Document Number
08-113
Tax Type
Retail Sales and Use Tax
Description
Taxpayer makes sales of food and provides support services to colleges, universities and preparatory schools
Topic
Appropriateness of Audit Methodology
Collection of Tax
Exemptions
Records/Returns/Payments
Sale for Resale
Date Issued
06-26-2008


June 26, 2008








Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period May 2001 through April 2004. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer makes sales of food and provides support services to colleges, universities and preparatory schools. The Taxpayer's services and operations include coffee kiosks, late night eateries and restaurants, custodial services, landscaping and grounds keeping, energy management or program maintenance. The Taxpayer contends that the Department's audit erroneously assesses the tax on sales and purchases made in connection with its provision of services. The Taxpayer has submitted additional documentation to support its position and requests an adjustment of the Department's assessment.

DETERMINATION


Sales Tax Collected and Not Remitted

The Taxpayer contends that it correctly collected and remitted the state sales tax and meals tax imposed by the localities where each educational institution was located. The Taxpayer states that it provided sufficient proof that all taxes were correctly collected and paid, but the auditor did not accept the documentation.

The Taxpayer has presented additional documentation regarding unremitted sales for eight exceptions at issue and contends the collected taxes have been properly paid to the Department and the local jurisdictions. The auditor's review of the documentation reveals that sufficient documentation has been presented to allow removal of lines 2, 5, 6 and 7, and for a reduction of line 4. The remaining documentation does not provide sufficient detail to allow for any adjustments to lines 1, 3 or 8.

Non-Taxed Sales - Certificates of Exemption

The Taxpayer sold food, refreshments and catering services to various university campus organizations without charging the retail sales tax. The Taxpayer contends that it received and accepted in good faith valid certificates of exemption from the universities that qualify as exempt entities. The Taxpayer has submitted documentation to support its position and requests a revision of the assessment.

Based on the Taxpayer's supporting documentation, it is agreed that adjustments are required with the exception of the following line items:
    • Lines 1 thru 7: The Taxpayer contends that these sales were made to exempt universities. However, a review of the sales invoices reveals that these are sales to an organization that did not submit a valid Virginia certificate of exemption.
    • Line 9: This sale is a cash sale to an individual. There is no evidence to support the Taxpayer's contention that the sale is to an exempt university.
    • Lines 10 and 45 through 49: These invoices and the exemption certificates supporting them reflect that these are sales of food to a local governmental entity. The Taxpayer has not presented any additional documentation to support that these are exempt sales to universities.

With regard to the sale of catered food to government entities, the Department has consistently held sales of meals to governments for consumption by individuals to be taxable. See Title 23 of the Virginia Administrative Code (VAC) 10-210-690 B, which provides no exemption for the purchase of taxable services, such as catered meals, by state and local government agencies. Such sales are exempt when sold to governments for consumption by them or for use in the provision of their services. For example, in Public Document (P.D.) 87-245 (11/4/87) the Tax Commissioner 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 for consumption by individuals at a government-sponsored social event. The distinction is that the government exercises a right or power over the use of the food because the inmates are in the custody of the government. In the government sponsored event, the government does not use or consume the food because it does not exercise a right or power over the food that is consumed by guests or employees of the government.

The Department's policy is consistent with a Virginia Attorney General's Opinion that 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). The Attorney General concluded that the consumption of meals by banquet guests did not sufficiently reflect use by the Commonwealth over the food to warrant exemption. The 1970 opinion was affirmed by an informal opinion of the Attorney General dated January 11, 1993. A copy of the informal opinion is enclosed. In this instance, the food sold is consumed by employees of the governmental entities. Based on the cited authorities, I do not find cause for an adjustment of these sales.
    • Line 11: This is a sale to an entity that the Taxpayer contends is an exempt university. The Taxpayer has not presented any documentation to support that the sale is an exempt sale.
    • Lines 12 and 35: The Taxpayer states that these sales are to exempt universities. However, the invoices reviewed by the Department's auditor reflect that these sales are to social and fraternal organizations not considered a part of the university structure. Title 23 VAC 10-210-4090 provides that sales to such organizations are subject to the tax.
    • Line 24: The Taxpayer states that this is a sale to an exempt university; however, the Taxpayer has not provided any evidence to support its assertion that the sale is exempt from the tax.
    • Lines 33 and 34: The Taxpayer contends that these sales are to an exempt university; however, a review of the sales invoice reveals that the purchaser is a provider of management services.
    • Lines 42 and 43: The Taxpayer contends that these sales are to an exempt university; however, a review of the sales invoice reveals that the purchaser is an organization of music teachers. The Taxpayer has not presented any verification of the organization's exempt status.
    • Line 44: The Taxpayer contends that this sale is to an exempt university; however, a review of the invoice does not reflect a university but an unknown purchaser for which the Taxpayer has not provided evidence to prove that the sale is exempt.

Non-Taxed Purchases - Tax Remitted to State

The auditor assessed tax on transactions for which the purchase invoices were missing. The Taxpayer states that, for these transactions, tax was accrued and paid to the Department or was remitted to vendors that remitted the taxes to the Department.

Based on the Taxpayer's supporting documentation, it is agreed that certain adjustments are required with the exception of the following line items:
    • Lines 43 through 48: These purchases were billed to an exempt university by the vendor; however, the university, in turn, sought reimbursement from the Taxpayer. The auditor has found that the purchases represent tangible personal property that is listed on the Taxpayer's books as operating expenses. Accordingly, I find that the Taxpayer, as the purchaser, is the user or consumer and is not entitled to an exemption from the tax.
    • Lines 81, 85, 88, and 89: The Taxpayer's appeal contends that these purchases are nontaxable real property repair expense reimbursements. These purchases actually represent operating expenses for catering services by the Taxpayer. Based on a review of the submitted documentation, the auditor was unable to correlate the expense amounts to any of the invoices or documents provided. However, part of the documentation was sufficient to reduce line 85 by *****.
    • Line 82: The Taxpayer's appeal states that the amount contested (*****) represents nontaxable real property repair expense reimbursements. The documentation provided by the Taxpayer reflects that these purchase invoices are for repair parts. The Taxpayer reimbursed the university for these purchases and are expensed items (not booked as capital expenditures) included in the operating expenses of the Taxpayer. Based on the documentation provided, the total for repair parts will be reduced to ***** to reflect actual parts purchases shown in the Taxpayer's documentation.
    • Line 118: This item is for a lease of tangible personal property by the Taxpayer. While the original invoice was paid for by an exempt university, the Taxpayer reimbursed the university for their expenditure. The lease is an operating expense to the Taxpayer and is a taxable transaction.
    • Line 120: The amount represents the purchase of printing, which is a taxable purchase by the Taxpayer. I find no basis for the removal of this transaction.
    • Lines 192, 198, 200, 202 and 204: These five items were booked by the Taxpayer as operating expenses. The Taxpayer does not present any additional documentation to support its claim that these amounts represent salary reimbursement expenses and are not taxable.
    • The auditor has commented that these items represent annual expenses. Because the auditor's sample is based on a single month's review of the Taxpayer's records, the auditor adjusted the amount to be included in the sample to reflect the computation for one month based on the Taxpayer's accounting methods. Accordingly, the Department's sample computation will include an amount totaling ***** rather than the total represented by lines 192, 198, 200, 202 and 204.

Maintenance and Repair Contracts

During the audit period, the Taxpayer states that it has properly paid the tax on contracts with various vendors that provided both maintenance services and repair parts for equipment and software used in various facilities throughout Virginia. The Taxpayer has not presented any documentation to support its contention.

Purchases for Resale

During the audit period, the Taxpayer states that it purchased tangible personal property that was ultimately resold to its customers, but which was held taxable in the Department's audit. The Taxpayer has not presented any documentation to support its contention that the property was purchased for resale.

Separately Stated Delivery Charges

During the audit period, the Taxpayer purchased tangible personal property that included delivery charges from various vendors. These charges were held taxable in the Department's audit. The Taxpayer has not presented any documentation to support its contention.

Electronic Delivery of Custom Software

During the audit period, the Taxpayer states that it purchased custom software from various vendors that was delivered in tangible form or was retrieved electronically depending upon the vendor. The Taxpayer has not presented any documentation to support its contention.

Real Property Improvements and Repairs

During the audit period, the Taxpayer utilized the services of real property contractors to repair and restore real property. The Taxpayer contends that it was held liable for the tax on tangible personal property utilized by the contractor in providing its real property construction services. The Taxpayer has not presented any documentation to support its contention.

Non-Taxable Services

During the audit period, the Taxpayer states that tax was imposed on purchase invoices for professional services not subject to the tax under Va. Code § 58.1-609.5. The Taxpayer has not presented any documentation to support its contention.

Items Shipped Out of State

During the audit period, the Taxpayer states that it purchased numerous items from its vendors who shipped the property directly out of the state and is therefore not subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Wrapping and Packaging Supplies

During the audit period, the Taxpayer purchased labels, tags and other supplies for packaging food sold to customers which became part of the product for sale or resale. The Taxpayer states that it also purchased containers of the type sold to restaurants that are used to package food products for sale or resale. The Taxpayer contends that such items were erroneously assessed in the Department's audit. The Taxpayer has not presented any documentation to support its contention.

Other Non-Taxable Items

The Taxpayer contends that it purchased numerous items and services not otherwise listed that are not subject to the tax but which were included in the Department's assessment. The Taxpayer has not presented any documentation with respect to these issues to support its contention. Accordingly, there is no basis for an adjustment.

Incorrect Tax Accrual Calculation

The Taxpayer states that it reconciles its monthly accrual of tax on transactions from its general ledger and that it over accrued the amount of use tax remitted with its monthly returns for several monthly filing periods. The Taxpayer has not presented any documentation to support its contention.

Missing Invoices

While the Taxpayer states that it disagrees with the assessment of tax on missing invoices, the Taxpayer has not presented any further documentation with respect to these issues. As a result, there is no basis for an adjustment.

Penalty Abatement

The Taxpayer contends that during the audit period all returns were timely filed remitting the full amount of tax believed to be due at the time of filing. The Taxpayer seeks an abatement of the compliance and amnesty penalties assessed in the Department's audit.

Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 A states, "The application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio." The purpose of the sales tax and use tax compliance ratios is to determine how well a taxpayer has complied with the Virginia tax laws in the collection and reporting of the sales tax or in the accrual and reporting of the use tax. With regard to third and subsequent generation audits, the regulation provides that penalty will be applied unless a taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax. This is the Taxpayer's fifth audit and the use tax compliance ratio is 67%. Because the Taxpayer did not meet the required use tax compliance level, the penalty was properly applied.

The Virginia Tax Amnesty Program was enacted during the 2003 Session of the Virginia General Assembly. Virginia Code § 58.1-1840.1 F 1 provides:
    • If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains any outstanding balance after the close of the Virginia Tax Amnesty Program because of the nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Tax Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply to the taxpayer.

Because the audit at issue covered Amnesty-eligible periods (taxable periods ending on or before April 30, 2003), and a compliance penalty was properly applied, the Amnesty penalty was properly assessed.

CONCLUSION


Based on the foregoing, the audit assessment has been adjusted. I note that the Taxpayer has submitted payment of the deficiency based on discussions between the Taxpayer, the auditor and a member of the Department's Appeals staff. If there are additional balances due, an updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date indicated on the bill statement.

The Code of Virginia sections, regulations, and 1970 Attorney General's Opinion and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact ***** of the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner


AR/1-1051398625.Q


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46