Tax Type
Retail Sales and Use Tax
Description
Food service management fees
Topic
Basis of Tax
Collection of Tax
Taxability of Persons and Transactions
Date Issued
12-09-1985
- December 9, 1985
RE: §58.1-182l Application/Sales and Use Tax
Dear ****
This will reply to your letter of June 18, 1982, in which you submit an application for correction of sales and use tax assessed to ***** and will reference my meeting of June 12, 1984, with ***** and information submitted by ***** on June 27, 1984.
FACTS
***** ("Taxpayer") is engaged in contracting with various clients for the operation of their food service facilities. In connection with such contracts, the taxpayer procures, prepares, and serves food, hires and pays employees, and purchases certain utensils and sundries necessary for the operation of its clients' food service facilities. The taxpayer's clients set the price of the food sold, but the taxpayer collects the sales tax from its client's employees, guests, etc., who purchase food. In addition, the taxpayer sometimes furnishes food to its clients for special events.
The taxpayer's clients are contractually bound to reimburse the taxpayer for all operating and administrative expenses incurred and are further obligated to pay the taxpayer a "management" or "subsidy" fee. By contract, all receipts from food sales to client's employees, guests, etc., immediately become the property of the taxpayer's clients.
An audit of the taxpayer produced an assessment for its failure to collect sales tax on management or subsidy fees paid by clients. The taxpayer contests such assessment, asserting that the tax collected from client's employees, guests, etc., is the only tax due on the food sold.
DETERMINATION
The transactions at issue in this case involve clients wishing to r cafeteria or other eating facility for their employees, guests and others. To accomplish this goal, the clients have contracted with taxpayer for the management and operation of their food service facilities. In consideration thereof, each client reimburses the taxpayer for the cost of food, beverages, and supplies needed to run a food service operation and pays the taxpayer a management or subsidy fee.
A review of the 'Dietary Department Management Agreement furnished the taxpayer indicates that all property for which the taxpayer is reimbursed by a client becomes the property of the client. Additionally, the agreement provides that the taxpayer will collect turn over to a client all cash receipts, and further provides that "[s]uch cash receipts will remain the property of the Client all times Furthermore, the taxpayer's clients set the price of the food sold their facilities.
Based upon the foregoing information, the retail sale of food to the ultimate consumer is actually made by the taxpayer's clients. Thus, the taxpayer is merely making a sale of food to its clients for resale to the clients' employees, guests, etc. Such sales for resale are exempt from the tax. As the management or subsidy fee is not part of the consideration paid by the ultimate consumer (the client's employees, guests, etc.), such fees will be removed from the department's audit to the extent related to exempt sales for resale.
Management or subsidy fees are taxable in this case, however, to the extent related to the provision of food directly to clients for their own use and not for resale, for example, the provision of food to clients for special events (banquets, receptions, free meals provided to guests, etc.). In such an event, the taxpayer is fabricating food belonging to its clients, a taxable transaction under the provisions of Virginia Code Section 58.1-602.16 (see also Section 63O-10-37 of the Virginia Retail Sales and Use Tax Regulations, copy enclosed). As noted in Regulation 630-10-37, "the tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly the materials used in the fabrication work." An example of such a taxable transaction is set forth in the regulation: "a tailor who makes an article of wearing apparel from materials furnished by the customer must collect and pay the tax on the charge for making the apparel.
While certain management or subsidy fees paid to the taxpayer in this case are deemed nontaxable, it should be noted that the same might not be true under a different factual situation.
Sincerely.
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner