Tax Type
Retail Sales and Use Tax
Description
Commissary services for a government agency; Services vs. sale
Topic
Property Subject to Tax
Date Issued
11-10-1998
November 10, 1998
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letters in which you seek correction of a retail sales and use tax assessment on behalf of ***** (the ``Taxpayer'), for the period November 1994 through October 1997.
FACTS
The Taxpayer contracts with state and local government agencies to provide commissary services to jail facilities. The Taxpayer contracts to operate the commissary facility at the jail and provides meals and commissary products to inmates and staff. At issue is the assessment of the use tax on the Taxpayer's purchases in connection with the performance of its contracts.
The Taxpayer believes the true object of its contracts is the sale of tangible personal property (the provision of meals and commissary products). The Taxpayer takes exception to the assessment of use tax and contends the provision of meals and commissary products qualifies as exempt sales to the government. In the event that the tax is upheld, the Taxpayer requests prospective compliance. The Taxpayer also requests a hearing prior to issuance of the determination.
DETERMINATION
Services vs. Sale of Tangible Personal Property
Code of Virginia Sec. 58.1-609.1(4) provides an exemption from the sales and use tax for tangible personal property purchased for use or consumption by the federal government and state and local governments of Virginia. Title 23 of the Virginia Administrative Code (VAC) 10-210-690 through 10-210-694 provides further guidance on the application of the government exemption.
Title 23 VAC 10-210-693 addresses the application of the tax to government contractors and states that the appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property or for the provision of an exempt service. In considering the tax treatment of government contracts, the department applies the true object test to determine whether the contract is for the sale of tangible personal property or whether the contract is for the provision of services to the government.
The Taxpayer contracts to operate the commissary facility. Under the terms of its contracts, the Taxpayer agrees to supply all commissary products and provide administrative, purchasing, equipment consulting, personnel advisement, supervision, and housekeeping services. In addition, all commissary service personnel are employees of the Taxpayer.
The Taxpayer provides an array of services well beyond the sale of meals and commissary products. When the Taxpayer contracts with the government and assumes the duties of meal preparation and operation of the commissary facility, the true object of the contract becomes the provision of services. Within the context of a services contract, the government exemption does not apply to any sales the Taxpayer makes to the government. However, the Taxpayer may purchase commissary products to be sold to jail inmates exempt of the tax under the resale exemption. The tax must be collected on the retail sale of such products and remitted to the department.
Application of Prior Rulings
You cite Public Document (P.D.) 95-173 (6/26/95) to distinguish the Taxpayer's activities from those of a taxpayer whose contracts for the provision of meal preparation services were deemed services contracts. In P.D. 95-173, a taxpayer was engaged in a fixed price contract with the federal government to operate a dining and mess facility and prepare and serve meals that were sold to military personnel. The government supplied the food, dining facility, kitchen equipment, and certain supplies including eating utensils. You point out that unlike the taxpayer in P.D. 95-173, the Taxpayer in this case purchases the food, supplies, and ancillary items in order to prepare the meals and then makes a sale of a finished product to the government.
I cannot agree with you on this point. The Taxpayer in this case and the taxpayer in P.D. 95-173 contract to prepare meals and provide services in connection with the operation of a governmental dining facility. The fact that the Taxpayer may purchase the food and other supplies, as opposed to the government supplying such items, does not change the true object of the contract, which is the provision of services.
In your letter of July 13, 1998, you also cite P.D. 87-245 (11/4/87) in support of the Taxpayer's position. The ruling addressed the application of the government exemption to food purchased by a county for use in feeding jail inmates and food purchased from a caterer for a county-sponsored event. The Tax Commissioner determined the county exercised sufficient use over the food purchased for feeding jail inmates to qualify for the government exemption. On the other hand, it was determined the county did not exercise an exempt use when purchasing food for a countysponsored event because the food was consumed by guests at the event.
The ruling in P.D. 87-245 is not applicable in this case because there was no contract between a food service vendor and the county regarding meals fed to jail inmates. The county purchased food from vendors for use in preparing meals that were fed to jail inmates. The county was clearly purchasing tangible personal property for its use and consumption. Therefore, the purchases qualified for the government exemption. The instant case is distinguishable because the Taxpayer's activities are not limited to making sales of food to the government. Instead, the Taxpayer prepares meals and provides commissary products in the operation of a commissary facility for the government.
Based on the department's well established policy with respect to government contractors, the Taxpayer is deemed a service provider and must pay the tax on all purchases of tangible personal property used in connection with the preparation of meals under its services contract. If the sales tax is not charged by the Taxpayer's vendors, the Taxpayer must accrue and remit the use tax directly to the department.
Prospective Compliance
The Taxpayer contends it has been singled out by the department for retroactive application of the tax. The Taxpayer maintains that imposing the tax on a retroactive basis places it at a competitive disadvantage with respect to other companies contracting to provide meals and commissary or canteen supplies to jail facilities in Virginia. The Taxpayer requests it be allowed to comply with the department's policy on a prospective basis.
I am unable to grant the Taxpayer's request for two reasons. First, the Taxpayer has not been singled out as the department has audited other suppliers of food and commissary services to jail facilities. The application of the tax in those instances is consistent with the application of the tax in this case.
Second, the Taxpayer was provided a letter, dated April 14, 1995, from a department representative and advised that the contracts in question constituted services contracts. The letter addressed the application of the tax to the provision of canteen items and meals to inmates in connection with the services contracts.
You point out that the individual to whom the letter was addressed failed to inform the Taxpayer of the correspondence and has been terminated. In addition, you indicate that a department representative informed the Taxpayer in a phone conversation that inmate meal sales are not subject to the tax.
I understand that personnel changes occur in the course of business operations. However, the letter explaining the department's policy was discovered by the auditor in the Taxpayer's files and was readily available to the current personnel. Further, the information received by phone from the department may have been provided based on the description given of the Taxpayer's activities. If the Taxpayer questioned the application of the tax to its business activities, a ruling request should have been made to the department as suggested in the letter of April 14, 1995.
The assessment of the tax is proper in this case. I have reviewed the supplemental information provided and the issues involved are a matter of established policy. I do not find it necessary to grant your request for a hearing. Accordingly, the Taxpayer will receive an updated bill, including accrued interest. The bill should be paid within 30 days to avoid the accrual of additional interest charges.
If you have any questions, you may contact ***** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13664J
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letters in which you seek correction of a retail sales and use tax assessment on behalf of ***** (the ``Taxpayer'), for the period November 1994 through October 1997.
FACTS
The Taxpayer contracts with state and local government agencies to provide commissary services to jail facilities. The Taxpayer contracts to operate the commissary facility at the jail and provides meals and commissary products to inmates and staff. At issue is the assessment of the use tax on the Taxpayer's purchases in connection with the performance of its contracts.
The Taxpayer believes the true object of its contracts is the sale of tangible personal property (the provision of meals and commissary products). The Taxpayer takes exception to the assessment of use tax and contends the provision of meals and commissary products qualifies as exempt sales to the government. In the event that the tax is upheld, the Taxpayer requests prospective compliance. The Taxpayer also requests a hearing prior to issuance of the determination.
DETERMINATION
Services vs. Sale of Tangible Personal Property
Code of Virginia Sec. 58.1-609.1(4) provides an exemption from the sales and use tax for tangible personal property purchased for use or consumption by the federal government and state and local governments of Virginia. Title 23 of the Virginia Administrative Code (VAC) 10-210-690 through 10-210-694 provides further guidance on the application of the government exemption.
Title 23 VAC 10-210-693 addresses the application of the tax to government contractors and states that the appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property or for the provision of an exempt service. In considering the tax treatment of government contracts, the department applies the true object test to determine whether the contract is for the sale of tangible personal property or whether the contract is for the provision of services to the government.
The Taxpayer contracts to operate the commissary facility. Under the terms of its contracts, the Taxpayer agrees to supply all commissary products and provide administrative, purchasing, equipment consulting, personnel advisement, supervision, and housekeeping services. In addition, all commissary service personnel are employees of the Taxpayer.
The Taxpayer provides an array of services well beyond the sale of meals and commissary products. When the Taxpayer contracts with the government and assumes the duties of meal preparation and operation of the commissary facility, the true object of the contract becomes the provision of services. Within the context of a services contract, the government exemption does not apply to any sales the Taxpayer makes to the government. However, the Taxpayer may purchase commissary products to be sold to jail inmates exempt of the tax under the resale exemption. The tax must be collected on the retail sale of such products and remitted to the department.
Application of Prior Rulings
You cite Public Document (P.D.) 95-173 (6/26/95) to distinguish the Taxpayer's activities from those of a taxpayer whose contracts for the provision of meal preparation services were deemed services contracts. In P.D. 95-173, a taxpayer was engaged in a fixed price contract with the federal government to operate a dining and mess facility and prepare and serve meals that were sold to military personnel. The government supplied the food, dining facility, kitchen equipment, and certain supplies including eating utensils. You point out that unlike the taxpayer in P.D. 95-173, the Taxpayer in this case purchases the food, supplies, and ancillary items in order to prepare the meals and then makes a sale of a finished product to the government.
I cannot agree with you on this point. The Taxpayer in this case and the taxpayer in P.D. 95-173 contract to prepare meals and provide services in connection with the operation of a governmental dining facility. The fact that the Taxpayer may purchase the food and other supplies, as opposed to the government supplying such items, does not change the true object of the contract, which is the provision of services.
In your letter of July 13, 1998, you also cite P.D. 87-245 (11/4/87) in support of the Taxpayer's position. The ruling addressed the application of the government exemption to food purchased by a county for use in feeding jail inmates and food purchased from a caterer for a county-sponsored event. The Tax Commissioner determined the county exercised sufficient use over the food purchased for feeding jail inmates to qualify for the government exemption. On the other hand, it was determined the county did not exercise an exempt use when purchasing food for a countysponsored event because the food was consumed by guests at the event.
The ruling in P.D. 87-245 is not applicable in this case because there was no contract between a food service vendor and the county regarding meals fed to jail inmates. The county purchased food from vendors for use in preparing meals that were fed to jail inmates. The county was clearly purchasing tangible personal property for its use and consumption. Therefore, the purchases qualified for the government exemption. The instant case is distinguishable because the Taxpayer's activities are not limited to making sales of food to the government. Instead, the Taxpayer prepares meals and provides commissary products in the operation of a commissary facility for the government.
Based on the department's well established policy with respect to government contractors, the Taxpayer is deemed a service provider and must pay the tax on all purchases of tangible personal property used in connection with the preparation of meals under its services contract. If the sales tax is not charged by the Taxpayer's vendors, the Taxpayer must accrue and remit the use tax directly to the department.
Prospective Compliance
The Taxpayer contends it has been singled out by the department for retroactive application of the tax. The Taxpayer maintains that imposing the tax on a retroactive basis places it at a competitive disadvantage with respect to other companies contracting to provide meals and commissary or canteen supplies to jail facilities in Virginia. The Taxpayer requests it be allowed to comply with the department's policy on a prospective basis.
I am unable to grant the Taxpayer's request for two reasons. First, the Taxpayer has not been singled out as the department has audited other suppliers of food and commissary services to jail facilities. The application of the tax in those instances is consistent with the application of the tax in this case.
Second, the Taxpayer was provided a letter, dated April 14, 1995, from a department representative and advised that the contracts in question constituted services contracts. The letter addressed the application of the tax to the provision of canteen items and meals to inmates in connection with the services contracts.
You point out that the individual to whom the letter was addressed failed to inform the Taxpayer of the correspondence and has been terminated. In addition, you indicate that a department representative informed the Taxpayer in a phone conversation that inmate meal sales are not subject to the tax.
I understand that personnel changes occur in the course of business operations. However, the letter explaining the department's policy was discovered by the auditor in the Taxpayer's files and was readily available to the current personnel. Further, the information received by phone from the department may have been provided based on the description given of the Taxpayer's activities. If the Taxpayer questioned the application of the tax to its business activities, a ruling request should have been made to the department as suggested in the letter of April 14, 1995.
The assessment of the tax is proper in this case. I have reviewed the supplemental information provided and the issues involved are a matter of established policy. I do not find it necessary to grant your request for a hearing. Accordingly, the Taxpayer will receive an updated bill, including accrued interest. The bill should be paid within 30 days to avoid the accrual of additional interest charges.
If you have any questions, you may contact ***** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13664J
Rulings of the Tax Commissioner