Tax Type
Retail Sales and Use Tax
Description
Application of sales and use taxes; Use tax; Food service management company contracts with nonprofit entities
Topic
Taxability of Persons and Transactions
Date Issued
03-28-1997
March 28, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This is in reply to your letter in which you seek correction of sales and use tax assessed to *********** (the "Taxpayer"), for the period January 1993 through February 1995.
FACTS
The Taxpayer is a food service management company that contracts with schools, colleges, hospitals and nursing homes, and corporate clients. As a result of the department's audit, the Taxpayer was assessed tax on non-food items purchased for use in conjunction with food services provided to nonprofit schools, nonprofit hospitals and nonprofit nursing homes that enjoy exemptions from the sales and use tax under Virginia law. The Taxpayer disagrees with the assessment of the tax and believes that it is entitled to make untaxed purchases as an agent for its exempt clients.
To support its belief, the Taxpayer cites Code of Virginia §§ 58.1-609.4(2) and 58.1-609.7(4) which provide exemptions from the sales and use tax for purchases for use and consumption by nonprofit schools and colleges, and nonprofit hospitals and nursing homes, respectively.
DETERMINATION
Taxability of Food Service Contracts
Under the terms of the contracts reviewed, the Taxpayer furnishes all goods and services in order to manage and operate the food service facilities of its clients. The Taxpayer also provides catering services to its clients. The Taxpayer is reimbursed by clients for all items purchased in performance of the contract and title to the purchased items rests with the clients. The Taxpayer, regarding nonprofit clients, acts as an agent and makes purchases exempt of the tax by providing its clients' sales tax registration number to suppliers. The Taxpayer collects sales tax on food sales and bears the risk of profit and loss regarding the food service operations. The Taxpayer is paid a management fee by clients for its services.
The department has addressed the application of the tax to similar food service contracts in prior rulings. In Public Documents (P.D.) 85-202 (10/28/85) and 85-216 (12/9/85), the Tax Commissioner concluded, in both rulings, that the retail sale of the food is actually made by the client to the ultimate consumer and therefore, the food service provider is merely making a sale of food to its clients for resale to the clients' employees, guests, etc. It was determined that the sale of food from the food service provider to its client is deemed a sale for resale. As a result, the food service provider is entitled to purchase under the resale exemption food items to be provided in the food service operations of its clients. The same rationale applies to the Taxpayer in this case, independently of the tax status of its clients.
The Taxpayer, however, is not entitled to purchase for resale paper goods, cleaning chemicals, and other non-food items for use in conjunction with the provision of food. The resale exemption, in this instance, is negated because the items are purchased by the Taxpayer and used in connection with the management of the food service operation. As such, the Taxpayer makes a taxable use of such items and must pay the tax at the time of purchase consistent with Code of Virginia § 58.1-604, which imposes the use tax on the use or consumption of tangible personal property in the Commonwealth. This is true regardless of the fact that the Taxpayer passes the cost for such items on to its clients or the items become the property of its clients.
Consistent with P.D. 85-202 and P.D. 85-216, the resale exemption does not apply to the transaction between the Taxpayer and its clients when the Taxpayer furnishes catered food for its clients' own use and consumption in special events or functions. The Taxpayer must collect the tax from its clients on such food sales. Management fees are taxable to the extent related to the provision of food used and consumed by the Taxpayer’s clients and not for resale as discussed in these rulings.
Effective July 1, 1997, Senate Bill 706 and House Bill 1725 passed by the 1997 Session of the Virginia General Assembly, expand the current sales tax exemption for nonprofit public and private colleges or other institutions of learning to include food purchased for free distribution at the facilities of the nonprofit college or other institution of learning.
Agency Relationship as Applied to Non-food Items
Title 23 VAC 10-210-4020(A) provides that "[t]he tax does not apply to sales of tangible personal property to nonprofit schools, colleges and other institutions of learning for their use or consumption and paid for out of their funds." Emphasis added.
Title 23 VAC 10-210-720(B) provides that the tax does not apply to sales of tangible personal property to hospitals and licensed nursing homes conducted not for profit, for use and consumption by them, and paid for out of their own funds.
In addition, United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd., 569 F. 2d 811 (4th Cir. 1978) requires that one must be designated as its client's purchasing agent and authorized to bind the credit of its client in order to take advantage of any exemption that applies to such client.
In order to take advantage of the nonprofit school and nonprofit hospital exemptions that may apply to its clients, the Taxpayer must meet the requirements prescribed by United States v. Forst and payment for purchases must be made from its clients' funds as required by the regulations. That is not the case here. According to the contracts provided, the Taxpayer is deemed a purchasing agent and permitted to provide the exempt sales tax registration number of its clients to suppliers. There is no evidence, however, that the Taxpayer is authorized to bind the credit of its clients or make purchases from its clients funds. As such, the nonprofit school and nonprofit hospital exemptions are not available to purchases made by the Taxpayer.
Based on the foregoing, the auditor properly assessed the tax on non-food items purchased by the Taxpayer and provided in the performance of its food service contracts. Enclosed you will find copies of the cited statutes, regulations, case law, legislation, and prior department rulings for your information.
The Taxpayer will receive an updated bill including interest accrued to date. No additional interest charges will accrue on the outstanding balance provided full payment is made within 30 days. If you have any questions regarding this matter, please contact ********** in the Office of Tax Policy at ********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11847J
Rulings of the Tax Commissioner