Tax Type
Retail Sales and Use Tax
Description
Food and grocery items; Hotel banquet and tour group sales
Topic
Taxability of Persons and Transactions
Date Issued
04-28-1995
April 28, 1995
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This is in response to your letter of December 8, 1994 in which you seek correction of a sales and use tax assessment to *********(the "Taxpayer") for the period December 1990 through January 1994. It is noted that the Taxpayer has paid the assessment.
FACTS
The Taxpayer operates a hotel which provides lodging and meals. As a result of the department's audit, an assessment was made for certain untaxed sales and purchases. The Taxpayer contests the tax assessment with respect to the following: handling charges, maintenance contracts, a computerized reservation system, and the inclusion of the sales tax in the price of banquet and tour group meals.
DETERMINATION
Handling charges: The auditor held taxable combined shipping and handling charges on purchases where sales tax was not charged and the Taxpayer did not accrue the tax. You indicate that while the vendor's invoice states shipping and handling, in most cases it does not involve handling. You further indicate that the handling portion of the combined charges averages between 5 and 15 percent of the total charge.
Code of Virginia § 58.1-602 defines the term "sales price", in part, as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale." Handling charges are charges for services in connection with the sale of tangible personal property and accordingly are included in the price of an item.
Furthermore, the department's consistent policy on this issue, as exemplified in the enclosed P.D. 89-132 (4127189), has been that the tax applies to combined shipping and handling charges. However, in first time audit situations, the department traditionally allows taxpayers an allowance for the shipping portion of the charge. Based on information furnished by the Taxpayer, l will remove from the audit 90% of the assessed charges. However, it is anticipated that the Taxpayer will prospectively comply with the department's policy on this issue .
Maintenance contracts: The Taxpayer was held liable for maintenance contracts that provide for parts and labor. You request that the department assess only the portion of the maintenance contract with respect to the parts and not service.
The application of the sales and use tax to maintenance contracts is set forth in Virginia Regulation (VR) 630-10-62.1, a copy of which is enclosed. Under the regulation, contracts which provide both repair or replacement parts and repair parts, represent a sale of tangible personal property and thus are subject to the tax based upon their full selling price. The regulation further states that the tax will apply to the total charge for a maintenance contract regardless of the fact that the contract may separately charge for parts and labor. Accordingly, the maintenances contracts were appropriately held taxable in the assessment.
However, effective January 1, 1996, parts and labor maintenance contracts will be subject to the tax on one-half the total charge for such contracts, as enacted by the 1994 General Assembly. See Code of Virginia § 58.1-609.5(9), copy enclosed.
Computerized Reservation System: The purchase invoices and maintenance contract provided by the Taxpayer reveal that the Taxpayer purchased a computer and equipment from the vendor. However, neither the invoices nor the maintenance contract include the furnishing of reservation services by the vendor.
The department has ruled that where a vendor provides computerized reservation services and leases computer equipment as part of the overall charge for the service, the sales and use tax shall not apply. However, if the computerized equipment and the reservation service are acquired separately, the sale or lease of the system is considered a sale of tangible personal property and is subject to the tax. See the enclosed P.D's. 88-57 (4/4188) and 88-178 (6/29/88). Therefore, in the instant case, the total charge for the computerized reservation system would be considered a sale of tangible personal property and is therefore subject to the tax.
In regard to other items assessed in connection with the computer system, the department has consistently held that computer maintenance support contracts which include tangible enhancements (software upgrades), are taxable. See enclosed copies of P.D.92-196 (9130/92) and P. D . 87-209 (9/ 15 /87) .
However, as mentioned in the above cited code, effective January 1, 1996, parts and labor maintenance contracts are subject to the tax on one-half the total charge for such contracts.
Sales price: The auditor held taxable contract banquet and tour group sales where sales tax was included in the price of the meal. The Taxpayer maintains that the inclusion of the tax in the price of banquet and tour meals is for the convenience of the customer where the bills are paid by a company or association and not by the individual attending the function. The Taxpayer further maintains that each contract states that 4.5% sales tax is included in the price of the meal.
VR 630-10-64 provides in pertinent part that the tax applies to, "sales of meals by restaurants, hotels, motels, clubs, caterers, cafes and others...." Furthermore, under Code of Virginia § 58.1-625 (copy enclosed) a dealer is required to separately state the amount of the tax and add the tax to the sales price or charge. VR 630-10-24(A) provides additional guidance on the above statutory requirement, explaining "[i]dentification of the tax by a separate writing or symbol is not required provided that the amount of the tax is shown as a separate item on the record of the transaction." (Emphasis added).
When the Taxpayer states in its contract that the tax is included in the price of the meal, it fails to meet the above statutory requirement. Therefore, based upon the above, the banquet and tour group sales were correctly assessed on the total sales price.
Based on the above, the audit will be adjusted and a refund, with updated interest, will be issued. If you have any questions regarding this determination, 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/9075T
Rulings of the Tax Commissioner