August 3, 2016
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 January 2012 through January 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates a restaurant. The Department's audit disclosed that the Taxpayer was making sales of food and beverages and collecting the retail sales tax but failing to report the tax to the Department. The Taxpayer disagrees with the audit results, contending that the audit erroneously includes exempt gift card sales and sales to a group that the Taxpayer states is a nonprofit organization exempt from the sales tax. The Taxpayer seeks the removal of these sales from the Department's audit and an adjustment to the assessment.
DETERMINATION
Nonprofit Organization
Virginia Code § 58.1-623 A provides that 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. Virginia Code § 58.1-623 B further provides that the certificate shall relieve the person who takes such certificate from any liability for payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable.
In this instance, the Taxpayer made sales to a customer that claims to be a nonprofit organization exempt from the payment of the retail sales tax on its purchases. Based on this statement from the customer, the Taxpayer did not charge the tax on its sales to the customer. Additionally, the Taxpayer did not receive an exemption certificate from the customer to support the customer's claim that it was exempt from the tax.
The Taxpayer was given an opportunity to secure an exemption certificate from its customer, but the customer was not able to provide proof of exemption. Accordingly, the sales at issue are subject to the sales tax and will remain in the audit computations.
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 generally provides that penalty will not be assessed in a first generation audit. However, the regulation sets out an exception to this rule that when an audit by the Department discloses that the sales tax has been collected but not remitted, the penalty will be applied. Virginia Code § 58.1-625 states that all sales taxes collected by dealers are held in trust for the Commonwealth and must be remitted to the Tax Commissioner.
I note that the audit results consist of sales on which the sales taxes were collected but not remitted. Therefore, in accordance with the foregoing regulation, there is no basis to waive the assessed compliance penalty on such sales. I also note that the Taxpayer did not charge sales tax on the sales to the nonprofit organization. While these sales are taxable and will remain in the audit, the compliance penalty associated with these sales will be removed.
Gift Card Sales
Title 23 VAC 10-210-270 provides that the sale of a gift certificate is not taxable. When the owner of a gift certificate redeems the certificate for the purchase of tangible personal property, the transaction involving the tangible personal property is subject to the tax. The sale of a gift card is treated the same as sales of gift certificates and any transactions where gift cards or gift certificates are used to purchase tangible personal property, such transactions would be subject to the tax. In this case, the sales of the gift cards are not subject to the tax and will be removed from the audit.
The Department's audit will be returned to the appropriate field audit staff for a revision of the audit and the assessment. A revised audit and assessment will be issued to the Taxpayer. The Taxpayer will have 30 days from the issue date to remit payment for the outstanding balance of the assessment.
The Code of Virginia sections and regulation cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6155775449.Q