March 3, 2017
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the “Taxpayer”) for the period March 2014 through April 2015. I apologize for the delay in this response.
FACTS
The Taxpayer operates an indoor amusement business that offers laser tag as one of its attractions. The Taxpayer sells party packages that are typically purchased by customers for birthday parties. A party package can be purchased with the option for each party participant to play one or two games of laser tag. In addition, the party package includes the provision of pizza and beverages to each person attending the party. Invitations, a private room, paper products and cleanup of the room are also provided to the customer. The Taxpayer did not charge and remit the retail sales tax on the sale of party packages. However, the Taxpayer paid the sales tax to vendors on the purchase of pizza and soft drinks that were provided with the party packages.
The Department audited and assessed the Taxpayer retail sales tax on the untaxed charges for the party packages that included the provision of food and beverages. The Taxpayer contests the audit assessment on the basis that it contacted both the Department and a local government office and was advised by each agency that sales of the party packages were not subject to the Virginia retail sales tax. The Taxpayer states that it should not be penalized in the audit for relying on advice received from the Department and the local government. Further, the Taxpayer contends that the Department failed to allow a credit against the audit liability for the sales taxes paid on the food and drinks.
During the audit, the auditor acknowledged that the Taxpayer was entitled to the resale exemption on its purchases of food and drinks. However, the Taxpayer was not given credit in the audit for the sales taxes paid. Rather, the auditor advised the Taxpayer to request from its vendors a refund of the sales taxes erroneously paid on the food and drinks.
DETERMINATION
Taxation of Services
Virginia Code § 58.1-603 imposes the retail sales tax on “every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth, or who rents or furnishes any of the things or services taxable under this chapter....” A “retail sale” is defined in Va. Code § 58.1-602, in part, as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter ...” The retail sales tax is computed on the “sales price” of the property or services sold. Sales price is defined in Va. Code § 58.1-602, 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, ... without any deduction therefrom on, account of the cost of the property sold, the cost of materials used, labor or service costs; losses or any other expenses whatsoever.” (Emphasis added.)
Based on the statutory authorities cited, charges for labor or services are taxable when billed in connection with the sale of tangible personal property. There are certain statutory exemptions in the Code of Virginia for specific types of labor or services. Absent such an exemption, service or labor charges are properly included in the taxable sales price upon which the sales tax is computed if the charges are billed in transactions that include the sale of tangible personal property.
Admissions Policy
The application of the sales and use tax to party packages, like those sold by the Taxpayer, is governed by the Department's regulation and policy for admissions. The Department's admissions policy is addressed in Title 23 of the Virginia Administrative Code (VAC) 10-210-30, which states:
The tax does not apply to sales of tickets, fees, charges, or voluntary contributions for admissions to places of amusement, entertainment, exhibition, display, or athletic contests, nor to charges made for participation in games or amusement activities. However, “cover charges” or “minimum charges” which include the provision of or the entitlement to food, drinks, or other tangible property constitute a sale of property and are subject to the tax.
Public Document (P.D.) 14-41 (3/20/14) discusses a business that operated a sports themed amusement center. Laser tag was one of the attractions offered to the public. The business sold party packages that included a choice of admission to various attractions and included the provision of food items. The Department audited the business and assessed sales tax on the untaxed party package charges. The business appealed the assessment on the basis that the true object sought by purchasers of the party packages was the party experience rather than the food items included with the package. Based on the Department's admissions policy, the Tax Commissioner ruled that the assessment of tax on the total charge for the party packages was correct because the sale of the packages entitled the party guests to food, which is a sale of tangible personal property.
P.D. 14-1 (1/3/14) is also on point with this issue. Again, this public document addresses the sale of party packages that included admission to amusement facilities and the provision of food and beverages. The ruling states that the total charge for the party packages is subject to the retail sales tax. When provided in conjunction with food and beverages, admission charges are properly included in the taxable sales price of the party package sales transactions.
In the instant case, the Taxpayer sold food and beverages, which are tangible personal property. The sales transactions included charges for laser tag and other services. These services were billed in sales transactions that include the provision of tangible personal property. There is no statutory exemption from the tax for the services at issue. As such, the charges for the laser tag games and other services are properly included in the taxable sales price billed to customers for the party packages. In contrast, if the Taxpayer sells admissions to its laser tag facilities and the sale does not include the transfer of tangible personal property to customers as part of the transaction, the charge is an exempt service pursuant to Va. Code § 58.1-609.5 1 and the Department's admissions policy set out in Title 23 VAC 10-210-30. Consistent with the cited authorities, the contested sales tax assessment on the Taxpayer's sales of the party packages is correct.
Credit for Sales Taxes Paid
As previously noted, the Taxpayer paid retail sales tax on the pizza and beverages at the time of purchase. These items were subsequently resold to customers. Generally, the purchase of tangible personal property for sale or resale qualifies for exemption from the tax. Because the purchase of the pizza and beverages qualified for the resale exemption and the retail sales tax was assessed on these items in the audit, the auditor advised the Taxpayer that it could seek refunds of the sales taxes erroneously paid on the purchase of the pizza and soft drinks.
The basis for the auditor's position is addressed in several public documents issued by the Department. In P.D. 96-358 (12/6/96) a taxpayer was denied the allowance of a credit in its audit for sales taxes erroneously paid to vendors. The Tax Commissioner stated that refunds of this nature are not included as credits in audit findings to prevent misallocations of the 1% local sales tax. The dealer's discount must also be accounted for when refunds of retail sales taxes are issued. The taxpayer was advised to seek a refund for the erroneously paid sales tax from its vendors. Based on that ruling and others issued by the Department, the auditor was correct in not allowing credit in the audit for sales taxes that the Taxpayer erroneously paid to vendors.
Erroneous Advice
The Taxpayer states that it contacted the Department in 2014 by telephone to inquire if it was correct to pay the sales tax on purchases of pizza and soft drinks that were furnished with the party packages sold to customers. The Taxpayer claims that it was advised by a Department representative and a local government employee that it was acceptable to pay the tax on its purchases of pizzas and drinks
Virginia Code § 58.1-1845 sets out the Virginia Taxpayer Bill of Rights. Subsection 4 states that one of the guaranteed rights is for:
The right to abatement of tax, interest and penalties in accordance with § 58.1-1835, attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.
Virginia Code § 58.1-1835 provides that the Department must abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:
- The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
- The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and
- The facts of the case described in the written advice and the request thereof are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.
In considering any verbal advice given, there is always a chance that the facts provided are misunderstood or that insufficient facts are provided that contribute to an inaccurate response. The above statutory provisions require that the erroneous advice must be in writing to allow the Department to confirm that an employee gave erroneous advice.
The Taxpayer has not provided written proof that erroneous advice was provided by the Department and it is not possible to conclude that the Taxpayer reasonably relied on erroneous advice from the Department during the audit period. While I am sympathetic with the Taxpayer's situation, there is no basis to abate the audit assessment based solely on verbal advice that was given by the Department.
CONCLUSION
Based on the above, the audit liability is correct and the assessments issued as bill ***** and bill ***** are due and payable. Updated bills, which include accrued interest, will be issued to the Taxpayer and should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections, regulation and public documents 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 matter, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/633.S