Rulings of the Tax Commissioner

April 25, 2019

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

Dear *****:

This is in response to your letter submitted on behalf of *****  (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessments issued for the period September 2014 through December 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates an amusement and game center that offers bowling, laser tag, an arcade and sports, as well as food and beverages. The Taxpayer also offers birthday party packages that entitle attendees to both gaming services and food and beverages. As a result of the Department’s audit, the auditor assessed sales tax on the birthday party packages because the Taxpayer did not properly collect or remit the sales tax on the packages.  

Prior to the audit period at issue, the Taxpayer contacted the Department by telephone to inquire about the application of the sales tax on various transactions.  During the phone call, the Taxpayer asserts it was not made aware that the birthday party packages should be taxed on the total amount charged for the package. Based upon the verbal guidance received from the Department, the Taxpayer requests that the birthday party packages be removed from the audit. The Taxpayer provides that it has been charging the sales tax on the total charge of the birthday party packages since May 2016.  

DETERMINATION

Taxation of Services

Virginia Code § 58.1-603 imposes the retail sales tax on “every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth, or who rents or furnishes any of the things or services taxable under this chapter ....”  A retail sale is defined in Virginia Code § 58.1-602, in part, as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter ….”  The retail sales tax is computed on the sales price of the property and/or services sold. Sales price is defined in Virginia Code § 58.1-602, 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 …”  

Based on these authorities, charges for labor or services are taxable when billed in connection with the sale of tangible personal property.  There are certain statutory exemptions in the Code of Virginia for specific types of labor or services.  Absent such an exemption, service or labor charges are properly included in the taxable sales price upon which the sales tax is computed if the charges are billed in transactions that include the sale of tangible personal property.

Admissions Policy

The application of the sales and use tax to party packages, such as those held taxable in the current audit, is governed by the Department’s regulation and policy for admissions. The Department’s admissions policy is addressed in Title 23 of the Virginia Administrative Code (VAC) 10-210-30 as follows:

The tax does not apply to sales of tickets, fees, charges, or voluntary contribution for admissions to places of amusement, entertainment, exhibition, display, or athletic contests, nor to charges made for participation in games or amusement activities.  However, “cover charges” or “minimum charges” which include the provision of or the entitlement to food, drinks, or other tangible personal property constitute a sale of property and are subject to the tax.

In this instance, the birthday party packages include gaming services and sales of food and beverages.  There is no statutory exemption from the tax for the gaming services at issue. These services were billed in sales transactions that included the provision of tangible personal property. As such, the charges for the gaming services are properly included in the taxable sales price billed to customers for the party packages. However, when the Taxpayer sells admissions to its gaming services and the sale does not include the transfer of tangible personal property to its customers as part of the transaction, the charge is an exempt service pursuant to Virginia Code § 58.1-609.5 1 and the Department’s admission policy set out in Title 23 VAC 10-210-30. Accordingly, the sales tax assessment on the Taxpayer’s sales of the birthday party packages is correct.  

This determination is consistent with Public Document (P.D.) 14-41 (3/20/14).  In the public document, the taxpayer operated a sports themed amusement center.  The taxpayer sold party packages that included a choice of admission to various attractions and included the provision of food. In a Department audit, the taxpayer was assessed sales tax on the untaxed party package charges. The taxpayer appealed the assessment, contending that the true object sought by purchasers of the party packages was the party experience rather than the food items included in the package. Based upon the Department’s admissions policy, the Tax Commissioner ruled that the assessment of tax on the total charge for the party packages was correct because the sale of the packages entitled party guests to food, which is a sale of tangible personal property.

Department Guidance

Virginia Code § 58.1-1835 requires that the Tax Commissioner abate any portion of any tax, interest, and penalty attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity if:

1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and
3. The facts of the case described in the written advice and the request therefor are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.

In order for relief to be granted for the erroneous application of the tax, the tax application must be based on erroneous written guidance from the Department.  In this instance, the Taxpayer did not receive written guidance from the Department regarding the application of the sales tax on the sale of its birthday party packages to its customers.  Without full knowledge of the facts presented by the Taxpayer during its phone call and the information provided by the Department employee, I am unable to determine whether the Taxpayer applied the tax based upon erroneous information.  Additionally, the criteria found in Virginia Code § 58.1-1835 have not been met.  Accordingly, I am unable to grant relief to the Taxpayer as provided in Virginia Code § 58.1-1835.

This decision is supported by P.D. 05-5 (2/1/05), in which the Tax Commissioner addressed abating an assessment when written guidance was not provided by a Department employee to the taxpayer.  In that instance, the taxpayer did not provide evidence that it relied upon written advice from the Department, and the assessment at issue was upheld.  Additionally, the Tax Commissioner cited concern with verbal information received by the taxpayer because it was difficult to determine what specific questions were asked and what information regarding the taxpayer’s business operations were presented to the Department.  
 
Financial Hardship

Virginia Code § 58.1-105 B authorizes the Tax Commissioner to compromise and settle a tax liability of doubtful collectibility. The Taxpayer indicates that it is facing difficulty paying its bills.  Should the Taxpayer find that paying the full amount of the assessment will likewise cause a financial burden, the Taxpayer may wish to request an offer in compromise based on doubtful collectibility.  The Taxpayer must present evidence of doubtful collectibility to support a claim of financial hardship.  

If the Taxpayer wishes to pursue a settlement based on doubtful collectibility, please complete and return the enclosed OIC - Fee and OIC B - 3 forms to: Tax Commissioner, Virginia Department of Taxation, Post Office Box 2475, Richmond, Virginia 23218-2475. These forms will allow the Department to review and analyze the Taxpayer’s financial situation.  Upon completion of the Department’s review, a response will be issued based upon the information provided. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based upon doubtful collectibility.

CONCLUSION

Based on this determination, the assessment is correct.  A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. An offer in compromise based on doubtful collectibility or payment of the outstanding assessment must be made within 30 days of the date of the bill. Payment should be remitted to:  Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: ***** , Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections, regulation and public documents cited 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 about this determination, you may contact ***** at ***** .

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1130P