95-69 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Penalties and Interest; Audit penalty

Topic

Collection of Delinquent Tax

Date Issued

04-07-1995

April 7, 1995

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

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

This will reply to your letter of October 16, 1994 in which you, on behalf of your client*********(the "Taxpayer"), seek correction of the sales and use tax audit assessment for the period June, 1991 through April, 1994.

FACTS

The Taxpayer is in the food management/restaurant business. The Taxpayer provides meals to all full-time employees of their restaurants. As consideration for such meals, the Taxpayer deducts 35 cents per hour worked from gross wages of all full-time employees (this deduction is made prior to income taxes being withheld). As the result of a recent audit of the Taxpayer, the auditor held the amount deducted from the employee's salary as a taxable sale of meals to employees as provided under Virginia Regulation (VR) 630-10-64. The Taxpayer is taking exception to the taxing of employee meals based on Code of Virginia § 58.1-609.3(7), which provides a sales and use tax exemption for meals furnished by restaurant or food service operators to employees as a part of wages. The Taxpayer is of the opinion that since the charge for employee meals is deducted from the employee's wages, meals are furnished as a part of wages and are therefore exempt.

The Taxpayer is also requesting waiver of audit penalty. The Taxpayer feels that the method set forth in V R 630-10-80 for applying audit penalty does not always reflect the Taxpayer's true compliance with sales and use tax laws. The Taxpayer feels that sales tax paid to vendors should be taken into account when calculating the use tax compliance.

DETERMINATION

Code of Virginia § 58.1-609.3.7 provides a sales and use tax exemption for "meals furnished by restaurants or food service operators to employees as part of wages". Subsections B and C of VR 630-10-64 addresses meals "sold" to employees and meals "furnished" to employees. Subsection B provides that any employer who sells meals to an employee must add the tax to the charge and pay the tax on gross sales. Subsection C provides that meals and drinks that are furnished to employees without charge are not subject to the tax.

Based on the information provided in your correspondence, the meal allowances for employees are accounted for in the payroll account of the Taxpayer under the title "other earnings", not as a reduction or cost of goods sold or as an income account. The meal allowance is also identified as "earnings" on the employee's payroll check stub. In addition, the Taxpayer's position is further substantiated by the classification of the meal allowance as "wages" by the Virginia Department of Labor and Industry. In light of these recent findings, l find basis for removal of the meal allowance from the non-taxed sales measure of the audit. The audit will be revised accordingly.

In regard to the waiver of audit penalty, the Taxpayer is taking exception to the department's method of computing use tax compliance ratios for purposes of assessing audit penalty. Specifically, the Taxpayer feels that in computing the use tax compliance ratio, the department should include sales tax paid to vendors in the "Use Measure Reported" figure used in the numerator and the denominator. VR 630-10-109 addresses use tax and states, in part, the following:

- The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased. The rate of the state and local use tax are the same as the rates of the state and local sales tax. There is no duplication of the tax. (Emphasis added).

Therefore, the tax paid to vendors at the time of purchase is "sales" tax, not "use" tax. The purpose of the "use" tax compliance ratio is to determine how well the taxpayer has complied with Virginia tax laws in accruing and remitting use tax on untaxed purchases. To include sales tax paid to vendors in computing the use tax compliance ratio would inaccurately portray the taxpayer's compliance with the use tax laws.

In order for penalty to be waived on second and subsequent audits, use tax compliance ratios must be a minimum of 85%. Based on the above, and the fact that the Taxpayer's use tax compliance ratio on this second generation audit is 0%, the department is unable to waive penalty.

Therefore, based upon all of the foregoing, the audit will be revised accordingly. A revised assessment will be forthcoming. If you should have any further question, please feel free to contact the department.

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

OTP/8551K

Rulings of the Tax Commissioner