Tax Type
Retail Sales and Use Tax
Description
Food and grocery items; Gratuities
Topic
Taxability of Persons and Transactions
Date Issued
06-24-1996
June 24, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This is in reply to your letter of March 17, 1995 in which you seek correction of sales and use tax assessed to ********* (the "Taxpayer"), for the period December 1991 through October 1994. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates as a caterer and as a result of the department's audit was assessed sales tax on untaxed gratuity charges and catering services. The Taxpayer protests the tax on the gratuity charges and asserts that they are discretionary in nature and exempt from the tax. The Taxpayer also argues that the tax was erroneously assessed on sales of catering services to governments and organizations entitled to sales tax exemption under Code of Virginia § 58.1-609. The Taxpayer maintains that such sales were exempt pursuant to exemption certificates. Lastly, the Taxpayer requests removal of the tax on sales attributable to holders of direct payment permits and correction of miscellaneous audit errors. I will address the issues individually.
DETERMINATION
Gratuity charges
Virginia Regulation (VR) 630-10-64(D) provides that "[i]f a customer tips a dealer's employee, and the amount is wholly at the discretion or judgment of the customer, the tip is not subject to the sales tax." The section further states that "[i]f the dealer adds an amount or flat percentage to the meal price, whether the amount is designated as a tip or as a service charge, the addition is part of the sales price and is subject to the tax ...
The auditor found that on a majority of the customer invoices the Taxpayer automatically imposed a 10% service charge. The auditor correctly concluded that the Taxpayer's imposition of a 10% minimum gratuity charge did not meet the "wholly at the discretion of the customer" test under the regulation and assessed the tax. In some instances, the customer chose to pay an amount exceeding the 10% minimum and this was so noted either on the written contract for catering services or on the invoice. In accordance with the regulation, gratuity charges listed for an amount over 10% are deemed discretionary and will be removed from the audit. The department's policy regarding gratuities is discussed further in Public Documents 82-16 (3/1/82), 92-192 (9/29/92), and 95-66 (3/30/95), copies enclosed.
Governments
Code of Virginia § 58.1-609.1(4) provides an exemption from the sales tax for purchases of tangible personal property by the federal government and state and local governments of Virginia. VR 630-1045 provides further guidance on the application of the exemption and in Section 1.2(A) states that charges for meals and catered events are subject to the tax when purchased by a state or local government or public institution of learning, regardless of whether the purchases are pursuant to official purchase orders. Section 1.2(B), however, provides an exemption for federal government purchases of meals when made pursuant to official purchase orders. The issue of meals and catering services provided to governments, has been addressed in several rulings by the department. A sampling of rulings and the regulation are enclosed.
The department has consistently held sales of meals to governments for consumption by individuals as taxable. Such sales are exempt when sold to governments for consumption by them or for use in the provision of their services. For example, the Tax Commissioner, in P.D. 87-245 (11/4/87), found sales of food sold to a local government to be exempt because the food was served to inmates housed in a jail facility operated by the local government. The ruling makes a distinction between food purchases for consumption by jail inmates and food purchases by the local government for consumption by individuals at a social event sponsored by the local government.
In addition, the Virginia Attorney General has issued an opinion which addresses the application of the government exemption to catered meals purchased by the state with public funds and consumed by guests attending a conference hosted by the state. (Att'y Gen. Ann. Rep.: 1969-1970 at 291) See attachment to P.D. 87-245. 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 concluded 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. This opinion was affirmed by an informal opinion of the Attorney General dated January 11, 1993, copy enclosed.
The Taxpayer sold meals to state agencies, local governments, and public school systems that were consumed by individuals during banquets and office parties. Meals consumed by individuals during social events does not constitute use or the exercise of control by the governmental entity. The exemption does not apply to the Taxpayer's sale of meals to governments for such purposes.
Nonprofit colleges/schools
Code of Virginia § 58.1-609.4(2) provides an exemption for tangible personal property for use or consumption by a college or other institution of learning. The scope of this exemption is identical to the governmental exemption. The department has consistently held that food purchased by nonprofit colleges and schools is not used or consumed by the college or school, but instead by the individuals to whom it is served. See Public Documents 95-127 (5/19/95) and 96-98 (5/24/96), copies enclosed.
Nonprofit hospitals
Code of Virginia § 58.1-609.7(4) provides an exemption for tangible personal property for use or consumption by a nonprofit hospital or a nonprofit licensed nursing home. The department addressed the sales of catered meals to nonprofit hospitals in P.D. 94-378 (12/30/94) and P.D. 95-70 (4/3/95).
The Taxpayer sold meals to nonprofit hospitals for consumption by medical staff and hospital employees during social events and meetings. The same rationale applies in this instance as in the case of food sold to governments and nonprofit colleges. The Taxpayer's sales of catered meals to nonprofit hospitals for consumption by individuals other than patients does not constitute use and consumption by the hospital and as such the exemption does not apply. Alternatively, the Taxpayer's sales of food for use in the preparation of meals for consumption by patients clearly falls within the exemption.
Churches/nonprofit organizations/direct Payment sales/miscellaneous errors
Code of Virginia § 58.1-609.8(2) provides a sales and use tax exemption for purchases of tangible personal property by a nonprofit church for use in religious worship services and for use in the public church building in carrying out the work of the church and its related ministries. The auditor has previously deleted these sales from the audit.
The audit lists several sales to various nonprofit organizations that qualify for exemption under specific statutes in Code of Virginia § 58.1-609. These sales will be removed from the audit.
Code of Virginia § 58.1-624 grants the department the authority to issue direct pay permits to allow manufacturers, miners, and public service corporations to pay sales tax directly to the department on purchases of tangible personal property for their own use. The department has confirmed that the tax was paid by the holders of valid direct payment permits regarding specific sales. As such, those sales will be removed from the audit.
The auditor has revised the original audit and removed any miscellaneous errors.
Exemption certificates
Code of Virginia § 58.1-623 and VR 630-10-20 provide that all Virginia sales, leases, and rentals of tangible personal property are subject to the tax unless the contrary is established. The burden of proving that the tax does not apply rests with a dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable.
In accordance with the above, sales for which an exemption certificate was on file at the time of the sale will be removed from the audit. Sales made pursuant to Form ST-12 certificates (government exemption), in which purchase orders were not attached will remain taxable. For future audits, the Taxpayer is advised that reasonable care must be taken to avoid tax-free sales made under exemption certificates when such sales are not exempt under the law.
The auditor will revise the audit to reflect the necessary adjustments. The Taxpayer will receive a revised bill including interest accrued through the date of the letter of protest. The bill should be paid within 30 days to avoid the accrual of additional interest charges.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9604J
Rulings of the Tax Commissioner