Document Number
95-70
Tax Type
Retail Sales and Use Tax
Description
Nonprofit organizations; Hospital meals furnished to non-patients
Topic
Taxability of Persons and Transactions
Date Issued
04-03-1995
April 3, 1995



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


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

This will reply to your letter dated June 15, 1993 in which you seek correction of sales and use tax assessed to your client, ********* (the "Taxpayer"), as a result of an audit for the period May 1989 through April 1992.
FACTS

The Taxpayer is a nonprofit hospital qualified under IRC § 501(c)(3). As a result of the audit, the Taxpayer disagrees with the tax assessed in three areas:
  • Internal accounting charges for catered meals provided by the hospital's food service division to various hospital departments for staff meetings, board meetings, technical and educational meetings, special events such as employee retirement and Christmas parties, and sales of catered meals to unrelated

  • Charges to various hospital departments for food items such as coffee and other beverages, sandwiches, and fruit provided by the hospital's food service division to medical staff and hospital employees; and
  • Unreported cafeteria revenue associated with "pink tickets" issued by the hospital to employees and volunteers in appreciation for blood donation and volunteer work. The "pink tickets" entitle the individual to a free meal in the hospital cafeteria.

The Taxpayer protests the assessment and argues that the tax has been assessed upon purchases of food and related products exempt under Code of Virginia §58.1-609.7(4) (formerly Code of Virginia §58.1-608(A)(7)(d)) which are prepared and used by the Taxpayer in the provision of its medical services. The Taxpayer further asserts that meals provided to patients were erroneously included in the audit work papers as food items provided to the medical and hospital staff free of charge.
DETERMINATION

The central issue in this case is whether food and related products purchased and prepared by the Taxpayer and served to medical staff and hospital employees, as well as unrelated entities, constitute tangible personal property used or consumed by the Taxpayer in the provision of its medical services. It is the Taxpayer's belief that the provision of food and related products to its medical and hospital staff, and outside entities ultimately contributes to the furtherance of the hospital's exempt purpose.

Code of Virginia §58.1-609.7(4) provides an exemption for tangible personal property purchased for use or consumption by a nonprofit hospital or licensed nursing home. The exemption applies to purchases of medical supplies, furnishings, and equipment by hospitals and nursing homes, in addition to, administrative supplies used by these facilities. 1 he exemption further applies to food purchases which are prepared for service to patients. However, the Taxpayer also provides food and related products to individuals other than patients.

Under longstanding Virginia case law, exemptions from the tax are to be strictly construed, with any doubts resolved against the one claiming exemption. In this case, based upon a 1970 Attorney General's opinion, the provision of food and related products to medical and hospital staff, and unrelated entities, in any form, does not constitute "use or consumption" by the Taxpayer as mandated by the statute. By contrast, purchases of food for use in the preparation of meals to be consumed by the patients, in light of the hospital's provision of medical services, clearly fall within the exemption.

The Attorney General's opinion in question (ATT'Y GEN. ANN. REP.: 1969-1970 at 291) addressed the issue of the application of the government exemption to meals purchased by the Commonwealth with public funds and consumed by guests attending a conference hosted by the Commonwealth. The opinion referenced "use" (as defined in Code of Virginia §58.1-602) as meaning the exercise of any right or power over tangible personal property incident to the ownership thereof. The Attorney General opined that the consumption of meals by banquet guests did not sufficiently reflect "use" or the exercise of control, by the Commonwealth, over the food to warrant exemption. The opinion held that the exemption for tangible personal property for use or consumption by the Commonwealth did not extend to the sales of meals even though the purchase of meals was made for governmental purposes and paid for out of public funds. The same rationale applies in this case, i.e., a hospital is not entitled to exemption from the tax on purchases of meals consumed by individuals other than its patients because the hospital exercises no control over the consumption of such meals. The tax does not apply to patient meals because the meals are consumed in connection with the provision of the hospital's medical services to its patients.

I would also note that the 1970 Attorney General's opinion was affirmed in an informal opinion issued on January 11, 1993 and the department's policy was incorporated into the revised sales and use tax regulation on nonprofit organizations. I have enclosed copies of both for your review, as well as a copy of P.D. 84-227 (1114184) relating to a state university which involves a virtually identical fact situation as the Taxpayer's. In the ruling, the Tax Commissioner denied the exemption for governments and their political subdivisions to charges for catering services provided by a nonprofit state university to its various departments because the meals were not consumed by the otherwise exempt organization.

Accordingly, the tax is applicable to the Taxpayer's charges to its departments of food and related products and charges for food and related products to unrelated entities. These charges constitute sales as defined in Code of Virginia §58.1-602 and the tax applies to the "sales price" which includes any markup as provided in the definition of "sales price" under §58.1-602. The application of the tax to the "sales price" is consistent with P.D. 84-227. The tax also applies to the cost price of the food items used in the "pink slip" meals as these meals are provided free of charge. The charge for meals and food products to patients is not subject to the tax, and it is my understanding that the auditor removed all such items from the final report.

Although the assessment was correct based upon the foregoing, I will agree to grant the Taxpayer's request that the tax be applied on a prospective basis to the contested areas relating to the provision of catered meals and food products to internal departments and "pink slip" meals. Therefore, the tax imposed upon those items will be abated. The Taxpayer will receive a revised "Notice of Assessment" reflecting the taxable sales of catered meals to unrelated entities, including applicable interest, which should be paid within 30 days to avoid the accrual of additional interest charges.
                        • Sincerely,


                          Danny M. Payne
                          Tax Commissioner



OTP/7269J

Rulings of the Tax Commissioner

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