January 12, 2015
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of retail sales and use tax assessments issued to ***** (the "Taxpayer") for the period October 2010 through January 2014.
FACTS
The Taxpayer is a private country club. The Department audited the Taxpayer and assessed retail sales tax on various untaxed sales transactions that occurred during the audit period. The Department assessed sales tax on untaxed mandatory service charges and on minimum quarterly charges billed to club members. Sales tax was also assessed on reimbursements paid by club members to the Taxpayer for fertilizer purchased on behalf of the club members. The Taxpayer contests the assessment of sales tax on these three types of transactions.
DETERMINATION
Mandatory Service Charges
The Taxpayer operates dining facilities in which food is prepared and served to club members. A mandatory 20% service charge is added to the price of the meals sold to club members and their guests. The Department held the mandatory service charges taxable in the Taxpayer's audit based on the statutory definition of "sales price" in Va. Code § 58.1-602, which defines "sales price," in part, as:
the total amount for which tangible personal property or services are sold, including any services that are a part of the sale .... "Sales price" shall not include ... (v) that portion of the amount paid by the purchaser as a mandatory gratuity or service charge added by a restaurant to the price of a meal, but only to the extent that such mandatory gratuity or service charge does not exceed 20% of the price of the meal.
The mandatory service charges billed by the Taxpayer were held taxable in the audit because the Taxpayer did not pay the dining facility staff the mandatory service charges billed to and collected from club members. The auditor interpreted the statutory definition of sales price to require the payment to the Taxpayer's staff of the mandatory service charges billed to club members.
The Department recently issued Public Document (P.D.) 14-150 (8/27/14), which addresses the application of the retail sales tax to mandatory gratuity and service charges. P.D. 14-150 discusses a taxpayer that was assessed retail sales tax on mandatory gratuity charges added to bills for banquets and similar events. This determination states that the statutory definition of sales price does not require the seller of meals to pay employees the gratuity or service charges billed to customers. Although gratuities are generally considered to be payments for services that are distributed to the servers and other staff that work such events, the statute contains no requirement that the entire gratuity amount billed be paid to banquet staff, restaurant staff or other types of employees. The definition of sales price in the statute excludes from the sales tax service charges in addition to gratuity charges. This suggests a broader exemption that encompasses charges for other services in addition to gratuity charges. The exemption is restricted only by the requirement that gratuity or service charges must be 20% or less of the charge billed for the meal or meals.
In Shelor Motor Co. v. Miller, 261 Va. 473, 479, 544 S.E.2d 345, 348 (2001), the Court stated, "It is well settled that when the language of a statute is plain and unambiguous, we are bound by the plain meaning of that language." Based on the plain meaning of the statutory definition of sales price and the Department's policy as set out in P.D. 14-150, the audit assessment of retail sales tax on the mandatory service charges billed to customers by the Taxpayer is erroneous. Mandatory gratuity or service charges billed in excess of the statutory limit of 20% are taxable. In such cases, only the amount of mandatory gratuity or service charges in excess of the 20% limit is subject to the tax.
Minimum Quarterly Charges
The Taxpayer bills a "minimum quarterly charge" to club members that fail to purchase a minimum amount of meals and food in the club dining facilities each quarter. The minimum quarterly charge supplements the loss of revenue incurred by the Taxpayer's dining facilities. The Taxpayer maintains that the minimum quarterly charges do not relate to the provision of goods or taxable services. Rather, the charge is billed as an assessment of additional dues to those members that do not meet the purchase minimum for the quarter.
The Department's auditor held the minimum quarterly charges taxable based on the provisions of Title 23 of the Virginia Administrative Code 10-210-30, which addresses the application of the retail sales tax to admissions. The regulation states that cover charges or minimum charges for admission to places of amusement, entertainment, exhibition, display and athletic contests are taxable retail sales when the charge includes the provision of or entitlement to food, drinks or other tangible personal property.
Virginia Code § 58.1-602 defines "sale" as "any transfer of title or possession, or both, ... 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 ...." In the instant case, the quarterly minimum charge is not consideration paid for the transfer by the Taxpayer to club members of title to or possession of tangible personal property. The quarterly minimum charge is not billed for the rendition of taxable services by the Taxpayer. There are no rights to tangible personal property or services conveyed to club members that are assessed the charge by the Taxpayer. In fact, the charge is assessed as a result of a member's failure to purchase tangible personal property or services. As such, the quarterly minimum charges billed to club members are not retail sales and are not subject to retail sales and use tax. The audit will be adjusted to remove the quarterly minimum charges.
Fertilizer Reimbursements
The Taxpayer purchases fertilizer for use in its operations. The Taxpayer also purchases fertilizer as a service to club members. The members reimburse the Taxpayer for the fertilizer purchased on their behalf. The reimbursement payments made by club members to the Taxpayer were treated as taxable retail sales in the audit. The Taxpayer states that it pays Virginia retail sales tax on the fertilizer at the time of purchase and has provided several vendor invoices to document this claim. The Taxpayer asserts that the reimbursement payments should not have been assessed in the audit because the sales tax was already paid on the fertilizer and that the audit assessment of sales tax on the reimbursement amounts results in double taxation.
In accordance with Va. Code § 58.1-612, the retail sales tax is collectible from all persons who are dealers. Virginia Code § 58.1-612 states that a "dealer" includes every person who "sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution ... tangible personal property." A "retail sale" is defined in Va. Code § 58.1-602 to mean a sale to any person for any purpose other than for resale. In this case, an exchange of tangible personal property (fertilizer) for a consideration occurs between the Taxpayer and the club members. The transactions are not sales for resale, as the club members are the end users of the fertilizer. The Taxpayer is making retail sales, as defined in Va. Code § 58.1-602, when it purchases fertilizer on behalf of and receives reimbursement from club members.
This treatment is consistent with the Department's policy as set out in P.D. 95-319 (12/15/95). This determination letter discusses a computer software business that ordered discount computer hardware and software for some of its customers. The purchases were made using the taxpayer's credit card and the customers reimbursed the taxpayer for the cost of the items ordered. Although this practice was not a normal part of the taxpayer's business, the Tax Commissioner ruled that the taxpayer was making retail sales and was liable for collection of the retail sales tax.
I understand that the Taxpayer has changed its accounting system and now charges the retail sales tax on sales of fertilizer to club members. Based on the authorities cited, the Taxpayer should continue this practice. The Taxpayer may provide a Form ST-10 to the fertilizer supplier to claim the resale exemption on purchases of the fertilizer. This will prevent the double taxation of the fertilizer sold to club members. The Taxpayer should accrue and pay to the Department consumer use tax on the cost price of the fertilizer used in its operations. The consumer use tax accrual should be reported as personal use on line 2 of the Taxpayer's sales and use tax return, Form ST-9.
The Taxpayer has provided copies of invoices that confirm the payment of Virginia sales taxes to the fertilizer supplier. While the audit assessment is correct with respect to this issue, the Taxpayer's documentation demonstrates that the audit assessment results in the double taxation of the fertilizer sold to members. In addition, the Taxpayer now collects the tax on fertilizer sales to club members. Accordingly, I will agree to waive the assessment on the fertilizer sales for purposes of this audit only.
CONCLUSION
Based on this determination, the audit will be returned to the appropriate field audit staff for revision. The audit staff will make the adjustments to the audit assessments as set out in this determination. The Department's records indicate that the Taxpayer has paid the audit bills in full. Therefore, refunds of the overpaid bill amounts, plus applicable interest, will be issued as soon as practicable.
The Code of Virginia sections, regulation and public document cited, along with other reference documents, are available on line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5721704227.S