Commissioner