Tax Type
Retail Sales and Use Tax
Description
Management fees relating to food service operation
Topic
Basis of Tax
Collection of Tax
Date Issued
10-28-1985
October 28, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of July 11, 1985, in which you submit an application for correction of sales and use tax assessed to ***** as the result of a recent audit.
FACTS
***** ("Taxpayer") has contracted with ****** ("Food Service") for the management and operation of the food service facilities located on Taxpayer's premises. Food Service procures all food, beverages, supplies, and equipment necessary for the operation of Taxpayer's facilities, for which Food Service is reimbursed by Taxpayer. By contract, all items procured by Food Service remain its property until reimbursement is made by Taxpayer. Food Service is contractually responsible, subject to the approval of Taxpayer, for the planning and execution of menus, establishment of quantities and portions to be sold, and the establishment of prices to be charged for food and beverages sold to Taxpayer's employees, tenants, customers, guests, and others. In addition, Food Service plans, prepares, and serves special meals and provides food and beverages for other special events as Taxpayer may desire from time to time.
In addition to reimbursing Food Service's expenses, Taxpayer pays to Food Service a "management" fee equivalent to a percentage of sales made by Food Service or a fixed dollar amount, whichever is more. While Food Service collected tax on sales to Taxpayer's employees, tenants, customers, guests, etc., it did not collect tax from Taxpayer on management fees. A recent audit of Taxpayer produced an assessment for its failure to do so.
In addition to contesting tax assessed on management fees paid to Food Service, Taxpayer contests the assessment of tax on maintenance contracts entered into with florist for the upkeep of plants in Taxpayer's facilities and the replacement of dead plants. Lastly, Taxpayer contests the imposition of penalty.
DETERMINATION
Under the terms of the Business Food Service Management Agreement provided by the Taxpayer, Food Service agrees to procure, on Taxpayer's behalf, food and other items necessary for the operation of Taxpayer's food service facilities. Such items become the Taxpayer's property after it reimburses food Service. Most purchases by Food Service are in fact paid out of Taxpayer's funds through the establishment of a working funds account, consisting of funds advanced by Taxpayer and receipts from sales to Taxpayer's employees, tenants, customers, guests, etc.
The above referenced agreement also places the responsibility for the planning and execution of menus, establishment of quantities and portions of food to be sold, and the establishment of prices to be charged for food and beverages sold in the hands of Food Service, subject to the approval of Taxpayer. Thus, while decisions affecting the types, quantity and price of items sold are generally made by Food Service, Taxpayer has ultimate control over the decision making process and ultimately bears the risk of profit or loss in the operation of its food service facilities.
Based upon the foregoing, it is Taxpayer, rather than Food Service, making sales of food and beverages to its employees, tenants, customers, guests, etc. Thus, the procurement of food by Food Service and the subsequent sale to Taxpayer is an exempt sale for resale. Accordingly, management fees related to such sales are not taxable and will be removed from the department's audit. The resale exemption does not apply, however, to sales of food and beverages from Food Service to Taxpayer for use or consumption by Taxpayer. In such, cases where Food Service furnishes food and beverages for special events or serves special meals, Taxpayer is the ultimate user or consumer and is taxable based upon the "sales price"of the items purchased.
As the term "sales price'" is defined in Section 58.1-602.17 as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale," the management fees paid by Taxpayer as part of the cost of the food it uses or consumes is subject to tax. The same is true even with respect to food purchased by Food Service with Taxpayer's funds. In such situations, Food Service is fabricating food belonging to Taxpayer, a taxable transaction under the provisions of Virginia Code Section 58.1-608.16. That statute defines as a sale subject to tax "the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used is fabrication." In this case, the management fee provided Food Service represents the taxable charge for fabricating food.
Therefore, based upon the foregoing, management fees will be removed from the department's audit to the extent such fees relate to food prepared for resale by Taxpayer. However, management fees related to the preparation of food for use or consumption by Taxpayer will remain taxable.
As to the other issue raised by Taxpayer, the application of the tax to maintenance and service contracts is set forth in Section 630-10-62.1 of the Virginia Retail Sales and Use Tax Regulations. The contract in question calls for a florist to maintain the plants in Taxpayer's facilities for a fixed fee and to replace any dead plants at no additional charge. Subsection D of Regulation §630-10-62.1 directly addresses such contracts:
Maintenance contract, the terms of which provide both repair or replacement parts and repair labor, represent a sale of tangible personal property. The total charge for such contracts is subject to the tax since at the time the contract is entered into it is impossible to ascertain what portion of future repair transactions will represent parts and what portion will represent labor.
Accordingly, the assessment of tax on such contracts is proper in this case and no relief is due Taxpayer.
Lastly, I find basis for the relief of penalty assessed to Taxpayer in this case as the size of Taxpayer's business increased significantly during the audit period and also due to the substantial turnover in Taxpayer's accounts payable staff.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner