June 2, 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 assessments issued for the period September 2012 through August 2015. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates five restaurants in Virginia. The Department’s audit disclosed that the amount reported on the Taxpayer’s sales returns was underreported from the daily sales information provided by the Taxpayer. The difference between the returns and daily sales reports was recorded in the audit as sales tax collected and not remitted. In addition, exempt sales were also assessed in the audit because the Taxpayer did not provide exemption certificates to verify the exempt sales.
In addition, the Taxpayer provided meals to its managers and families as part of their compensation and benefits package. The Taxpayer also provided cards to customers that allow the customer to redeem the card for a free food item. The auditor assessed use tax on the cost of free meals provided to employees’ family members, and the cards providing a free food item to customers. Certain asset acquisitions for which purchase invoices were not provided were also assessed use tax in the audit.
The Taxpayer contests the assessment for tax collected and not remitted on the basis that the audit does not accurately reflect the total amount of sales tax remitted by the Taxpayer for the periods in question because the Taxpayer operates under a 52-53 week fiscal year. The Taxpayer states that it remitted sales tax based on 13 four-week periods throughout the year, not 12 calendar months. Based on this, the Taxpayer believes the sample periods selected for the audit do not correspond to the sales and sales tax reported by the Taxpayer during the audit period. Additionally, the Taxpayer states that the Department’s estimated amount of free manager’s meals is not reflective of the actual transactions. Finally, the Taxpayer requests additional time to provide invoices for certain asset acquisitions.
DETERMINATION
Accounting Method
Title 23 of the Virginia Administrative Code (VAC) 10-210-480 provides:
In the case of dealers regularly keeping books and accounts on the basis of an annual period that varies 52 to 53 weeks, reporting consistent with such account period is acceptable, provided a satisfactory explanatory statement is attached to the dealer’s first return filed under such annual period. Each return filed by these dealers must include all accounting periods which end during the period covered by the return.
It appears the Taxpayer did not provide an explanatory statement with its first return filed under the periods covered by the audit. In addition, the Taxpayer did not include with the return all accounting periods which end during the period covered by the return. The auditor reconciled the Taxpayer’s daily sales reports to the sales tax returns for the sample months selected and found that the amounts reported on the sales tax returns were underreported from the daily sales information that was provided. However, the Taxpayer states that because it remits sales tax based on 13 four-week periods throughout the year, instead of the more common 12 periods, the sample did not accurately reflect the total amount of sales tax remitted by the Taxpayer.
After reconciling the Taxpayer’s sales tax returns to its corporate income tax return, it appears that the Taxpayer made “catch-up” payments throughout various months, and the sales tax remitted to the Department is consistent with its corporate income tax return. Based on this finding, the audit will be returned to the audit staff to verify that the appropriate amount of sales tax was remitted to the Department. If this is found to be true, penalty will be removed in accordance with Title 23 VAC 10-210-2032 B 3, which waives penalty in regard to first generation audits, except when certain circumstances exists.
Employee Meals
Virginia Code § 58.1-609.3 7 provides an exemption from the sales tax for "Meals furnished by restaurants or food service operators to employees as a part of wages." Title 23 VAC 10-210-930 C interprets this Code section and states that “Meals and drinks that restaurants and food service operators furnish to their employees without charge are not subject to the tax.”
The Taxpayer provides meals to its managers and their families as part of their compensation and benefits package. Meals provided to employees free of charge are exempt from the tax in accordance with the statute and regulation. As such, these transactions will be removed from the audit. Meals provided to family members, however, are not exempt from the tax and are considered taxable withdrawals from inventory. These transactions will not be removed from the audit. The audit disclosed the Taxpayer did not distinguish between meals provided to employees and those provided to employees’ family members. Going forward, the Taxpayer should properly account for employee meals by maintaining documentation on the cost price of meals provided to employees free of charge.
Complementary Meals
Title 23 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.” 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 food quality, 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 provides “one-on-me” cards to customers that allow the customer to redeem the card for free food items. The Taxpayer is not liable for additional tax where the tax has already been collected from a customer and a free meal is provided to that customer as a result of poor food quality. The Taxpayer should provide documentation that distinguishes between “one-on-me” meals provided as a result of poor food quality and free meals provided for any other reason. If the Taxpayer is unable to provide documentation, a 65%-35% split between complementary meals for exempt poor food quality and taxable poor quality service, respectively, has been deemed reasonable for calculating the tax paid on exempt complementary meals due to poor food quality, in accordance with Public Document 05-169 (12/13/2005).
CONCLUSION
The audit will be returned to the appropriate field audit staff to make the adjustments in accordance with this determination. The auditor will contact the Taxpayer to obtain the information requested for verification and evaluation. The Taxpayer will have 60 days from the date of this letter to submit all required additional information for the Department’s review. Once the revisions are complete, the Taxpayer will be issued revised bills with updated interest to date if any outstanding assessment balances remain. The bills should be paid within 30 days of the bill dates to avoid the accrual of additional interest charges.
The Code of Virginia sections, regulations, and public document cited 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, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1490H