Tax Type
Retail Sales and Use Tax
Description
Audit procedures; Audit samples
Topic
Collection of Delinquent Tax
Date Issued
03-29-1996
March 29, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will respond to your letter of June 25, 1995, seeking correction of the sales and use tax assessment issued to ******* (the Taxpayer). Copies of all references cited in this letter are enclosed.
FACTS
The Taxpayer operates a resort hotel. An audit for the period of February 1992 through January 1995 resulted in the assessment of tax on certain untaxed sales and purchases. The Taxpayer maintains that no tax should apply to: (1) charges for room rentals and meals furnished employees of state and local government agencies and nonprofit organizations who furnish exemption certificates, and (2) service gratuities which are separately stated on customer's bills and negotiated with customers. The Taxpayer also believes that the sampling technique overstates the liability for recurring purchases since significant purchases were made during the sample period from out-of--state vendors.
DETERMINATION
Lodging and Meals
Subsection 1.2(A) of Virginia Regulation (VR) 630-10-45 provides, in part, the following:
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- Charges for meals, catered events, lodging, and other accommodations, such as meeting or conference rooms, are subject to the tax when paid for by the state or local government or public institutions of learning, or employees of such, regardless of whether the purchases are made pursuant to required official purchase orders.
This has been the long-standing policy of the Department of Taxation since the inception of the retail sales and use tax in 1966. On the other hand, when meals and lodgings are sold to federal government employees on government business, such sales are exempt from the tax if payment is made directly by the federal government pursuant to a required official purchase order to be paid for out of public funds. Federal law prohibits a state from imposing a sales or use tax on any type of sale to the United States. See § 1.2(B) of VR 630-10-45 for further details.
For purchases made by nonprofit organizations which qualify for an exemption on purchases of tangible personal property, the tax will generally apply to the purchase of meals and lodging by such entities even if an exemption certificate is presented to the Taxpayer. According to VR's 630-10-74 and 630-10-97.1, meals and lodgings are considered taxable services, not tangible personal property. In order to make an exempt purchase of meals and lodging, an organization's exemption must contain specific language which exempts the purchase of services. Presently, there are only four exemptions which specifically exempt taxable services. See Code of Virginia §§ 58.1-609.4(4), 58.1-609.4(12), 58.1-609.8(34), and 58.1-609.8(50).
Organizations qualifying for one of these four exemptions have been issued ruling letters from the department stating that they qualify for such exemption. Since none of the exemption certificates received by the Taxpayer are applicable to taxable services and are therefore unacceptable in exempting such sales, and the department's policy on these matters is well established, I find no basis for removing these sales from the department's audit.
Gratuities
The department's policy on tips and service charges is set out by VR 630-10-64(D) which specifically provides that "[i]f a customer tips a dealer's employee, and the amount is wholly at the discretion or judgement of the customer, the tip is not subject to the sales tax." The regulation goes on to state, however, 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 a part of the sales price and is subject to the tax even if the amount or flat percentage is paid over in part or in whole by the dealer to employees."
The courts have consistently held that a tax assessment issued by the proper authorities is prima facie correct and valid and that the burden of proof is upon the taxpayer to prove otherwise. As such, the Taxpayer must show via convincing evidence (e.g., a written policy in by-laws, statement on customer's ticket, sign posted in restaurant, etc.) that gratuities are at the complete discretion of its customers. See PD 92-192 (9/29/92).
According to the auditor, the Taxpayer automatically adds a 15% gratuity to the customer's ticket for meals purchased, but the percentage of the gratuity may fluctuate depending upon the size of the party. It my understanding that there is no indication on the tickets or menus furnished to customers that the amount of the tip is wholly at the discretion or judgement of the customer. Also, there are no signs posted in the Taxpayer's restaurant or other visible indications for the customer to know that tipping is voluntary.
Although the Taxpayer maintains that tips are negotiated with customers, the Taxpayer has not furnished any convincing evidence that tipping is left to the complete discretion of its customers. In the absence of such proof, I must conclude from the foregoing that the gratuities are set by the Taxpayer, and that in substantially all instances, including sales to employees of state and local government and nonprofit organizations, such gratuities become a taxable addition to the sales price of the meals.
As you are concerned that some gratuities may have been assessed twice, I will have the auditor review this area of the audit with you.
Audit Sample
Sampling is an audit technique of significant value that is widely used in the public and private sectors. The department uses sampling in all types of sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. See PD 92-236 (11/12/92). When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
The Taxpayer maintains that the purchase sample overstates its liability. In order to prove that the assessment is incorrect, the Taxpayer must demonstrate that the sample used is not representative of the audit period or that it is flawed in some other manner to invalidate the sample. In the case at hand, the Taxpayer has not presented any evidence to invalidate the sample. Significant purchases were made from out-of-state vendors during the sample period. As the auditor sampled one full year of the three year audit period, this sample duration supports the validity of the sample. It seems likely that the Taxpayer made similar purchases to those in the sample period at other times during the audit period as these purchases would appear to occur on a regular and recurring basis.
Based on the information presented, I must conclude that the sample is representative of the audit period and appears valid in every respect. Nevertheless, if the Taxpayer can show that no purchases of tangible personal property were made for any month of the audit, the tax (and associated interest) assessed on the extrapolated measure for any such month will be removed from the audit.
The Taxpayer will receive an updated Notice of Assessment for Bill #58519 (contested sales) which should be paid within the next 30 days. The auditor will also contact the Taxpayer to verify the gratuities portion of the audit and find out whether the Taxpayer has the information requested above to possibly revise the other assessment, Bill #58515. Upon revision or finding that no adjustment is required, Bill #58515 will be updated for accrued interest, revised if necessary, and sent to the Taxpayer. The Taxpayer should pay the latter assessment within 30 days of receipt.
If you have any questions about this determination, please contact*** of my Office of Tax Policy at*****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9947R
Rulings of the Tax Commissioner