95-127 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Government transactions; Food service provider

Topic

Taxability of Persons and Transactions

Date Issued

05-19-1995

May 19, 1995

Re: §58.1-1821 Application: Retail Sales and Use Tax

Dear****************.

This is in response to your letter of February 23, 1995 in which you seek correction of a sales and use tax assessment issued to ******************(the Taxpayer) for the period August 1991 through July 1994.

FACTS

The Taxpayer operates as a food service provider. In this capacity, the Taxpayer engages in vending machine sales and also provides manual food and beverage services through cafeterias operated for customers.

The predominant issue in this case is the tax on fixed assets and other tangible personal property associated with the Taxpayer's purchase of a vending machine business from *********(the Seller). In this regard, you maintain that the transaction represents an exempt occasional sale. In addition, the Taxpayer protests the tax on: i) tangible personal property purchased in connection with the operation of a cafeteria for a federal government contractor, and ii) sales made to a Virginia public college.

Each of these separate issues will be addressed in detail below.

DETERMINATION

Vending Machine Business: The Seller operated a multi-faceted food service business in Virginia, consisting of both route vending sales and manual food services (i.e., cafeteria sales, concession sales, etc.). In July 1991, the Seller entered into an Asset Purchase Agreement to sell to the Taxpayer most of the assets associated with its route vending operation, including contracts, real property, motor vehicles, inventories, fixed assets and other tangible personal property.

Notwithstanding the above, the agreement also stipulates that the Seller will continue to operate manual food service operations in Virginia at stadiums, arenas and other public facilities and that such activities sometimes include the servicing of on-site vending machines.

Code of Virginia § 58.1 -609.10(2) exempts from the tax an occasional sale which is defined in §58.1-602 to mean:

- A sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale ... of all or substantially all the assets of any business and the reorganization or liquidation of any business, provided such sale ... is not one of a series of sales ... sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration. (Emphasis added)

It is apparent that the Seller has sold, at one time and to one buyer, substantially all of the assets of its Virginia vending business. For example, I note that prior to October 1991, the Seller operated as a vending machine dealer in thirteen Virginia localities. Since then, the Seller makes limited vending machine sales, in association with its manual food services as noted above, in only one Virginia locality.

Accordingly, the transaction is deemed to be a qualifying sale of "substantially all the assets" of a business for purposes of the occasional sale exemption, and the purchases made in connection with this transaction will be removed from the assessment.

Federal Government Contract: The Taxpayer entered into a subcontract to operate, for a monthly management fee, a cafeteria at a federal government installation. Under the terms of the subcontract, the Taxpayer is required to provide a starting inventory of glassware, flatware and other tableware. Further, the Taxpayer is required to replace such items as necessary, the cost of which is included in the monthly cost statements to the contractor.

Both the initial inventory of tableware and the replacements thereof become the property of the contractor. You maintain that the contractor enjoys tax exempt status and you further maintain that since these items are ultimately purchased by the contractor, the Taxpayer may purchase them exempt of the tax.

The application of the tax to government contractors is set out in Virginia Regulation (VR) 630-10-45(E) which indicates that contractors who perform services for the federal government are deemed to be the users and consumers of property purchased in connection with providing those services. As further indicated, this application of the tax applies even when title to the property passes to the government. This issue has also been addressed in a number of prior determinations which are enclosed as Public Documents 95-39 (3115195) and 94-231 (7129194).

While it has not been determined in this case if the property ultimately passes from the contractor to the government, the Taxpayer itself is the user of the property, and as such is liable for the tax. Also, I am not convinced that the contractor is itself a tax exempt entity since the contractor does not appear to be an agency of the government (rather, it is a consortium of universities and colleges). Even if this were the case, or even if the Taxpayer contracted directly with the federal government, no exemption would apply. As noted above, the Taxpayer must pay the tax on the purchase of property used to provide its food management services.

Furthermore, this application of the tax to food service providers is consistent with VR 630-10-64 which addresses restaurants, caterers and similar businesses. As noted in the regulation, items such as kitchen equipment, plates, glasses and similar items purchased for use in preparing and serving meals are taxable and cannot be purchased exempt of the tax. Also see the enclosed Tax Bulletin 92-10 for more information on this issue.

Sales: The Taxpayer operates a cafeteria at a Virginia public college. This facility prepares and sells meals to students, faculty and others, and the Taxpayer has properly collected and remitted the tax on these sales.

In addition to preparing and selling meals, the Taxpayer will occasionally prepare and serve coffee, desserts and similar refreshments at school sponsored functions (e.g., faculty meetings and student orientation). Believing that the sale of these refreshments were exempt, the Taxpayer did not charge tax when billing the college. Further, I understand that the Taxpayer received a certificate of exemption from the school, but did so after these transactions were assessed in the audit.

The department's policy regarding the application of the tax to food purchased by nonprofit schools has been addressed in a number of prior determinations, a sample of which is enclosed. In each case, the department has consistently determined that food is not used or consumed by the college, but rather by the individual to whom it is served.

Accordingly, the assessment made in connection with these sales is correct and will remain in the assessment. Further, the Taxpayer is required to charge and collect the tax from the school on all subsequent food sales.

Conclusion: Based on these determinations, the assessment is revised to remove those items purchased in connection with the occasional sale transaction. This revision reduces this outstanding assessment to********** as shown on the attached calculations. No additional interest will accrue on this balance provided payment is made within 30 days.

If you have any additional questions regarding this letter, please contact **********my Office of Tax Policy at**********.

- - - - Sincerely,
        
        Danny M. Payne
        Tax Commissioner

OTP/9074

Rulings of the Tax Commissioner