January 12, 2015
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letters in which you seek the correction of retail sales and use tax assessments issued for the period May 2010 through January 2014 to five business locations operated by ***** (the "Taxpayer").
FACTS
The Taxpayer operates hotels in Virginia. The hotels prepare and serve meals for meetings, banquets and similar events that are held at the hotels. The Taxpayer adds a mandatory 20% service charge to the bills for meetings, banquets and similar events. The Taxpayer was not charging retail sales tax on the mandatory service charges. The Department audited each hotel and assessed the Taxpayer retail sales tax on the untaxed mandatory service charges billed with the charges for the meeting and banquet services provided by the hotels to customers. The Taxpayer contests the assessments of sales tax on the mandatory service charges billed by each hotel.
DETERMINATION
The Taxpayer maintains that there is no statutory basis to assess the retail sales tax on mandatory service charges that do not exceed 20% of the total charge for banquets, meetings and similar events. The Taxpayer notes that the accounting system used by each hotel separately accounts for nontaxable service charges (those billed at 20% or less) and applies the sales and use tax to any service charges in excess of 20% of the total charge billed for the events.
The Department held the service charges taxable in the Taxpayer's audits based on the statutory definition of "sales price" in Va. Code § 58.1-602, which defines "sales price," in part, as:
the total amount for which tangible personal property or services are sold, including any services that are a part of the sale .... "Sales price" shall not include ... (v) that portion of the amount paid by the purchaser as a mandatory gratuity or service charge added by a restaurant to the price of a meal, but only to the extent that such mandatory gratuity or service charge does not exceed 20% of the price of the meal.
The mandatory service charges billed by the hotels were held taxable in the audit based on two factors. The statutory definition of sales price was interpreted by the auditor to require the hotels to pay the persons working the banquets and meetings the entire amount of the mandatory service charges billed to customers. The audit assessments on the untaxed mandatory service charges were also based on the inclusion of the term "restaurant" in the statutory language for the exemption. The auditor did not consider the Taxpayer's hotels to be restaurants for purposes of the mandatory gratuity exemption.
The Department recently issued Public Document (P.D.) 14-150 (8/27/14), which addresses the application of the retail sales tax to mandatory gratuity and service charges. P.D. 14-150 discusses a taxpayer that was assessed retail sales tax on mandatory gratuity charges added to bills for banquets and similar events. This determination states that the statutory definition of sales price does not require the seller of meals to pay employees the gratuity or service charges billed to customers. Although gratuities are generally considered to be payments for services that are distributed to the servers and other staff that work such events, the statute contains no requirement that the entire gratuity amount billed be paid to banquet staff or other employees. The definition of sales price in the statute excludes from the sales tax service charges in addition to gratuity charges. This suggests a broader exemption that encompasses charges for other services in addition to gratuity charges. The exemption is restricted only by the requirement that gratuity or service charges must be 20% or less of the charge billed for the meal or meals.
The Taxpayer also contends that the audits improperly limit the mandatory gratuity and service charge exemption to restaurants only. P.D. 14-150 addresses this issue and notes that the term "restaurant" is not defined in Title 58.1 of the Code of Virginia. However, P.D. 14-150 refers to the statutory definition of restaurant found in Va. Code § 35.1-1 9, which provides that a restaurant includes "any place where food is prepared for service to the public on or off the premises, or any place where food is served." The Department's meals regulation, Title 23 of the Virginia Administrative Code 10-210-930, is also cited in P.D. 14-150, which explains that the meals regulation has broad application to all types of businesses that sell meals. The policy set out in the regulation applies to gratuity and service charges.
Based on the plain meaning of the statutory definition of sales price, the statutory definition of restaurant, the Department's meals regulation and P.D. 14-150, the audit assessments of retail sales tax on the mandatory service charges billed to customers by the Taxpayer is erroneous. Mandatory gratuity or service charges billed in excess of the statutory limit of 20% are taxable. In such cases, only the mandatory gratuity or service charges in excess of the 20% limit are subject to the tax.
CONCLUSION
The Department's records indicate that the Taxpayer has paid in full the contested bills issued to its five hotel locations. Therefore, refunds of the bill payments, plus applicable interest, will be issued for each business location as soon as practicable.
The Code of Virginia sections, regulation and public document cited, along with other reference documents, are available on line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5750266314.S