88-55 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Sale of restaurants; Occasional sale exemption criteria

Topic

Exemptions

Taxability of Persons and Transactions

Date Issued

04-04-1988

April 4, 1988

Re: Ruling Request
Retail Sales and Use Tax

Dear******************

This is in reply to your letter of April 15, 1987 in which you ask for a ruling regarding the applicability of the Virginia Retail Sales and Use Tax to certain transactions between********** and its franchisees. I apologize for the delay in responding to your letter and I hope that this delay has not caused you any inconvenience.

FACTS

Currently, there are approximately 40 restaurants which are company-owned by ***********(Corporation). Corporation reports the tax on the sales of meals for these restaurants under a consolidated sales tax certificate. Corporation also has an out-of-state dealers certificate under which they report the sales and use tax from their equipment center, uniform center and various other distributions centers around the country.

You are requesting a ruling concerning the sales tax implications of the sale of an ongoing restaurant (including the sale of the used fixtures and equipment, inventory and supply items, etc.) owned by Corporation to a franchisee. You also ask for a ruling regarding the sales tax implications of the reverse type of sale - from a franchisee to Corporation. Specifically, you ask whether these sales qualify as an "occasional sale."

RULING

Virginia Code §58.1-608.15 provides an exemption from the tax for an "occasional sale" as defined under Virginia Code §58.1-602.12. This exemption is further detailed under Virginia Regulation 630-10-75. The regulation defines "occasional sale" as:

- 1. A sale by a person who is engaged in sales on three or fewer separate occasions within one calendar year, except that sales at fairs, flea markets, circuses and carnivals and sales made by street vendors are not occasional sales: or
  
  2. A sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration. The words "not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration" mean that a registered dealer is not entitled to an occasional sale exemption solely by virtue of the fact that the article sold may be of a different class from the merchandise he/she regularly sells; or
  
  3. The sale or exchange of all or substantially all the assets of any business; or
  
  4. The reorganization or liquidation of any business.

The Virginia Supreme Court has ruled that statutes granting tax exemptions must be construed strictly against the taxpayer. Commonwealth v. Community Motor Bus Co., 214 Va. 155, 198 S.E. 2d 619 (1973). Therefore, the department must examine each request for exemption closely to determine if the transaction meets all of the necessary criteria.

Based upon the language contained in the regulation, the sale of a single restaurant by the Corporation to the franchisee would not qualify unless it was the sale of all or substantially all of the restaurants owned by the Corporation. Additionally, the regulations require that the sale of a business, even if it was a sale of substantially all of the assets, would not qualify for the exemption if the sale was conducted over more than three separate occasions. For example, if Corporation liquidates its business by selling restaurants to franchisees on a separate basis, the sales would not qualify for the exemption if more than three separate sales are involved. However, if Corporation sold all of its restaurants in three or fewer transactions, the sales would qualify for the exemption.

The sale of a single restaurant by a franchisee to the Corporation may qualify for the "occasional sale" exemption, provided that the sale of the restaurant was the "sale or exchange of all or substantially all the assets" of the business and such a sale took place over three or fewer occasions. Furthermore, in order to substantiate the amounts exempt from tax as an occasional sale, the records of the transaction must separately state the value of the tangible personal property and the value of the real estate transferred.

I hope that this ruling will resolve the confusion in this area and give you sufficient guidelines to follow. To further assist you, I have enclosed a copy of another recent ruling regarding the occasional sale exemption. If you have any further questions, please do not hesitate to contact this office.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner