July 21, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response 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 January 1, 2015 through December 31, 2017.
FACTS
The Taxpayer operates restaurants with one location in Virginia. The Taxpayer provides banquet and event catering services. The Department’s audit disclosed that the Taxpayer made untaxed sales of food and catered meals to customers with invalid exemption certificates. The transactions at issue involve sales made to a government entity and two nonprofit entities. The Taxpayer cites Virginia Tax Bulletin (VTB) 16-3 (5/2/2016) to contest the transactions at issue.
DETERMINATION
Exemption Certificates
Generally, Virginia Code § 58.1-623 A provides:
All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 B further explains that:
Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate. [Emphasis added].
VTB 16-3
The Department issued VTB 16-3 to address the policy change related to the exempt purchase of meals and catering by nonprofit organizations, churches, and governmental entities. Prior to the Department’s policy change, nonprofit organizations, governmental entities, and churches were prohibited from using their sales and use tax exemption certificates to make exempt purchases of prepared meals and catering, as these categories of food were considered taxable services. Under the new policy, meals and catering are not subject to the tax in accordance with the statutory exemptions provided to state and local governmental entities and nonprofit organizations.
The Taxpayer cites the following portion of VTB 16-3 to support that the transactions at issues are exempt from the tax:
Effective for purchases made on and after April 22, 2016, state and local governmental entities, nonprofit organizations, and nonprofit churches may use their Retail Sales and Use Tax exemption certificates issued pursuant to Va. Code § 58.1-609.1(4), § 58.1-609.11, and § 58.1-609.10(16) to make exempt purchases of food and meals, as well as certain “taxable services” provided in connection with the provision of meals.
VTB 16-3 further provides the following:
Effective for purchases made on and after April 22, 2016, nonprofit organizations, state and local governmental entities, and churches may use their respective nonprofit exemption certificate, governmental exemption certificate, Form ST-12, and self-issued exemption certificate, Form ST-13A to purchase prepared foods, catering and related services provided in connection with the sale of food exempt of the sales and use tax.
Contested Transactions
***** (Department of Defense)
This transaction involves the sale of catered meals to a civilian DOD employee. The issuance of VTB 16-3 did not change the Department’s policy as it relates to federal government entities. VTB 16-3 states, in part, that “[f]ederal governmental entities and employees traveling on government business remain exempt from the tax on their purchases of meals and catering, provided payment for the meals is made directly by the federal government pursuant to a required official purchase order to be paid out of public funds.” This policy is codified in Title 23 VAC 10-210-690 A, which provides the following:
Sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable …
Subsection B states that:
Purchases of meals, lodging, and other accommodations, by the federal government or its employees traveling on government business are exempt from the tax provided payment for the meals, lodging, or other accommodations is made directly by the federal government pursuant to an official purchase order (e.g., by direct billing to government or use of government credit card).
For this transaction, the Taxpayer did not provide an exemption certificate or the required proof of government payment. The Taxpayer provided a copy of an employee identification card, but this is not sufficient to determine whether this transaction is exempt. The Taxpayer was given the opportunity during the audit to provide an exemption certificate, purchase order, and proof of payment to determine the exempt status of this transaction. The necessary documents were not provided during the audit, nor were they submitted with the appeal. Accordingly, the transaction was properly included in the audit.
***** (Nonprofit)
For this transaction involving the sale of catered meals, the documentation provided does not reflect the Department’s policy change. The certificate still states that the “exemption is not applicable to the purchase of taxable services, such as meals or lodging.” The following section of VTB 16-3 is applicable for the exemption documentation provided for this transaction:
Although the current nonprofit exemption certificate explicitly prohibits the use of the certificate to purchase taxable services exempt of the tax, at this time, the Department will not issue a new nonprofit exemption certificate to any nonprofit organizations that purchase qualifying prepared food, catering, and other related services. Instead, the Department will issue a notice letter that qualifying nonprofit organizations may present, along with their exemption certificates, when making purchases of prepared meals, food and catering. [Emphasis added].
The transaction was properly included in the audit. Pursuant to VTB 16-3, a notice letter from the Department following the April 22, 2016 policy change should accompany the exemption certificate.
***** (Nonprofit)
For this transaction involving the sale of food and wine, only a portion of the exemption certificate was provided to the auditor and again with the appeal. This documentation is insufficient to determine the nature of the tangible personal property covered under the exemption certificate. In addition, because the certificate was prepared and dated prior to the issuance of VTB 16-3, a notice letter from the Department following the April 22, 2016 policy change should accompany a valid and complete exemption certificate. Accordingly, the transaction was properly included in the audit.
CONCLUSION
Based on this determination, the assessment is correct. No further action is required as the assessment has been paid in full.
The Code of Virginia sections, regulations, and tax bulletin 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/3290.G