Tax Type
Retail Sales and Use Tax
Description
Tax base; Vending machine sales; Computation of tax
Topic
Basis of Tax
Date Issued
05-06-1997
May 6, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This will reply to your letter in which you seek correction of the retail sales and use tax audits of ****** (the "Taxpayer") for the period of May 1990 through December 1994.
FACTS
The Taxpayer is in the business of providing food service, vending machine facilities, laundry and maintenance service, and labor-only management services. The Taxpayer's customers are typically hospitals, universities, and corporate cafeterias. The Taxpayer was audited and is taking exception to the following two areas held taxable in the audit.
Catering
The Taxpayer provides catering services to non-profit colleges, universities, schools, and hospitals. For educational institutions, the Taxpayer caters meals for educational functions, including graduation and award ceremonies. For hospitals, the Taxpayer furnishes meals primarily to doctors, nurses, and other health care professionals in employee lounges and on surgery breaks. These meals are furnished free of charge as these individuals are required to remain in close proximity to specified areas during their time on duty. The Taxpayer also furnishes meals free of charge to spouses of patients admitted to the maternity ward of certain hospitals. The Taxpayer billed the tax on the free meals to the hospitals. The hospitals in question advised the Taxpayer that such meals should be exempt as being used directly in the provision of its medical services.
Vending Machine Sales
The Taxpayer has developed an internal accounting system to track vending machine sales and the amount of sales tax due. The Taxpayer has developed an algebraic equation in which a predetermined rate is applied to net sales to determine the amount of tax due. The predetermined rate is calculated so that the tax due amount equals the amount due had the Taxpayer applied the 5.5% rate on the cost of goods sold, the reporting method set forth in Code of Virginia § 58.1-614. The Taxpayer is requesting permission to use this alternative method for reporting vending machine sales and that the liability associated with vending machine sales be removed from the audit.
DETERMINATION
Catering
The central issue involving catering is whether meals provided free of charge to medical staff, hospital employees, and spouses of maternity patients constitutes tangible personal property used or consumed by the hospital in the provision of medical services.
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. The exemption further applies to food purchases which are prepared for service to patients. In the present case, the issue involves food furnished to medical staff during surgery breaks and spouses of maternity patients.
Under longstanding Virginia case law, exemptions from the sales tax are to be strictly construed, with any doubts resolved against the one claiming the exemption. In this case, consistent with a 1970 Attorney General's opinion, the provision of food and related products to medical staff and unrelated entities, in any form, does not constitute "use or consumption" by the Taxpayer as mandated by the statute.
The Attorney General's opinion in question (ATT'Y GEN. ANN. RET.: 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.
Accordingly, the tax is applicable to food and meals furnished to medical personnel during surgical breaks and also to meals furnished to spouses of maternity patients. The tax is applicable to the cost price of the food as the food is furnished free of charge.
Vending Machine Sales
Code of Virginia § 58.1-614, copy enclosed, provides that dealers making sales of tangible personal property through vending machines shall be required to remit the tax based on 5 1/2% of the cost of goods sold through such vending machines. In the alternative, in cases where this method is not feasible, upon approval by the Tax Commissioner, the vendor may report tax due based on a percentage of gross receipts which takes into account the inclusion of the tax.
In the present case, the Taxpayer uses an algebraic equation based on "net revenue" to determine the amount of vending machine tax due. This method has been demonstrated to the auditor and the auditor has advised that the result of using the algebraic equation does in fact result in the same amount of tax due had the Taxpayer computed the tax based on 5 1/2% of the cost of goods sold. While the Taxpayer did not receive written approval from Tax Commissioner prior to incorporating this method, l will agree to accept this method for the audit period in question henceforth. The audit will be adjusted accordingly.
The auditor will make the necessary revisions in accordance with the above and notify the Taxpayer of the corrected liability. If you should have any questions, please contact ******* , Office of Tax Policy, at ********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12103K
Rulings of the Tax Commissioner