Tax Type
Retail Sales and Use Tax
Description
Tax for professional management services provided to healthcare and long term care facilities.
Topic
Subtractions and Exclusions
Tangible Personal Property
Taxable Income
Date Issued
04-30-2012
April 30, 2012
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer'), in which you request a ruling on the application of the retail sales and use tax to charges for professional management services provided to healthcare and long term care facilities. I apologize for the delay in responding to your request.
FACTS
The Taxpayer provides professional management services to healthcare and long term care facilities. These services range from management of customers' housekeeping and laundry departments to dietary department services. The Taxpayer requests this ruling following the audit of one of its Virginia customers that was assessed tax on the total charge for dietary services at its retirement facilities. The Taxpayer did not charge its customer tax on the charge for its dietary services, believing that it was providing professional services to its customer that were not subject to the tax.
In its ruling request, the Taxpayer provides six scenarios on which it seeks guidance. The Taxpayer states that Scenario 1 represents the way in which it currently conducts its business. Should it be determined that the Taxpayer is correctly applying the tax in this scenario, the Taxpayer does not require a ruling with respect to the other five scenarios.
RULING
In Scenario 1, the Taxpayer provides nutritional consulting services, business management services, food preparation services, and the purchase of raw bulk food under one contract. The Taxpayer's customer provides adequate kitchen and dining facilities, and the Taxpayer's employees are responsible for operating those facilities. The Taxpayer purchases raw bulk food and its employees prepare the food in the customer's kitchen and serve the meals to the customer's patients in the customer's dining facilities or in the patients' rooms. Title to the food never passes to the Taxpayer's customer, and the Taxpayer states that it pays tax on the food at the time of purchase. The Taxpayer bills the customer a fee calculated on a per patient per day basis, which covers the cost of all services provided and includes a reasonable profit margin.
The Taxpayer maintains it provides professional services to its customers that are not subject to the tax. The Taxpayer contends that the true object of the transaction is the provision of services, not the food prepared for and served to the customer's patients.
Virginia Code § 58.1-609.5 1 provides, in pertinent part, that the retail sales and use tax does not apply to "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charge is made ...." Title 23 of the Virginia Administrative Code 10-210-4040 A states, "Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable." The regulation further states:
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- Transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. As explained in subsection D of this section, the "true object" test is used to determine the taxability of these transactions.
Title 23 of the Virginia Administrative Code (VAC) 10-210-32 B states:
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- Purchases of tangible personal property by nonprofit adult care residences and nonprofit adult day care centers licensed by the Department of Social Services are exempt from the tax. Purchases of tangible personal property by all other adult care residences and adult day care centers, whether conducted for profit or not, are taxable unless otherwise exempt. If a vendor fails to collect the tax from a nonexempt entity, the entity must remit the tax to the department as provided in 23 VAC 10-210-6030.
In Public Document (P.D.) 85-202 (10/28/85), the taxpayer contracted the operation of its food service facilities to a food service business. In connection with the contract, the food service business procured food and supervised the preparation and serving of such food to the patients, staff, employees and visitors of the taxpayer. The taxpayer was contractually bound to reimburse the food service business for all food and food supplies purchased on its behalf. Title to such food and food supplies rested with the taxpayer at all times. The taxpayer paid the food service business a weekly management fee. The taxpayer contested the assessment of tax related to the management fees it paid to the food service business for the preparation of the food. It was determined that the taxpayer was the ultimate consumer of the food served to its patients. Accordingly, the taxpayer was held liable for the tax based upon the total price for which the food was purchased, as well as the portion of the management fees attributable to such purchases.
In this instance, the Taxpayer is responsible for procuring, preparing and serving food to its customer's patients. Unlike the taxpayer in P.D. 85-202, the Taxpayer's customer never takes possession of or title to the food. As such, no tangible personal property is transferred from the Taxpayer to its customer. The Taxpayer's customer contracts with the Taxpayer to operate the customer's dietary department. The Taxpayer performs tasks that its customer would otherwise have to perform. As such the contract between the Taxpayer and its customer is for the provision of services as contemplated in Va. Code § 58.1-609.5 1 and Title 23 VAC 10-210-4040. Title 23 VAC 10-210-32 is not applicable in this instance because no tangible personal property is sold to the Taxpayer's customer. Accordingly, the fees associated with the transaction in Scenario 1 are not subject to the tax. Additionally, the other scenarios presented will not be addressed because this ruling finds that the Taxpayer is properly applying the tax to the way in which it is currently conducting its business.
This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia section, regulations and public document cited are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this ruling, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
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- Tax Commissioner
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AR/1-4443618300.P
Rulings of the Tax Commissioner