Tax Type
Retail Sales and Use Tax
Description
Resales; Non-food items
Topic
Taxability of Persons and Transactions
Date Issued
01-23-1995
January 23, 1995
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This is in response to your letter of September 26, 1994 in which you seek correction of a sales and use tax assessment for the period May 1991 through April 1994 issued to **************(the Taxpayer).
FACTS
The Taxpayer operates a restored historic inn which provides lodging and meals. At issue is the application of the tax to non-food items purchased by the Taxpayer and to that portion of the assessment on gratuity charges added to customers' bills. The Taxpayer also questions the assessed penalty.
RULING
Each of the issues will be addressed as follows:
Non-food purchases: The Taxpayer purchases food exempt of the tax for resale. However, certain vendors, who sell both food and non-food items, mistakenly failed to charge the tax on non-food items. You indicate that you dispute the tax on some of these transactions and that the issue can be resolved only through a time-consuming review of food and non-food purchases from these vendors.
I understand that the Taxpayer's records for the earlier segment of the audit (May through December 1991) were incomplete, and so untaxed purchases for this period were estimated. The estimated liability for this eight month term, based on untaxed purchases made during the subsequent 28 months of the audit period, accounts for less than 10 percent of total liability for untaxed purchases.
Conversely, more than 90 percent of the total liability for untaxed purchases is based on specific invoices for non-food items purchased January 1992 through April 1994. These purchases, which primarily include charges for printing, firewood, candles, furnishings and other property used and consumed by the Taxpayer, are taxable. Accordingly, based on the information before me, and lacking any evidence to the contrary, the assessment on untaxed purchases is correct as assessed.
Tax on gratuities: During the audit period, the Taxpayer added an 18 percent gratuity charge on its restaurant bills. You indicate that the Taxpayer did not notify customers that this charge was discretionary, but you further indicate that if the gratuity was questioned, the customer was then informed that he or she could pay more or less than the stated amount. I understand, however, that in most cases, if not all, customers paid the 18 percent charge without any changes.
The application of the tax to tips and gratuities is set out in Virginia Regulation (VR) 630-10-64 and provides that if the tip "is wholly at the discretion or judgment of the customer, the tip is not subject to the sales tax." (Emphasis added) Therefore, since the Taxpayer did not inform customers that the gratuity was discretionary, the assessed liability regarding this issue is correct.
In addressing this liability, the Taxpayer proposes that the department waive the assessment related to this issue. In exchange the Taxpayer will agree, for a period of two years, to add an 18 percent mandatory gratuity to all meal charges and will accordingly collect and remit the tax on these charges. The Taxpayer will also agree to withdraw its protest of untaxed purchases as discussed above.
While I appreciate your efforts to expeditiously settle this case, the department cannot accept your offer since the decision on how to treat gratuity charges must remain entirely with the Taxpayer. The department is mandated to enforce the proper application of the tax to whatever billing procedure the Taxpayer chooses, but has no authority to impose any preference.
The department's policy on gratuities is further discussed in the enclosed Public Document 92-192 (9/29192), a case which appears nearly identical to the Taxpayer's. As in that ruling, the tax is applicable to the Taxpayer's current procedures. Should the Taxpayer subsequently decide to notify customers that a stated gratuity is discretionary, no tax will apply to those charges.
Penalty: There seems to be some misunderstanding on the assessed penalty charges. As you indicate, this is the Taxpayer's first audit, and the department's policy is to generally waive penalty charges on first audits. In accordance with this policy, no penalty charges were assessed on any of the audit issues. including untaxed purchases or untaxed gratuities.
At the beginning of the audit it was found that the Taxpayer's sales and use tax return (Form ST-9) for March 1994 was delinquent. Also, the return for April 1994 became delinquent during the course of the audit. The assessed penalty was only for these two delinquent returns and was charged pursuant to Code of Virginia §58.1-635.
Over the past three years, the Taxpayer has customarily filed its returns in a timely manner; in those few cases when returns were filed late, penalty was assessed and paid. Indeed, in most cases where the Taxpayer filed a late return, the Taxpayer calculated, self-assessed and paid the penalty without the department having to issue a bill. Thus, the penalty charges in this case were assessed in the same manner as on any late-filed sales and use tax return.
The tax, penalty and interest on the delinquent sales and use tax returns has been paid. A notice of assessment for the unpaid balance, with interest accrued to date, will shortly be issued. No additional interest will accrue on the outstanding assessment provided full payment is made within 30 days.
If you have any questions regarding this letter, you may contact **************of the department's Office of Tax Policy at***************.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8522I
Rulings of the Tax Commissioner