12-58 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

The sale of catered food is considered the sale of a service; Nonprofits

Topic

Exemptions

Date Issued

04-27-2012

April 27, 2012

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 June 2007 through October 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a catering and food service business. As a result of the Department's audit, the Taxpayer was assessed tax on untaxed sales and purchases. The auditor denied exemption certificates obtained from customers for the exempt sale of meals and catered foods because the exemption is not valid for taxable services. The Taxpayer protests the assessment on the basis that it met the requirements for accepting exemption certificates in good faith in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-280.

DETERMINATION

Tax Application to Sales of Catered Food

Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 provides that charges for services are generally exempt from the sales and use tax. However, services provided in connection with the sale of tangible personal property are taxable. Food in and of itself constitutes tangible personal property. However, the provision of catered food involves the element of preparation which is a service. Because preparation services must be performed in order to provide catered food, the sale of such constitutes a taxable service in accordance with the regulation.

This is consistent with the Department's regulation regarding meals. According to Title 23 VAC 10-210-930, retail sales of meals by restaurants, hotels, motels, clubs, caterers, cafes and others are taxable. In these instances, certain services are provided in connection with the provision of food and, therefore, a taxable service is rendered.

Sales to Nonprofit Organizations and Governments

Title 23 VAC 10-210-1071 provides that exemptions granted to nonprofit organizations typically apply to the ruse or consumption of tangible personal property by an organization. When the exemption is limited to use or consumption of tangible personal property, the organization must pay the tax on purchases of meals and lodging, which are considered taxable services. In limited situations, the General Assembly has granted broader exemptions to certain organizations that exempt taxable services.

As explained previously, the sale of catered food is considered the sale of a service. Unless a nonprofit organization has been granted an exemption for its purchases of taxable services by the General Assembly, the organization is required to pay the tax on such purchases. Therefore, the Taxpayer must charge the tax on sales of catered food to nonprofit organizations that have not been granted an exemption that includes the purchase of taxable services.

With respect 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. The auditor provided the Taxpayer copies of Public Document's (P.D.) 08-113 (6/26/08) and 08-114 (6/26/08) that further address the sale of meals to governments. The rulings make a distinction between exempt food purchases for consumption by governments for use by them in the provision of their services, and taxable food purchases for consumption by individuals at a government-sponsored social event.

Exemption Certificates

Virginia Code § 58.1-623 A states, "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 under this chapter."

Additionally, Va. Code § 58.1-623 B provides that "[t]he certificate . . . shall relieve the person who takes such certificate from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable."

Pursuant to Title 23 VAC 10-210-280 A, "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice." Subsection B of the regulation further provides that "[r]easonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates."

The Department has previously ruled in P.D. 98-29 (2/20/98) that an exemption certificate obtained after the start of an audit cannot be accepted "in good faith" and is subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during audit.

The Taxpayer accepted various exemption certificates from customers for sales that are included in the audit. The contested sales for which a valid exemption certificate was presented to and received in good faith by the Taxpayer will be removed from the audit. The remaining contested sales for which an invalid exemption certificate or no exemption certificate was received by the Taxpayer will remain in the audit. Further, sales for which the Taxpayer obtained an exemption certificate from the customer after the beginning of the audit will be upheld because these certificates were not accepted in good faith. For future audit purposes, sales will be held taxable in accordance with the policy set forth in this letter.

CONCLUSION

The audit will be returned to the audit staff for the aforementioned revisions. Once the revisions are complete, a revised bill, with interest accrued to date, will be mailed to the Taxpayer. I note that the Department's records indicate that two payments totaling ***** have been applied to the Taxpayer's audit bill under the vendor debt setoff program. The outstanding assessment must be paid within 30 days from the date of the revised bill to avoid the accrual of additional interest and the assessment of a 20% amnesty penalty on amnesty-eligible periods (taxable periods ending on or before May 21, 2009).

The Code of Virginia section, regulations, and public documents 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 about this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Craig M. Burns
        Tax Commissioner

AR/1-4760008322.T

Rulings of the Tax Commissioner