Document Number
12-63
Tax Type
Retail Sales and Use Tax
Description
Management Company retains control, possession and ownership of the food through preparation and serving the residents
Topic
Appropriateness of Audit Methodology
Property Subject to Tax
Taxable Transactions
Date Issued
04-30-2012

April 30, 2012




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

Dear *****:

This is in response to your letter submitted on behalf of *****, *****, ***** and ***** (the "Taxpayers") in which you seek correction of the retail sales and use tax assessments issued for the periods August 2005 through July 2009 Audit period at issue for ***** and *****. and November 2006 through June 2009 Audit period at issue for ***** and *****.. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayers operate as continuing care retirement facilities for senior citizens. The Taxpayers contest the assessment of tax on the full price paid to ***** (the "Management Company") for professional services in the management and operation of the Taxpayers' dietary departments. In consideration of these services, the Taxpayers pay a monthly flat fee to the Management Company calculated as a dollar amount per patient per day.

The Taxpayers contend that the assessment of tax is incorrect because the Management Company does not make sales of food to the Taxpayers or the Taxpayers' residents, nor do the Taxpayers take possession of or title to the food used by the Management Company at any time. The Taxpayers maintain that the Management Company retains control, possession and ownership of the food through preparation and serving the residents. The Taxpayers further state that the true object of the contracts with the Management Company is for services and not for the sale of tangible personal property as held in the audit. The Taxpayers also maintain that the prior rulings of the Department, in which the Tax Commissioner rules that nursing homes, hospitals and similar facilities are the users and consumers of food served to residents, are distinguishable from the instant case. Additionally, the Taxpayers state that even if the sales at issue were for food, the taxable base for that sale would be only the sales price of the tangible personal property and the charge for the services provided by the Management Company would not be included in the sales price. Finally, the Taxpayers maintain that if taxable, the reduced rate for food for human consumption should apply.

DETERMINATION


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 (VAC) 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:
    • 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 VAC 10-210-32 B states:
    • 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 Management Company is responsible for procuring, preparing and serving food to the Taxpayers' residents. Unlike the taxpayer in P.D. 85-202, the Taxpayers never take possession of or title to the food. As such, no tangible personal property is transferred from the Management Company to the Taxpayers. The Taxpayers contract with the Management Company to operate their dietary departments. The Management Company performs tasks that the Taxpayers would otherwise have to complete themselves. As such, the contracts between the Taxpayers and the Management Company are 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 Taxpayers by the Management Company. Accordingly, the fees associated with the contracts are not subject to the tax and will be removed from the audits.

Based upon this determination, the audit will be returned to the audit staff for revisions. Revised bills, with interest accrued to date, will be mailed to the Taxpayers upon completion of the revisions. No further interest will accrue provided the outstanding assessments are paid within 30 days from the date of the bills. The Taxpayers should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessments, you may contact ***** at *****.

The Code of Virginia section, regulations and public document 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 determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,



Craig M. Burns
                • Tax Commissioner



AR/1-4444114686.P


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46