Tax Type
Retail Sales and Use Tax
Description
Coupons and discounts; Restaurant sales
Topic
Basis of Tax
Computation of Tax
Date Issued
06-08-1994
June 8, 1994
Re: §1821 Application: Retail Sales & Use Tax
Dear***************
This will reply to your letter of November 16, 1993 seeking correction of a sales and use tax assessment to your client,***********(the "Taxpayer"), for the period September 1990 through June 1993.
FACTS
The Taxpayer, a restaurant, was assessed as the result of a recent audit for having understated its sales tax and for failing to remit use tax on expense items. A review of the Taxpayer's sales records revealed a discrepancy of approximately 40% between the amount of sales reported on the monthly sales tax returns and on the monthly income statements. The Taxpayer has no records to substantiate the discrepancy as he maintains that some of the documentation was destroyed when a water heater burst. The Taxpayer alleges that the assessment should be revised (i) consistent with the previous audit and (ii) based on information provided regarding free and discounted meals covered by trade agreements with vendors and advertising coupons and on meals provided at no or reduced cost to employees and management.
Furthermore , the Taxpayer seeks waiver of the penalty assessed on the grounds of good faith and reasonable efforts to comply with the reporting requirements.
DETERMINATION
Virginia Regulation (VR) 630-10-64 provides that retail sales of meals by restaurants, hotels, motels, and others are taxable. However, it also provides that meals and drinks that restaurants and food service operators furnish to their employees without charge are not subject to the tax.
Furthermore, the department historically has held that when discounts are issued by a restaurant in the form of coupons or through participation in discount programs offering a reduction in the price of meals or through other means, sales tax is due only on the amount of the bill after the discount has been computed. This is true only if the restaurant absorbs the loss resulting from the discount and will not be reimbursed by another organization. [See P.D. 88-174 (6/29/88), copy enclosed]
However, if a restaurant is to be reimbursed for the discount by an outside organization, through whatever means such as "free advertising" as in the instant case, or with money, etc., the tax is to be computed on the bill amount prior to the discount. This is expressly contemplated in Va. Code Sec. 58.1-602, which defines the term "sale" as including the exchange or barter of tangible personal property. Accordingly, no adjustment in the assessment is warranted due to meals "traded" for advertising.
In the instant case, the auditor held as taxable the difference in sales figures reported on the Taxpayer's sales tax returns and on its monthly income statements and corporate income tax returns. The Taxpayer explained the discrepancy between his sales reports and income statements by saying that on a monthly basis a percentage was deducted from gross sales for promotions (buy one-get one free). However, it is my understanding that the auditor found that the daily sales records had already been adjusted for promotions which amounted to 1-2% of daily sales. Furthermore, the financial statements have never been adjusted to reflect this kind of deduction. Finally, adequate documentation has not been provided to substantiate the Taxpayer's claim. While some documentation was provided, it only served as further evidence that the tax should have been accrued on the discounts on meals for which advertising was provided in return as explained above.
In addition, the Taxpayer alleges that the assessment should be revised to remove meals provided to employees and management at no or a reduced cost. However, the Taxpayer has not provided sufficient documentation to support this position. Since the assessment is the result of discrepancies between the sales reported on the sales tax returns and income statements, in order to support its argument, the Taxpayer must show that its accounting records were adjusted to increase its sales figures by the amount of the discount allowed on subject meals. This would involve noncash accounting entries to sales, with a corresponding increase to an expense such as employee compensation. In addition to extensive and comprehensive recordkeeping, there would be journal entries or other evidence to document this noncash activity. This type of accounting adjustment would be unusual for have made as it requires extensive recordkeeping.
The Taxpayer seeks waiver of the penalty assessed contending that they made a good faith and reasonable effort to comply with the reporting requirements. VR 630-10-80, as it was in effect at the time of this audit, provides that "[o]n a second or subsequent audit, a dealer is expected to demonstrate a higher degree of sales and use tax compliance" and that "[p]enalty will not be waived on second or subsequent audits for other than exceptional mitigating circumstances." For the prior audit, the Taxpayer's sales tax compliance ratio was 99%. However, while information on the proper method of accounting for the tax on give-away/discount meals was provided to the Taxpayer at the conclusion of the prior audit, in this third audit the Taxpayer's sales tax compliance ratio dropped substantially to 58%.
It is recognized that the water heater accident at the Taxpayer's location may have destroyed some sales records that could have been reviewed; however, it is not apparent that these records would have explained the differential between theTaxpayer's monthly income statements and its reported taxable sales (additionally, the department's auditor was advised by an employee of the Taxpayer that other of its sales records had been disposed of in order to reduce storage needs). Taking into account the large drop in sales tax compliance, coupled with a wide variance between the Taxpayer's income statements and reported taxable sales, the Taxpayer has not established "exceptional mitigating circumstances" as required by VR 630-10-80.
Accordingly, the assessment is correct and a revised Notice of Assessment with accrued interest will be mailed to the Taxpayer as soon as practicable. A representative from the Norfolk District Office will be contacting the Taxpayer regarding an installment payment plan.
Sincerely,
Danny M. Payne
Tax Commissioner
c: ******* District Office
OTP/7581H
Rulings of the Tax Commissioner