April 25, 2018
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period November 2012 to October 2015.
FACTS
The Taxpayer operates full-service restaurants. In an audit of the Taxpayer by the Department, the auditor identified various categories of complementary meals that were deducted from gross sales. In total, 30 separate categories of complementary meals were deducted from gross sales. The auditor was unable to identify which complementary meals categories were a result of poor food quality and which were a result of circumstances other than poor quality food, which would render the transaction as taxable. As a result, the Department issued assessments for additional tax and interest.
The Taxpayer contests the inclusion of certain categories of complementary meals and claims that food waste due to poor food quality were incorrectly included with complementary meals adjustments. The Taxpayer also states that certain categories included in the audit are retailer's coupons for its loyalty program. Finally, the Taxpayer contests the inclusion of certain fixed assets in the asset adjustments and claims that these fixed assets are related to a real property construction contract.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-210-930 E states, “A dealer who has collected the tax from a customer but subsequently issues a ticket which is redeemable for a free meal will not be liable for any additional tax on the free meal provided the redeemable ticket was issued to the customer as a result of poor food quality.” [Emphasis added]. When a redeemable free meal ticket is issued to a customer as the result of poor service, for public relations purposes or for any reason other than poor quality food, the dealer must report use tax on the cost price of all tangible personal property furnished in providing the free meal at the time the ticket is redeemed.
The Taxpayer's complementary meals categories listed 30 separate categories including “BR Differential”, “Guest Relations”, “Kitchen Error”, “Members Relations”, “Beer — Bartender error”, and “Server Error” among others. The auditor was unable to distinguish which groups were a result of “poor food quality” but included ten different categories as exempt under Title 23 VAC 10-210-930 E. According to the auditor, very little documentation or information was provided to distinguish among the different categories of complementary items. The auditor was also unable to determine from the sales data how to treat rewards and loyalty program items and listed all of these items as taxable withdrawals from inventory. In its appeal, the Taxpayer provides no additional documentation and very little information to prove that food waste due to poor food quality was incorrectly included as taxable or that items for the loyalty program should be included as retailer's coupons.
In accordance with Virginia Code § 58.1-205, a tax assessment issued by the Department is considered prima facie correct and the burden is on the taxpayer to prove that the assessment is incorrect. Because so little information was provided with the appeal, there is currently no basis to adjust the audit related to this issue. The Taxpayer has furnished no documentation in support of its contentions and thus has not met its burden of proof in accordance with Virginia Code § 58.1-205.
The Taxpayer also contests the inclusion of certain fixed assets and claims that these assets were part of a real property construction contract. The Taxpayer cites Title 23 VAC 10-210-410 as legal authority for its claim. After the appeal was submitted, the Taxpayer provided the auditor with the necessary documentation to show the transactions at issue were related to real property construction; therefore, these items will be removed from the audit.
CONCLUSION
The Taxpayer's audit will be revised to remove the charges for transactions related to real property construction. The audit will be referred to the appropriate field audit staff for revision. Updated bills, with accrued interest, will be issued to the Taxpayer. The bill should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia and regulation sections 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 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/1539.H