Rulings of the Tax Commissioner

November 9, 2021

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 assessment issued for the period April 2014 through March 2018. I apologize for the delay in responding to your letter. 

FACTS

For the period at issue, the Taxpayer, a Virginia conference center, offered overnight accommodations, meeting facilities and dining services to its guests for a combined daily rate. Guest meals were not billed separately, unless served as part of private catered meals in the meeting rooms. The Taxpayer also provided meals to its employees, which were prepared from the same inventory, in the same manner, and in the same location as guest meals. Under audit, the Taxpayer was assessed use tax related to the untaxed purchase of food and sales tax related to the purchase of two conference tables. 

The Taxpayer appeals, contending that the purchases of food were exempt under the resale exemption, and that sales tax was paid to the vendor on the purchase of several conference tables. The Taxpayer also contests the audit sample methodology, contending the error factor calculation should be based on the percentage of revenue from 2014, rather than an average of later years where revenue was higher. The Taxpayer further notes that the audit period was improperly extended beyond the original three-year period and should be limited to April 2014 through January 2017. 

DETERMINATION

Taxability of Food Purchases 

Virginia Code § 58.1-603 4 imposes the retail sales tax on “the gross proceeds derived from the sale or charges for rooms, lodgings or accommodations furnished to transients as set out in the definition of ‘retail sale’ in § 58.1-602.”  Virginia Code § 58.1-602 defines “retail sale,”, in part, as follows: 

The terms “retail sale” and a “sale at retail” shall specifically include the following: (i) the sale or charges for any room or rooms, lodgings, or accommodations furnished to transients for less than 90 continuous days by any hotel, motel, inn, tourist camp, tourist cabin, camping grounds, club or any other place in which rooms, lodging, space or accommodations are regularly furnished to transients for a consideration…

Title 23 of the Virginia Administrative Code (VAC) 10-210-930 addresses meals and provides that retail sales of meals by restaurants, hotels, motels, caterers, etc. are taxable. Cover, minimum and room service charges in connection with the provision of meals are a part of the sales price and are taxable. 

The question for this audit period is whether the meals provided to the guests by the conference center are retail sales subject to the tax. If so, the underlying food purchases made by the Taxpayer may be made under a resale certificate of exemption. If not, such food purchases by the hotel would be subject to the retail sales and use tax. 

Guest Meals

The Department has previously addressed the issue of a hotel providing a complimentary breakfast in the morning and nonalcoholic beverages in the evening to registered guests in Public Document (P.D.) 87-269 (11/24/1987). The Department found that when the cost of the food and nonalcoholic beverages provided to a guest on a “complimentary” basis was included in the taxable room rental charge, a hotel may purchase such food and beverage under a resale certificate of exemption, Form ST-10. 

In contrast, in P.D. 98-206 (12/16/1998), the Department reviewed the taxability of consumable amenities provided to guests by a full service resort, which included soaps, sponges, lotions, shower caps, bath oils and chocolates. Here, the Department found that purchases of amenities for use in guest rooms are taxable because there is no separate charge on the guests’ bill. P.D. 98-206 went on to explain that because such items are provided as an integral part of the accommodations offered by the taxpayer, they are purchased for the taxpayers own use or consumption and therefore may not be purchased exempt for resale. See also P.D. 92-120 (6/29/1992).

According to the Taxpayer, every room in their facility is sold as part of a package, and every guest staying in their facility is entitled to the buffet breakfast, coffee break station, lunch buffet and dinner buffet. In addition to the daily room fee, guests are billed a minimum of $55 per day for a meal package. This covers coffee usage at $10, breakfast at $10, lunch at $15 and dinner at $20. The description provided by the Taxpayer is more analogous to the facts in P.D. 87-269 as related to complimentary meals and beverages.

During the audit, items that could be identified as complimentary meals and beverages were removed from the exceptions list. Exceptions, which could not be clearly distinguished from employee meals, however, remain in the audit.

Employee Meals

Virginia Code § 58.1-609.3 7 provides an exemption from the sales tax for “meals furnished by restaurants or food service operators to employees as part of wages.”   The Department has clarified this exemption is specifically limited to meals furnished to restaurant employees as part of wages. See P.D. 94-60 (3/15/1994). Meals provided by restaurants that is not included as a part of employee compensation, and meals provided to employees other than restaurant or food service operation employees are subject to the sales and use tax. 

The tax on employee meals was assessed because no documentation was provided by the Taxpayer to demonstrate that these meals were being provided as a form of compensation during work shifts. Appropriate evidence would include information from an employee handbook outlining the policy regarding free meals, the value of free meals in employee compensation packages, or records from a point of sale system to record and account for the cost of the meals. See P.D. 20-97 (6/2/2020). 

Asset Purchase 

The Taxpayer contends the charge from ***** (the “Vendor”) was for the refurbishing and repair of tables, not the provision of new items and asserts the applicable taxes were included in the price stated on the invoice. Upon reviewing the documentation provided, it appears the Vendor was building custom tables, rather than refurbishing tables supplied by the Taxpayer. Additionally, the document provided is not an invoice, but an estimate that includes the cost price for various different design elements from which the Taxpayer could choose a final combination of items. While the estimate mentions the inclusion of sales tax, it fails to include sufficiently detailed line items on which to base a tax calculation. Further, the Department’s records do not contain a return from the Vendor for taxes collected from this transaction. 

The Taxpayer argues that the Department should pursue this liability with the Vendor and the purchase should be removed from the audit. However, under long settled principles of sales and use tax law, the Department may seek payment of the tax from either the seller or the purchaser of tangible personal property. In the case of United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977) aff’d, 569 F.2d 811 (4th Cir. 1978), the court held that while “the seller is legally obligated to collect the tax from the purchaser, the statute [Virginia Code § 58.1-625] makes the tax the legal debt of the purchaser.”  Thus, the courts fully recognize that legal obligations apply to both the seller and the purchaser. 

Audit Sample

Sampling is an audit technique of significant value that is widely used in both the public and private sectors. The Department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the final results should be within a narrow percentage range of the actual amount that would have been determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Every effort is made to select objectively the sample periods that are representative of the period being audited.

Upon review of the audit report and the information presented, I find no basis to invalidate the sample and extrapolation. The auditor did not use 2014 because the audit period does not cover the full year. Instead, the auditor used 2016 for sample and extrapolation purposes. The auditor notes that a different basis was offered but the Taxpayer refused to provide additional information. The sample and error factor were applied in accordance with established audit procedures. 

Statute of Limitations

Pursuant to Virginia Code § 58.1-634, “the taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable... The Tax Commissioner shall not examine any person’s records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so.”   

The Taxpayer argues the audit should be limited to the three-year period of April 2014 through January 2017. The Taxpayer believes the extrapolation should be restricted to this period and all periods for 2017 and 2018 should be used for a subsequent audit. Upon review of the audit report, it appears that the audit was extended forward beyond the statutory three-year period in order to bring the Taxpayer as up to date as possible. The audit report, however, does not include an agreement between the Taxpayer and the Department regarding an extension of audit period. Absent documentation as evidence the Taxpayer and auditor mutually agreed to bring the audit period current, the audit must be limited to only include the statutory three-year period.

CONCLUSION

Based on the evidence and information provided, the Taxpayer has been unable to clearly show that a portion of its food purchases were provided complimentary to guests or qualify as exempt employee meals. In addition, the Taxpayer has not met that burden in regards to tangible personal property (conference tables) purchases included on the exception list. Further, the Taxpayer has provided no basis for recalculation of the error factor. However, because the audit period was extended beyond the statutory period and no basis has been provided for the extension, the audit and resulting assessment should be restricted to the original audit period of April 2014 through January 2017.

In accordance with this determination, the Department's audit will be returned to the appropriate field audit staff for a revision of the Department's assessment. A copy of the revised audit report and a revised bill, including interest to date, will be sent to the Taxpayer as soon as possible. To avoid the accrual of additional interest, the Taxpayer should pay the bill within 60 days of the date of this letter.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. 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/1737.A