April 22, 2016
Re: Request for Ruling: Retail Sales and Use Tax
This will reply to your request for a ruling on the application of the retail sales tax to sales of meals and prepared foods made by an anonymous client (the "Taxpayer"). I apologize for the delay in this response. The Department has devoted a significant amount of time and resources to reviewing the issues presented in this ruling, thus contributing to the delay in this response.
The Taxpayer is a fast food restaurant chain with locations in Virginia. The Taxpayer's food menu includes sandwiches, french fries, salads, desserts and beverages. The Taxpayer sells many of its general menu items in large quantities and serving sizes or as prepackaged meals and box lunches. Large quantities of the menu items, prepackaged meals and box lunches are ordered from the Taxpayer's "catering" menu. Food from the catering menu must be ordered at least 24 hours in advance. Customers may pick up the orders or have the Taxpayer deliver the orders purchased from the catering menu. Customers pick up approximately 80% of the catering menu orders. The Taxpayer does not provide typical catering services, such as setup, serving and cleanup, in connection with its sales of food or meals from the catering menu. Delivery of the food or meals is the only service provided by the Taxpayer after the food is prepared at its restaurant locations.
The Taxpayer's customers include various religious, educational, nonprofit and charitable organizations. Some of these organizations are exempt from paying sales and use taxes on purchases of tangible personal property. The Taxpayer seeks confirmation from the Department that its sales of prepared food, boxed lunches and beverages from both its general and catering menus are considered sales of tangible personal property. As such, the Taxpayer maintains that sales of its menu items are exempt from the retail sales and use tax if the purchaser provides a valid exemption certificate or letter issued by the Department which states that the purchaser qualifies for an exemption on purchases of tangible personal property.
The Taxpayer notes that the Department's nonprofit regulation, Title 23 of the Virginia Administrative Code (VAC) 10-210-1071, states that the sale of meals is deemed to be the sale of a taxable service. This regulation references Title 23 VAC 10-210-4040 as the basis for treating the sale of meals as a taxable service. In contrast to the provisions of Title 23 VAC 10-210-1071, the Taxpayer cites Public Document (P.D.) 08-158 (8/29/08), which states that meals and food constitute tangible personal property. For this reason, the Taxpayer seeks clarification of the Department's policy regarding sales of prepared food and meals.
Government and Nonprofit Exemptions
Virginia Code §§ 58.1-609.1 4 and 58.1-609.11 are the sales and use tax exemption statutes for government entities and nonprofit entities, respectively. Virginia Code § 58.1-609.1 4 provides, in part, that the retail sales and use tax does not apply to "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States." (Emphasis added.)
Virginia Code § 58.1-609.11 B provides, in part:
On and after July 1, 2004, in addition to the organizations described in subsection A, the tax imposed by this chapter or pursuant to the authority granted in §§ 58.1-605 and 58.1-606 shall not apply to purchases of tangible personal property for use or consumption by any nonprofit entity that, pursuant to this section, (i) files an appropriate application with the Department of Taxation, (ii) meets the applicable criteria, and (iii) is issued a certificate of exemption from the Department of Taxation for the period of time covered by the certificate. (Emphasis added.)
Subsection A of Virginia Code § 58.1-609.11 was enacted to grandfather exemptions for nonprofit entities already holding valid sales and use tax exemptions prior to the effective date of Va. Code § 58.1-609.11. Subsection A states, in part, that:
Any nonprofit organization that holds a valid certificate of exemption from the Department of Taxation, or any nonprofit church that holds a valid self-executing certificate of exemption, that exempts it from collecting or paying state and local retail sales or use taxes as of June 30, 2003, shall remain exempt from the collection or payment of such taxes under the same terms and conditions as provided under such sections as such sections existed on June 30, 2003 ....
Subsection A also sets out expiration dates for various categories of exempt entities, at which time the entities must follow the procedures in Subsection B and meet the criteria in Subsection C to qualify for a nonprofit exemption. Generally, both the government and nonprofit exemptions apply to purchases of tangible personal property for use or consumption by the qualifying entity. Based on the statutory language for the exemptions, the Department has previously held that the government and nonprofit exemptions do not typically apply to purchases of meals, food and catering, which are treated as sales of taxable services rather than tangible personal property.
Taxation of Meals and Food
P.D. 08-158 discusses a business that prepared and sold hot and cold bulk foods to private schools, church affiliated schools and day care providers. Most of the customers were nonprofit organizations that were exempt from federal income taxation under Internal Revenue Code § 501(c)(3). Some customers had provided the business exemption certificates claiming a sales and use tax exemption for purchases of tangible personal property. The business prepared volume batches of food by cooking, counting and sorting various food items and packaging the food in bulk containers. The business also delivered the prepared food. The Department audited and assessed the business sales taxes on untaxed sales of bulk foods to customers that had claimed exemptions from the tax. The basis of the audit assessment was that the food sales were sales of taxable services rather than sales of tangible personal property. Thus, the exemption certificates that the business accepted from customers were deemed invalid by the auditor because they did not apply to sales of taxable services. The business filed an appeal of the assessment with the Tax Commissioner.
The Tax Commissioner's response to the appeal, issued as P.D. 08-158, states that meals and food are tangible personal property based on Attorney General Opinion 67-70 (May 14, 1970) and the Virginia Supreme Court's decision in Chesapeake Hospital Authority v. Commonwealth, 262 Va. 551, 554 S.E.2d 55 (2001). Attorney General Opinion 67-70 addresses the application of the sales and use tax exemption for state and local government entities to the purchase by the state of Virginia of catered meals provided to guests at a banquet. The Attorney General agreed that meals are tangible personal property. However, the exemption was denied because the state did not exercise over the food rights or powers sufficient to meet the use or consumption requirement of the exemption statute.
Based on this opinion, the Department has consistently held sales of food, meals and catering to government entities for consumption by individuals to be taxable. Only in limited situations are such sales deemed to be for use or consumption by a government entity. For example, in P.D. 87-245 (11/4/87), a Virginia political subdivision was allowed to purchase food served to jail inmates exempt of the sales and use tax. Because the local government entity was responsible for feeding the jail inmates, it exercised sufficient rights and powers over the food to be considered the user of the food. As such, the government entity met the use or consumption requirement in Va. Code § 58.1-609.1 4 and was eligible for the government exemption.
In Chesapeake Hospital Authority, the Virginia Supreme Court's decision states that, with regard to the taxation of prepared food or meals, the Tax Commissioner must look to whether the entity claiming the exemption is the user or consumer of the food or the meals that are purchased. The Court reiterated that meals and food are tangible personal property. The Court noted that both the government and nonprofit exemption statutes apply to either the use or the consumption of tangible personal property. The Court concluded that the hospital satisfied the use requirement in the exemption statute because it purchased the food with its funds, prepared the food and decided the disposition of the food. Although individuals consumed the food, sufficient control was exercised over the food to be considered "use" for purposes of both the nonprofit and government exemptions.
Based on the authorities cited above, the Tax Commissioner concluded in P.D. 08-158 that exemptions for purchases of tangible personal property apply to food or meals purchased and provided by schools, nonprofit organizations and government agencies for consumption by individuals when the provision of meals or food is part of the official function of the entity. In such cases, the purchasing entity exercises sufficient dominion or control over the food provided to the individuals that consume the food to consider the purchasing entity as the user of the food. For example, a nonprofit day care center that is responsible for providing day care services to children and furnishes lunch and snacks to the children in its care may purchase the food exempt of the tax, provided the day care center has obtained an exemption certificate or letter from the Department certifying that it qualifies for exemption from the retail sales and use tax on purchases of tangible personal property.
Based on the facts presented, the Taxpayer's sales of food and meals from its general and catering menus are sales of tangible personal property rather than sales of services. The Taxpayer provides some services in connection with its sales of meals and food. The services include preparing, cooking, packaging and occasionally delivering the meals and food. In accordance with Title 23 VAC 10-210-4040 B, any services provided in connection with taxable sales of food or meals are taxable as services in connection with the sale of tangible personal property. The Taxpayer should note, however, that Va. Code § 58.1-609.5 3 provides an exemption from the tax for separately stated delivery or transportation charges.
In summary, the provision of services in connection with sales of meals, prepared food and catering does not change the character of the sales transactions. These sales remain sales of tangible personal property, rather than sales of a service. Unless a specific service is exempt under Virginia law, the services provided in connection with sales of meals, prepared food and catering become part of the taxable sales price billed to customers for the meals, food or catering. Accordingly, it is proper for a seller of meals, prepared food or catering to accept from the purchaser a valid exemption certificate that applies to purchases of tangible personal property.
This ruling letter concludes with additional clarification of the Department's policy that sets out in more detail the circumstances under which it is proper for a dealer to accept an exemption certificate for the purchase of meals, food and catering.
Treatment of Specific Sales Transactions
The Taxpayer provides some examples of typical sales transactions with religious, educational, nonprofit and charitable organizations. The following examples are referenced by number and addressed in the sections of this ruling that follow. The responses that follow are applicable to public school systems in addition to nonprofit schools. Public school systems qualify for the government exemption as provided under Va. Code § 58.1-609.1 4.
1. Restaurant sells prepared food or box lunches to schools for the purpose of feeding students;
2. Restaurant sells prepared food or box lunches to school clubs for the purpose of resale during fundraising activities and by a school concession stand.
3. Restaurant sells prepared food or box lunches to Parent Teacher Organizations/Parent Teacher Associations (PTO/PTA) for the purpose of
resale during fundraising activities and
4. Restaurant sells prepared food to religious organizations for the purpose of feeding members on a weekly basis and for purposes of resale during fundraising
Example #1 - Schools and Day Care Centers
The Department has issued several public documents that address the treatment of food or meals purchased by schools and day care centers. In accordance with P.D. 08-158, food and meals may be purchased by a school or day care center exempt of the tax if an official function of the school or day care center is the provision of meals and food to the individuals attending the school or day care center. P.D. 96-196 (8/14/96) provides that sales of box lunches to a church affiliated school that served the lunches to students qualify for the sales and use tax exemption for churches. In this instance, the school operated as a related ministry of the church and the provision of lunch to students was part of the official function of the school. In summary, schools and day care centers that qualify for a sales and use tax exemption under the government or nonprofit exemptions may purchase prepared foods and box lunches exempt of the tax for the purpose of feeding students or persons in their care.
Example #2 and #3 - School Fundraising
Prior to July 1, 2004, the Code of Virginia set out specific exemption statutes for various nonprofit organizations, including nonprofit schools. One of these statutes provided an exemption for tangible personal property purchased for use, consumption or sale at retail by a nonprofit elementary or secondary school or group associated with a nonprofit school for use in fundraising activities, the net proceeds of which are contributed directly to the school or used to purchase certified school equipment.
P.D. 86-222 (11/3/86) interprets this statute and explains that all the following criteria must be met to qualify for exemption: 1) the organization must be affiliated with a nonprofit elementary or secondary school, 2) the property purchased must be used in fundraising activities on behalf of the school and 3) the net proceeds from the fundraising activities must be contributed directly to the school or used to purchase certified school equipment. P.D. 86-222 emphasizes that this exemption is limited in scope to nonprofit schools and organizations related to nonprofit schools. Also instructive is P.D. 89-118 (4/10/89), which discusses the Department's policy with respect to exempt sales and purchases by PTA organizations.
As previously noted, Va. Code § 58.1-609.11 A sets out certain grandfather provisions for nonprofit organizations that held valid sales and use tax exemptions as of June 30, 2003. Subsection A states that any entity that was exempt from collecting sales and use tax as of June 30, 2003 would continue to be exempt from sales tax collection, if the entity followed the procedures set forth in subsection B and met the criteria set forth in subsection C of Va. Code § 58.1-609.11. Subsection E of § 58.1609.11 also provides that “[a]ny entity that is determined under subsections B, C, and D by the Department of Taxation to be exempt from paying sales and use tax shall also be exempt from collecting sales and use tax, at its election, if (i) the entity is within the same class of organization of any entity that was exempt from collecting sales and use tax on June 30, 2003 ....”
Based on the above, sales of prepared food or box lunches by and to school clubs, PTAs, PTOs and schools themselves for fundraising purposes qualify for exemption if the organization at issue held a valid exemption as of June 30, 2003 or is within the same class of organization as an entity that held a valid exemption for the payment and collection of sales and use tax as of June 30, 2003. An organization must meet the criteria in the original exemption statute to be considered part of the same class of organizations that held this specific exemption prior to June 30, 2003. In either case, the school club, PTA, PTO or similar organization must apply to the Department for exemption pursuant to Va. Code § 58.1-609.11, if it does not currently hold an exemption certificate issued by the Department. The Taxpayer should note that the Form ST-13 exemption certificate referenced in both P.D. 86-222 and P.D. 89-118 has been revised and is no longer an acceptable exemption certificate for use in claiming a nonprofit exemption.
Churches and Religious Organizations
Virginia Code § 58.1-609.10 16 provides an exemption from the tax for:
Tangible personal property purchased by nonprofit churches that are exempt from taxation under § 501(c) (3) of the Internal Revenue Code, or whose real property is exempt from local taxation pursuant to the provisions of § 58.1-3606, for use (i) in religious worship services by a congregation or church membership while meeting together in a single location and (ii) in the libraries, offices, meeting or counseling rooms or other rooms in the public church buildings used in carrying out the work of the church and its related ministries, including kindergarten, elementary and secondary schools. The exemption for such churches shall also include baptistries; bulletins, programs, newspapers and newsletters that do not contain paid advertising and are used in carrying out the work of the church; gifts including food for distribution outside the public church building; food, disposable serving items, cleaning supplies and teaching materials used in the operation of camps or conference centers by the church or an organization composed of churches that are exempt under this subdivision and which are used in carrying out the work of the church or churches; and property used in caring for or maintaining property owned by the church including, but not limited to, mowing equipment; and building materials installed by the church, and for which the church does not contract with a person or entity to have installed, in the public church buildings used in carrying out the work of the church and its related ministries, including, but not limited to worship services; administrative rooms; and kindergarten, elementary, and secondary schools.
The term "church" is defined in Title 23 VAC 10-210-310 A, in part, as "a nonprofit religious organization, regardless of faith, that would be considered a church under the standards promulgated by the Internal Revenue Service for federal income tax purposes...."
Example # 4 - Purchases
Title 23 VAC 10-210-310 B states that churches may elect to use the general nonprofit entity sales tax exemption set out in Va. Code § 58.1-609.11 or the statutory exemption for churches set out in Va. Code § 58.1-609.10 16. Churches must apply to the Department to obtain the general nonprofit entity exemption. The exemption is applicable to purchases only. The Department issues a Retail Sales and Use Tax Certificate of Exemption to churches that qualify under this option. Churches also have the option to use a self-issued exemption certificate, Form ST-13A, to claim the statutory exemption for purchases by churches.
While both the general nonprofit entity and church exemptions apply to purchases of tangible personal property, the statutory church exemption is narrower in scope than the general nonprofit exemption. If a church provides the Taxpayer with a Form ST-13A, the exemption applies to sales of prepared food and meals to the church for consumption by church members in the public church buildings used in carrying out the work of the church and its related ministries. The exemption also applies to the purchase of prepared food and meals distributed by the church as gifts outside the public church buildings. The statutory exemption for churches also includes purchases by church camps and conference centers operated by a church or an organization composed of churches. Title 23 VAC 10-210-310 F provides additional information on this specific part of the exemption.
Title 23 VAC 10-210-310 C explains that sales to churches claiming the exemption must be invoiced to and paid for directly by the church. Individuals cannot use personal funds to make exempt purchases on behalf of churches. Further, the exemption is not applicable to purchases made by individuals that are reimbursed by the church. Thus, the use of personal checks or cash does not provide sufficient proof the church has made a direct payment for the purchase of prepared food, meals or other merchandise. The church must also furnish the seller a copy of Form ST-13A or the general nonprofit entity exemption certificate in support of an exempt purchase. Otherwise, the vendor should tax the sale.
In summary, churches that issue vendors Form ST-13A to claim the statutory church exemption may make exempt purchases of prepared food and meals from the Taxpayer when used in one of the exempt manners set out in the exemption statute. As explained in P.D. 08-158, churches that claim the general nonprofit exemption must purchase the prepared food and meals for use as part of an official function or purpose of the church.
There is no statutory fundraising exemption for churches. Generally, churches that sell tangible personal property, including food or meals, are subject to the dealer requirements set out in Va. Code § 58.1-612 and are required to collect and remit to the Department the applicable retail sales tax on the sales. However, churches that are registered to collect the retail sales tax may make exempt purchases of tangible personal property, including meals and food, from the Taxpayer under the resale exemption. A valid resale exemption certificate, Form ST-10, should be obtained from the church at the time of the exempt sale in accordance with the provisions of Va. Code § 58.1-623 and Title 23 VAC 10-210-280.
In addition, Title 23 VAC 10-210-310 I 2 states:
If a church makes sales of food for which a profit is realized, the church should collect tax from the customers and remit the tax to the department. In these instances, the church may purchase the food exempt from the tax using a resale exemption certificate. For purposes of this subdivision only, if the sales price charged for food is completely offset by the cost of the food, and the church realizes no profit, then the church is not required to charge the tax to its customers on the sales price of the food. Instead, the church must pay the tax to its vendors on the purchase price of the food purchased. As long as the church pays tax on the purchase price of the food that it sells at cost, the church is not required to register as a dealer while conducting this activity or charge tax to customers.
Based on this provision of the church regulation, there may be instances when a church instructs the Taxpayer to charge the applicable tax on its sales of prepared food and meals because the church has elected to sell the food at cost and is not required to charge the tax on its sales of food and meals. In such cases, the resale exemption would not apply to the purchase of prepared food and meals.
Occasional Sales Exemption for Nonprofits,
Sales by nonprofit entities and churches may qualify for the general occasional sales exemption in Va. Code § 58.1-609.10 2. In addition, the 2009 Virginia General Assembly amended the exemption statute to allow a broader occasional sales exemption for nonprofit organizations, including churches. Virginia Tax Bulletin ("VTB") 09-8 (6/23/09) explains this legislative change. The language for the expanded exemption set out in Va. Code § 58.1-609.10 2 states:
A nonprofit organization that is eligible to be granted an exemption on its purchases pursuant to § 58.1-609.11, and that is otherwise eligible for the exemption pursuant to this subdivision, shall be exempt pursuant to this subdivision on its sales of i) food, prepared food and meals and ii) tickets to events that include the provision of food, prepared food and meals, so long as such sales take place on fewer than 24 occasions in a calendar year.
Based on the statutory change to Va. Code § 58.1-609.10 2 as explained in VTB 09-8, § 501 (c) 3 and charitable § 501 (c) 4 organizations, including churches, that are eligible for an exemption on purchases under Va. Code § 58.1-609.11 qualify to make exempt occasional sales on no more than 23 occasions per year. Further, nonprofit organizations that have applied to the Department and received a nonprofit exemption certificate are not required to pay the tax on purchases of prepared food and meals sold on no more than 23 occasions per year. Churches may use either a nonprofit exemption certificate issued by the Department or the church exemption certificate, Form ST-13A, to make exempt purchases of prepared food and meals sold on no more than 23 occasions per year.
In addition, VTB 09-8 discusses an administrative change to the occasional sales exemption that applies to all § 501 (c) nonprofit organizations. VTB 09-8 states that § 501 (c) nonprofit organizations may sell food, prepared food and meals and tickets to events that include the provision of food, prepared food and meals without collecting sales tax on such sales, subject to certain requirements. The organization may not hold events on more than 12 occasions per year and must not be required to register as a dealer under Va. Code § 58.1-612, based on its other activities. Qualifying nonprofits must pay the sales tax to vendors on the sales price paid for the food, which includes any catering, preparation or other taxable services provided with the food. The profits from sales of food or event tickets must be used solely to support the organization or be donated to another § 501 (c) organization. The organization must maintain adequate records for three years after each event to verify these requirements. These organizations are not eligible for a general sales and use tax exemption on purchases but still qualify for the occasional sales treatment discussed in VTB 09-8, if all the criteria set out in the bulletin are met.
Due to confusion regarding the application of the retail sales and use tax exemptions for government and nonprofit entities to sales and purchases of meals, food and catering, clarification of the Department's policy is warranted. The following clarification of the Department's policy is effective on the date of this ruling letter and will be applied on a prospective basis.
As explained in this ruling, the Department will not deny an exemption from the retail sales and use tax on sales or purchases of meals, food and catering on the basis that the meals, food and catering are taxable services. Rather, the Department will evaluate exemptions from the tax based on whether the entity claiming the exemption meets the use or consumption requirement of its respective exemption statute. To satisfy the use or consumption requirement, the government or nonprofit entity claiming the exemption must establish that the furnishing to individuals of meals or food, including catered meals, is an official function, mission, service or purpose of the government or nonprofit entity. Further, the entity claiming exemption must exercise sufficient dominion or control over the meals, food or catering provided to and consumed by individuals. Sufficient dominion or control is demonstrated if the charge for the food, meals or catering is billed to and paid for by the entity claiming the exemption from the tax and the entity determines the disposition of the meals or food, i.e., to whom, when and how the meals or food are served and consumed.
Criteria for Exempt Purchases of Meals and Food
If the government or nonprofit entity meets the use or consumption requirement of the exemption statute, the seller must be provided a valid exemption certificate or exemption letter from the Department to support a claim for exemption on the purchase of meals, food or catering. The entity claiming the exemption must pay for the meals, food or catering with its own funds. The record of the sale should indicate the exempt entity's name and the seller must have a corresponding exemption certificate or letter for the same entity to support the exempt sale. An exemption is not allowable for purchases paid for by individuals on behalf of an exempt entity or in cases where the purchaser will be reimbursed by the exempt entity for the purchase of the meals, food or catering.
In some cases, government and nonprofit entities are registered with the Department to collect and remit sales tax on their sales. As registered dealers, these entities are eligible to make exempt purchases of tangible personal property, including meals and food, under the resale exemption. In accordance with the provisions of Va. Code § 58.1-623 and Title 23 VAC 10-210-280, a valid resale exemption certificate, Form ST-10, should be obtained by the seller at the time of the exempt sale from those entities claiming the resale exemption. The resale exemption is not applicable in cases where the entity purchases meals, food or catering for its own use or consumption. However, the government or nonprofit exemption may apply to such purchases, if the exemption criteria discussed in this ruling are met.
This ruling is based on the facts provided and summarized above. Any change in the facts or the introduction of new facts may lead to a different result. The Code of Virginia sections, regulations, public documents and tax bulletin cited, along with other reference documents, are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If the Taxpayer has any questions concerning this ruling, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns