08-114 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Taxpayer is a provider of food, facility, and uniform services to correctional facilities

Topic

Appropriateness of Audit Methodology

Collection of Tax

Exemptions

Records/Returns/Payments

Date Issued

06-26-2008

June 26, 2008

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

Dear *****:

This is in reply to your letter in which you seek correction of the retail sales and
use tax assessment issued to ***** (the "Taxpayer") for the period May 2001 through April 2004. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a provider of food, facility, and uniform services to correctional facilities. The Taxpayer offers state, county and municipal correctional facilities daily meals, commissary services, and laundry and facilities management. The Taxpayer also offers other ancillary services such as vending and office coffee systems. The Department's audit held taxable certain sales and purchases of tangible personal property. The Taxpayer disagrees with the audit findings and seeks an adjustment to the Department's assessment.

DETERMINATION

Non-Taxed Sales - Certificates of Exemption

The Taxpayer sold food and coffee to the staff and trustees of correctional facilities without charging the tax on such sales. The Taxpayer contends that it received and accepted in good faith valid certificates of exemption from city and county governmental entities based on the location of each correctional facility.

Virginia Code §§ 58.1-623 and 58.1-623.1 and Title 23 of the Virginia Administrative Code (VAC) 10-210-280 set forth the criteria for the proper use of certificates of exemption.

- All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt ....

The regulations provide that "an exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate." Therefore, the seller must use reasonable care and judgment in selling tangible personal property exempt of the tax, even when an exemption certificate from the purchaser is provided. The Department's Form ST-12 exemption certificate used by governmental entities does not contain a statement that taxable services are exempted. Even though the Taxpayer accepted an exemption certificate from a state or local government agency, the certificate cannot be used to exempt a state or local government's purchase of meals not covered by the exact wording of the certificate.

With regard 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. See Title 23 VAC 10-210-690 B, which provides no exemption for the purchase of taxable services, such as catered meals, by state and local government agencies. Such sales are exempt when sold to governments for consumption by them or for use in the provision of their services. For example, in Public Document (P.D.) 87-245 (11/4/87) the Tax Commissioner 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 distinction is that the government exercises a right or power over the use of the food because the inmates are in the custody of the government. In the government sponsored event, the government does not use or consume the food because it does not exercise a right or power over the food that is consumed by guests or employees of the government.

The Department's policy is consistent with a Virginia Attorney General's Opinion that addresses 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). 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 1970 opinion was affirmed by an informal opinion of the Attorney General dated January 11, 1993. A copy of the informal opinion is enclosed. In this instance, the food is used or consumed by employees of the correctional facilities. Based on the cited authorities, I do not find cause for an adjustment of these issues.

Non-Taxed Purchases - Tax Remitted to State

The Taxpayer states that in these transactions, where the auditor has assessed the tax on missing purchase invoices, the tax was accrued and paid to the Department or was remitted to vendors who remitted the taxes to the Department.

Assets: The Taxpayer has provided evidence that the use tax was self-assessed on five assets listed on lines 5, 6, 7, 8, and 13. The amounts will be removed from the Department's assessment.

Purchases: The Taxpayer has provided evidence that the tax has been selfassessed on all the purchases listed by the Taxpayer in its non-contested purchases exhibit and these will be removed from the audit assessment with the exception of line items 96 and 97. Line item 96 represents the purchase of consumables, and no evidence has been provided to show that tax has been paid to the vendor or the Department. Line item 97 represents an invoice that was missing during the auditor's initial review. The Taxpayer has not provided any documentation that the tax has been paid to the vendor or the Department.

Maintenance and Repair Contracts

During the audit period, the Taxpayer states that it properly paid tax on contracts with various vendors that provided both maintenance services and repair parts for equipment and software used in various facilities throughout Virginia. The Taxpayer has not presented any documentation to support its contention.

Purchases for Resale

During the audit period, the Taxpayer states that it purchased tangible personal property that was ultimately resold to its customers, but which was held taxable in the Department's audit. The Taxpayer has not presented any documentation to support its contention that the property was purchased for resale.

Separately Stated Delivery Charges

During the audit period, the Taxpayer purchased tangible personal property that included delivery charges from various vendors. The Taxpayer contends that these charges were held taxable in the Department's audit. The Taxpayer has not presented any documentation to support its contention.

Electronic Delivery of Custom Software

During the audit period, the Taxpayer states that it purchased custom software from various vendors that was delivered in tangible form or was retrieved electronically depending upon the vendor. The Taxpayer has not presented any documentation to support its contention.

Real Property Improvements and Repairs

During the audit period, the Taxpayer utilized the services of real property contractors to repair and restore real property. The Taxpayer contends that it was held liable for the tax on tangible personal property utilized by the contractor in providing its real property construction services. The Taxpayer has not presented any documentation to support its contention.

Non-Taxable Services

During the audit period, the Taxpayer states that tax was imposed on purchase invoices for professional services not subject to the tax under Va. Code § 58.1-609.5. The Taxpayer has not presented any documentation to support its contention.

Items Shipped Out of State

During the audit period, the Taxpayer states that it purchased numerous items from its vendors who shipped the property directly out of the state and is therefore not subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Wrapping and Packaging Supplies

During the audit period, the Taxpayer purchased labels, tags and other supplies used as part of the packaging for food sold to its customers. The Taxpayer states that it also sold containers to customers of the type that restaurants use to package food products for sale or resale. The Taxpayer contends that the Department's audit erroneously held these items subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Other Non-Taxable Items

The Taxpayer contends that it purchased numerous items and services not otherwise listed that are not subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Incorrect Tax Accrual Calculation

The Taxpayer states that it reconciles its monthly accrual of tax on transactions from its general ledger and that it over accrued the amount of use tax remitted with its monthly returns for several monthly filing periods. The Taxpayer has not presented any documentation to support its contention.

Missing Invoices

While the Taxpayer states that it disagrees with the assessment of tax on missing invoices, the Taxpayer has not presented any further documentation to support its contention.

Penalty Abatement

The Taxpayer contends that during the audit period all returns were timely filed, remitting the full amount of tax believed to be due at the time of filing. The Taxpayer seeks an abatement of the compliance and amnesty penalties assessed in the Department's audit.

Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 A states, "The application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio." The purpose of the sales tax and use tax compliance ratio is to determine how well a taxpayer has complied with the Virginia tax laws in the collection and reporting of the sales tax or in the accrual and reporting of the use tax. With regard to third and subsequent generation audits, the regulation provides that penalty will be applied unless a taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax. This is the Taxpayer's third audit and the use tax compliance ratio is 14%. Because the Taxpayer failed to meet the required use tax compliance level, the penalty was properly applied.

The Virginia Tax Amnesty Program was enacted during the 2003 Session of the Virginia General Assembly. Virginia Code § 58.1-1840.1 F 1 provides:

- If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains any outstanding balance after the close of the Virginia Tax Amnesty Program because of the nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Tax Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply to the taxpayer.

Because the audit at issue covered Amnesty-eligible periods (taxable periods ending on or before April 30, 2003), and a compliance penalty was properly applied, the Amnesty penalty was also properly assessed.

CONCLUSION

Based on the foregoing, the audit assessment has been adjusted. I note that the Taxpayer has submitted payment of the deficiency based on discussions between the Taxpayer, the auditor and a member of the Department's Appeals staff. If there are additional balances due, an updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date indicated on the bill statement.

The Code of Virginia sections, regulations, public document and 1970 Attorney General's opinion cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact ***** of the Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1051398634.Q

Rulings of the Tax Commissioner