Document Number
95-172
Tax Type
Retail Sales and Use Tax
Description
Lodging; Telephone charges
Topic
Taxability of Persons and Transactions
Date Issued
06-26-1995
June 26, 1995



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


Dear****************

This will respond to your recent letters seeking correction of the sales and use tax assessments issued to *************(the "Taxpayer").
FACTS


The Taxpayer is engaged in the business of offering motel accommodations. A recent audit of various periods from March 1992 through October 1994 resulted in assessments for untaxed purchases of tangible personal property used in the operation of the motels and for not charging the tax on certain sales held taxable in the audit.

During the audit period, the Taxpayer sold two of its six motels. The auditor held the entire sale price of the real and tangible property of the two motels as taxable since a detailed breakdown of the real and tangible property was not provided. The Taxpayer felt that the sale of the two motels was an "occasional" sale and therefore exempt from the tax.

The Taxpayer also protests the tax assessed on the total amount charged to motel guests for long-distance telephone calls. Although Virginia Regulation (VR) 630-1 0-48(C) exempts toll charges (i.e., charges by telephone companies which are merely passed on by the motel to its guests), the auditor held the entire long-distance telephone charge taxable since the Taxpayer was unable to provide the amount of markup applied by the Taxpayer to the toll charges. The Taxpayer maintains that there is no statutory provision under the retail sales and use tax laws for taxing any sort of telephone charge. The Taxpayer further maintains that the entire amount charged its guests for long-distance telephone services represents an exempt "toll charge" since the Taxpayer owns its telephone system, pays the telephone companies directly for long-distance telephone services and sets the final charge for these services.

Although the use tax assessed in this case is not protested, the Taxpayer seeks waiver of the associated penalty and interest on the basis that the prior auditor never supplied the Taxpayer with use tax forms, certificate of registration number, and other information as he said he would.
DETERMINATION


Occasional Sale

The department's policy as it relates to the issue in this case is well established and set forth in existing public documents. Please find attached copies of five public documents issued by the department which relate to this issue. Of these, P.D. 92-5 (3/13/92) dealt specifically with the sale of one hotel by a hotel chain and sets out the following determination:
    • You contend that the sale of a single hotel constitutes the sale of a "business" within the meaning of the statute and Virginia Regulation 630-10-75. Had the corporation operated only one hotel, your conclusion would be correct. However, the corporation is engaged in the business of operating a chain of hotels; as such, the sale of a single hotel does not constitute the sale of all or substantially all of the corporation's assets, either nationwide or in Virginia.
Also, the term "business" is defined by Code of Virginia §58.1-602 as "any activity engaged in by any person, or caused to be engaged in by him, with the object of gain, benefit or advantage, either directly or indirectly." (Emphasis added). The commercial or mercantile activity engaged in by the Taxpayer is the selling of accommodations through a chain of motels; this is the Taxpayer's business. Therefore, as the two motels sold by the Taxpayer only represent a portion (33%) of its motel business in Virginia, the sale does not constitute the sale of all or substantially all of the Taxpayer's business in Virginia.

Accordingly, the audit will be revised to remove the tax assessed on the real property portion of this transaction, provided the Taxpayer furnishes a detailed breakdown of the values associated with the real and tangible assets transferred in this sale.

Toll Charges

I find that P.D. 95-17 (2/2/95, copy enclosed) is instructive in setting out the department's policy for applying sales tax to additional charges in connection with accommodations. The pertinent part of that response is shown below.
    • Although you are correct in that the sales tax normally does not apply to true service transactions, it does apply to services performed in connection with the taxable sale or rental of tangible personal property and accommodations. Code of Virginia §58.1-602 defines "sales price" as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale." Somewhat more broadly, the statute defines "gross proceeds" as "the charges made or voluntary contributions received for ... furnishing services." Accordingly, these provisions serve to ensure that tax is collected on the total price charged for tangible personal property, accommodations, and any services that are part of the transaction.
VR 630-10-48(C), as adopted in 1985, correctly sets out the department's longstanding policy that "[a]ny additional charges made in connection with the rental of a room or other lodging or accommodations are deemed to be a part of the charge for the room and are subject to the tax. For example, additional charges for movies, local telephone calls and similar services are subject to the tax."

However, VR 630-10-48(C) further provides that "[t]oll charges for long-distance telephone calls are not subject to the tax." "Toll charges" are those separate charges made by telephone companies for long-distance telephone calling services. As such, these toll call services are not deemed services in connection with the rental of accommodations. However, when a motel or hotel adds an amount (a markup) to the telephone company's toll charge, the department has consistently held that the markup is taxable as an additional charge in connection with accommodations. See P.D. 84-261 (12/28/84) & P.D. 88-72 (5/2/88).

Although I understand the Taxpayer's belief that the total amount charged its guests for long-distance telephone services represents a toll charge, the department's consistent policy has been that only that portion of the charge which reimburses the Taxpayer for the exact amount charged by the telephone company for the long-distance call would be exempt from the tax.

Again, however, the assessments will be revised to remove the telephone company's toll charges. To accomplish this, the Taxpayer must furnish the department with an estimate of the average percentage of markup applied to the toll charges during the audit.

Food Products of Continental Breakfast

The food products assessed in this case were not contested. However, it is my understanding that a continental breakfast is furnished to guests as part of the charge for the room rental; that is, the Taxpayer makes no separate charge for continental breakfasts. Although use tax was assessed in the audit on fruit and dairy products consumed by the guests in connection with continental breakfasts, such products have already been subject to the sales tax as the tax was charged and collected by the Taxpayer on the gross proceeds received from the room rental. Therefore, these food products will be removed from the audit.

Penalty and Interest

VR 630-10-80, copy enclosed, provides that the application of interest to audit deficiencies is mandatory and cannot be waived. The regulation also sets out the department's policies with respect to audit penalty. Although the department cannot waive interest, based upon the circumstances, I do find basis for the waiver of penalty.

The audit will be revised in accordance with this determination, and revised assessments will be issued as soon as possible. The information requested for the occasional sale and toll charge issues should be furnished to the department's auditor as soon as practicable. Upon completion of the revisions in this case, revised audit reports and revised notices of assessment will be sent to the Taxpayer.

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

                        • Sincerely,



                          Danny M. Payne
                          Tax Commissioner
OTP/9649R

Rulings of the Tax Commissioner

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