December 29, 2017
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling on the application of the Virginia retail sales and use tax to purchases of alcohol and alcoholic beverages by the ***** (the “Taxpayer”). I apologize for the delay in responding to your request.
FACTS
The Taxpayer, a nonprofit organization, was granted a Virginia retail sales and use tax exemption by the Department under the statutory authority of Virginia Code § 58.1-609.11. The Taxpayer has experienced difficulty in purchasing alcohol and alcoholic beverages exempt of the sales tax from caterers, retail establishments and Virginia Alcoholic Beverage Control (ABC) stores. The Taxpayer seeks clarification of the Department's policy with respect to the purchase by nonprofit organizations of alcohol and alcoholic beverages. The Taxpayer seeks the Department's assistance in justifying to its vendors that the nonprofit exemption applies to qualifying purchases of alcohol and alcoholic beverages.
RULING
Nonprofit Exemption
Virginia Code § 58.1-609.11 provides an exemption from the retail sales and use tax for tangible personal property purchased by qualifying nonprofit organizations for their use and consumption. To qualify for the exemption, a nonprofit organization must meet the statutory requirements for the exemption, file an application for the exemption and be issued a certificate of exemption by the Department. The Taxpayer was issued a nonprofit certificate of exemption dated February 11, 2015.
Generally, the sales tax exemption for nonprofit organizations applies to purchases of tangible personal property for use or consumption by the nonprofit organization. To qualify for exemption, the sale of tangible personal property must be made directly to and paid for by the nonprofit organization. Until the Department's recent policy change noted in the Taxpayer's letter, the purchase of meals and catering were treated as the purchase of taxable services rather than the purchase of tangible personal property. For this reason, the sale of meals and catering was not eligible for the nonprofit exemption, which applies to purchases of tangible personal property only.
Policy Change
Effective April 22, 2016, the Department changed its policy regarding the sale of meals and catering to nonprofit organizations, churches and government entities. The policy change is discussed in Virginia Tax Bulletin (VTB) 16-3 (5/2/16). VTB 16-3 states that state and local government entities, nonprofit organizations and nonprofit churches may use a Retail Sales and Use Tax Certificate of Exemption issued pursuant to Virginia Code §§ 58.1-609.1(4) (government entities), 58.1-609.10(16) (nonprofit churches) and 58.1-609.11 (nonprofit organizations) to make exempt purchases of food, meals and any services provided in connection with the sale of food and meals. The qualifying organization must satisfy a new bright-line test that is explained in the bulletin.
The Department will use a bright-line test to determine whether a qualifying organization's purchase of food or other tangible personal property, prepared meals, catering or related services satisfies the statutory “use and consumption” requirement when the purchase is for consumption by individuals. Under this test, nonprofit organizations, nonprofit churches and governmental entities must demonstrate the following:
- The provision of the applicable prepared meals, catering or services furthers a function, mission, service or purpose of the nonprofit or governmental entity; and
- The charge for the food, meals or catering service is billed to and paid for by the entity claiming exemption from the tax with payment drawn from the entity's account, rather than using cash or an individual's account; and
- The entity claiming the exemption determines to whom, when and how the meals or food are served and consumed.
Provided the Taxpayer's purchase of prepared meals, catering and related services meet all three criteria of the bright-line test, such meals and services, including alcoholic beverages, would qualify for the retail sales and use tax exemption afforded to nonprofit organizations in accordance with the Department's policy set out in VTB 16-3. The bright-line test criteria in VTB 16-3 should be applied to purchases of alcohol and alcoholic beverages in the same manner as food and meals. The Taxpayer may make qualifying purchases exempt of the tax from restaurants, other retail establishments and Virginia ABC stores by issuing the vendor a valid nonprofit certificate of exemption.
Exemption Certificates
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 addresses the use of certificates of exemption. Subsection A states that:
All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
Title 23 VAC 10-210-280 B then states that “[r]easonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates.” In the instant case, the Department has confirmed that the Taxpayer has qualified for the nonprofit exemption. As a result, the Taxpayer was issued an exemption certificate by the Department of Taxation. The exemption certificate contains information that allows the Department to verify that the use of the certificate by the purchaser is valid.
In this case, the purchaser is responsible for confirming that the use of the nonprofit exemption conforms to the use and consumption criteria of the bright-line test discussed in VTB 16-3. Vendors must insure that the nonprofit exemption certificate is signed, that the charge is billed to and paid for by the nonprofit entity claiming the exemption and that the expiration date of the certificate has not expired prior to the date of the purchase. If so, the certificate is valid on its face and the vendor is considered to have accepted it in good faith. A vendor that accepts an exemption certificate in good faith from a purchaser will not be held liable by the Department for failing to collect the sales tax on the transaction.
To facilitate the acceptance by vendors of the Taxpayer's Retail Sales and Use Tax Certificate of Exemption, it is recommended that a copy of this letter be presented to vendors, along with the Taxpayer's exemption certificate, to substantiate exempt purchases of alcohol and alcoholic beverages.
The Code of Virginia sections and regulation 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 ruling, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1282.S