10-47 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

The Food Tax Reduction Program

Topic

Exemptions

Records/Returns/Payments

Date Issued

05-07-2010

May 7, 2010

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 assessment issued to ***** (the "Taxpayer") for the period August 2005 through July 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a bakery and a restaurant selling baked goods, soups and sandwiches and other items for eat-in or takeout. During the audit period, the Taxpayer prepared, packaged and sold cold sandwiches to its customers and charged the reduced sales tax rate. The auditor determined that the sandwiches were not prepackaged sandwiches and were not marketed for home consumption and held the Taxpayer liable for the difference between the reduced sales tax rate and the general sales tax rate. The Taxpayer disagrees and contends that Virginia Tax Bulletin 05-7 does not restrict the application of the reduced tax rate on cold sandwiches, and the Department's assessment on this issue should be abated.

In a second issue, the Taxpayer sold boxed lunches, food trays, etc., to a nonprofit organization and to two governmental entities exempt of the tax without maintaining valid exemption certificates on file. The Department's auditor held the Taxpayer liable for the reduced tax rate because the food sold was eligible for home consumption. The Taxpayer disagrees with the assessment of the tax, stating the Department never advised the Taxpayer or made it aware of the laws regarding the application of the tax to such sales. The Taxpayer seeks a waiver of the tax and interest assessed on these sales.

DETERMINATION

Sandwich Sales

The Food Tax Reduction Program set out in Va. Code § 58.1-611.1 applies a reduced sales and use tax rate to sales of food purchased for home consumption as defined under the Food Stamp Act of 1977, 7 U.S.C. § 2012. This definition includes most staple grocery food items and cold prepared foods that are packaged for home consumption. The Food Stamp definition includes eligible foods that are packaged for home consumption or packaged for consumption away from the premises where such foods are sold or packaged on a "to go" basis. As such, for purposes of applying the Food Tax Reduction Program, any food (except hot food) that is packaged in a closed container, bag, or other similar packaging, and is not sold for immediate consumption falls in the category of eligible food for home consumption. This applies regardless of whether the food is sold to an individual or a business.

Notwithstanding the foregoing, the Food Tax Reduction Program provides an exclusion from the program for fast food establishments and restaurants. The exclusion states that food sold by a retail establishment whose gross receipts from the sale of food for immediate consumption constitute more than 80% of the total gross receipts of the establishment is not eligible to apply the reduced rate to its sales. In this instance, the Taxpayer's sale of food for immediate consumption does not total more than 80% of its total gross receipts. Therefore, under Va. Code § 58.1-611.1, the Taxpayer must apply the reduced rate to those food items that qualify under the Food Tax Reduction Program. However, it must be noted that when an establishment does not meet the 80% rule, the program requires that the establishment must keep separate records for food sales that qualify as food for home consumption. Based on the auditor's review of the Taxpayer's records, the Taxpayer has not kept separate records that distinguish between food sales for home consumption and food sales for immediate consumption.

The Department acknowledges that a portion of the sandwiches sold appear to be for home consumption and would normally be subject to the reduced food sales tax rate. Because the Taxpayer has not kept adequate records to segregate those sales showing sandwiches for home consumption, the auditor was correct in applying the general sales tax rate. Notwithstanding the foregoing, I will allow for the establishment of percentages, in this instance only, of sandwiches sold for home consumption and sandwiches for immediate consumption for the purposes of ascertaining a fair measure for sandwiches eligible for the reduced rate.

I note that the Department's auditor has made several attempts to contact the Taxpayer for purposes of establishing this percentage, without success. I will have the Department's auditor contact the Taxpayer within 30 clays from the date of this letter to make a final attempt to derive a fair percentage in an effort to reduce the sales tax assessment. If the Taxpayer does not provide the Department's auditor with the required information, I will consider the matter closed and the assessment will become immediately due and payable and subject to collection action.

Nontaxed Sales

Virginia Code § 58.1-603 imposes a tax "upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth." Virginia Code § 58.1-602 provides, in pertinent part, "Sale means any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration . . . ."

Pursuant to Va. Code § 58.1-623 A, "All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter."

NonProfit Organizations and Government Exemptions

Effective July 1, 2004, pursuant to Acts of Assembly 2003, cc. 757 and 758, a new process was introduced for nonprofit entities to obtain exemptions from the retail sales and use tax, codified at Va. Code § 58.1-609.11. This section provides a sales and use tax exemption for purchases of tangible personal property for use or consumption by any nonprofit entity that: (1) files an appropriate application with the Department of Taxation; (2) meets the applicable criteria, and (3) is issued a certificate of exemption from the Department for the period of time covered by the certificate. The exemption certificate must be presented to those vendors from which the nonprofit organization seeks exemption for the purchase of tangible personal property.

Because the Taxpayer is not a caterer and is selling food, which is tangible personal property, the Taxpayer may accept a properly completed exemption certificate from nonprofit organizations for the purchase of food packaged for home consumption. In those instances where a nonprofit organization does not present a properly completed exemption certificate, the reduced tax on food packaged for home consumption would apply.

With regard to governmental entities, the Taxpayer's sales of food are packaged for home consumption, and the sales represent sales of tangible personal property. Accordingly, if the governmental entities provide a valid and complete certificate of exemption, the sale of such food would be entitled to exemption from the tax. If the governmental entities do not provide any exemption certificate or the certificate is incomplete, no exemption is allowed. In this instance, because the eligible food is packaged for home consumption, the proper tax that would be applied would be the reduced food tax rate.

For the audit period, the Taxpayer did not have any exemption certificates on file for sales to the nonprofit organizations or to the government agencies. Therefore, the sales of food were properly subjected to the tax. Also, because the Taxpayer was making sales of eligible food for home consumption, the food sales to these organizations or agencies were properly subjected to the reduced food tax rate. Accordingly, there is no basis for a revision of the Department's assessment with regard to this issue.

Taxpayer Notification of Virginia Law

With regard to the Taxpayer's statement about the Department's failure to communicate information, I cannot agree. The Department published two tax bulletins explaining the Food Tax Reduction Program and the application of the reduced tax rate. See Tax Bulletins 99-11 (10/01/99) and 05-7 (05/31/05). These bulletins and the laws, regulations and public documents addressing the application of the sales tax to nonprofit organizations and agencies of the Virginia government: are available through the Department's website located at www.tax.virginia.gov.

CONCLUSION

The Taxpayer is given one final opportunity to provide documentation to establish percentages of sandwiches sold for home consumption and sandwiches for immediate consumption for the purposes of ascertaining a fair measure for sandwiches eligible for the reduced rate.

If the required information is not provided within 30 days after being contacted by the audit staff, it will be presumed no additional information is forthcoming. In that case, the balance of the assessment will become immediately due and payable and 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 section and other documents cited are available on-line in the Tax Policy Library section of the Department's website, located at www.tax.virginia.gov. If you have any questions regarding this determination, please contact ***** of the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-3152798040.Q

Rulings of the Tax Commissioner