Does Virginia's local meals tax exemption for nonprofit fundraisers apply when the nonprofit sells meals continuously, even if members-only or in competition with restaurants?

Plain-English summary

The Hampton Commissioner of the Revenue asked four related questions about the local meals tax exemption for nonprofit fundraisers. Section 58.1-3840(A) exempts meals sold by volunteer fire departments, rescue squads, nonprofit churches and religious bodies, and educational, charitable, fraternal, or benevolent organizations "as a fundraising activity" if the proceeds are used exclusively for the organization's nonprofit purposes. The exemption is capped: the first three sales per year are exempt, then the first $100,000 of gross receipts beyond that.

The Commissioner's two scenarios were practical. (1) A qualifying organization runs an ongoing, commercial-location food operation, open to the public, in direct competition with nearby for-profit restaurants. (2) A qualifying organization runs an ongoing food operation open only to its members, also continuous, also in competition with private restaurants if it were open to the public. In both, the proceeds go to the organization's nonprofit purposes. Are these "fundraising activities" eligible for the exemption?

AG Herring read the statute closely and gave several answers, plus a few non-answers (since some are factual questions).

"Fundraising activity" means meals sold to raise money for the qualifying entity's qualifying purpose. The Code does not define "fundraising activity." Under standard construction, the ordinary meaning controls: "fundraising" is the organized activity of raising funds for an institution or cause. So if the meal sales are genuinely raising money for the nonprofit's qualifying purposes, the exemption is potentially available. Whether any particular activity actually satisfies this requires a factual determination by the commissioner.

Competition with for-profit businesses is not a factor. Virginia law does not condition the exemption on a lack of competition with private restaurants. The legislature could have written that in, but did not. So an organization running a barbecue stand right next to a for-profit barbecue restaurant is not automatically disqualified.

Member-only versus public-open is not a factor. The statute does not require that fundraising activities be open to the public. A members-only event can still qualify, as long as the proceeds are used for the qualifying purposes.

Frequency is partly limited. The statute does not bar continuous operations, but it imposes a structural cap: the first three meal sales per year are exempt; beyond that, the first $100,000 of gross receipts per year is exempt; the rest is taxable. So a year-round food operation will exhaust the exemption past $100,000 in gross receipts (after the first three events).

The IRS definition is irrelevant. The Commissioner's request referenced an IRS use of "fundraising activity." Virginia's Income Tax chapter (Title 58.1 Ch. 3) has a conformity provision that ties some Virginia tax terms to federal income tax meanings, but that conformity rule does not extend to § 58.1-3840. There is no requirement that Virginia's local meals tax exemption mirror federal income tax usage.

Tax exemptions are construed narrowly. Citing Westminster-Canterbury v. City of Va. Beach, the AG flagged a longstanding principle: doubt about an exemption is resolved against the party claiming it. The commissioner of the revenue should make the determination, and the burden of showing eligibility is on the organization.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Section 58.1-3840 has been amended multiple times since 2014, and local meals tax rates and ordinances vary by locality. Any organization or commissioner currently working with the exemption should look at the present statutory text and the local ordinance.

Common questions

Who qualifies as a fundraising organization under § 58.1-3840(A)(b)?
The statute names volunteer fire departments and rescue squads, nonprofit churches or other religious bodies, and educational, charitable, fraternal, or benevolent organizations. The organization's tax-exempt status under federal law is not the test; the test is the organizational character under the Virginia statute.

What is the exemption cap?
The first three meal-sales events per calendar year are fully exempt. From the fourth event onward, only the first $100,000 of gross receipts per calendar year is exempt. Gross receipts beyond that threshold are taxable like any other meal sales.

Can a church run a weekly Wednesday-night dinner as a fundraiser?
Per the opinion, yes, if the proceeds go to the church's nonprofit purposes. The "fundraising activity" definition is not about frequency. But the $100,000 cap will start kicking in after a few months of busy weekly dinners, so the exemption value diminishes.

What about meals served free to members at no charge?
The statute applies to meals sold. Free meals are not subject to the meals tax in the first place. The exemption analysis is irrelevant.

Is the IRS Form 990 categorization relevant?
No. The IRS categorizes "fundraising activity" expenses for reporting purposes on Form 990, but Virginia's statute is independent. An activity might be classified as "fundraising" for IRS purposes and not qualify under § 58.1-3840(A)(b), or vice versa. The commissioner of the revenue applies the Virginia test.

What if a for-profit restaurant complains about competition?
The for-profit restaurant has no standing to challenge the exemption based on competition concerns under this statute. The exemption was written without reference to competitive harm. Lobbying the General Assembly to change the rule is the available path.

How does the commissioner decide a borderline case?
The commissioner reviews the facts: organizational character of the seller, use of proceeds, the structure of the activity, and any documentation. The burden is on the organization. If there is doubt, the doubt goes against the exemption.

Background and statutory framework

• Va. Code § 58.1-3840(A)(b): Local meals tax exemption for nonprofit fundraising sales by volunteer fire departments, rescue squads, churches, religious bodies, and educational/charitable/fraternal/benevolent organizations; first three times per year fully exempt, then first $100,000 of gross receipts per year.
• Va. Code § 58.1-301: Income tax conformity provision (tying some Virginia income tax terms to federal definitions); does not extend to § 58.1-3840.

The interpretive moves:

• Undefined terms take their plain and ordinary meaning.
• The statute's structure (the three-times-then-$100,000 cap) shows the legislature considered frequency directly.
• Absence of competitive-harm or open-to-public requirements means those factors are not in the statute.
• The income tax conformity rule is limited to its own chapter.
• Exemptions are construed narrowly against the claimant.
• Fact-specific eligibility determinations are for the commissioner of the revenue.

Citations

• Va. Code § 58.1-301
• Va. Code § 58.1-3840
• Hubbard v. Henrico Ltd. P'ship, 255 Va. 335, 497 S.E.2d 335 (1998)
• City of Va. Beach v. Flippen, 251 Va. 358, 467 S.E.2d 471 (1996)
• Marsh v. City of Richmond, 234 Va. 4, 360 S.E.2d 163 (1987)
• Westminster-Canterbury v. City of Va. Beach, 238 Va. 493, 385 S.E.2d 561 (1989)
• 2013 Op. Va. Att'y Gen. 308
• 2010 Op. Va. Att'y Gen. 56
• 2002 Op. Va. Att'y Gen. 331
• 2002 Op. Va. Att'y Gen. 338
• 1989 Op. Va. Att'y Gen. 338

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2014/14-054_Mugler.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Mark R. Herring
Attorney General

900 East Main Street
Richmond, Virginia 23219
804-786-2071
FAX 804-786-1991
Virginia Relay Services
800-828-1120
7-1-1

October 3, 2014

The Honorable Ross A. Mugler
Commissioner of the Revenue
Post Office Box 636
Hampton, Virginia 23669

Dear Commissioner Mugler:

I am responding to your request for an official advisory Opinion in accordance with § 2.2-505 of the Code of Virginia.

Issues Presented

Your inquiry relates to the application of the term "fundraising activity" as used in § 58.1-3840(A)(b), which provides an exemption from local excise taxes on meals sold by certain organizations for fundraising activities. You first present two scenarios and ask whether the exemption applies to the meals sold in each. You then ask whether Virginia law follows the definition of "fundraising activity" as set forth by the Internal Revenue Service; and whether availability of the exemption otherwise depends on the activity being open to the public rather than restricted to the organization's members. You also ask whether there is a difference between "fundraising activity" and activities that occur on a regular and continuous basis when in both instances the gross proceeds are used by the organization for its nonprofit charitable or benevolent purposes.

Background

In your first scenario, a qualifying organization has an ongoing activity that occurs on a regular and continuous basis and is open to the public. The gross proceeds are used by the organization for its nonprofit educational, charitable, benevolent, or religious purposes. This activity occurs at a commercial location and is in competition with nearby for-profit businesses that are required to collect the local meals tax. Your second scenario involves an organization that has an ongoing activity that occurs on a regular and continuous basis and is open only to members of the organization but not to the general public. In both scenarios, the gross proceeds are used by the organization for its nonprofit educational, charitable, benevolent, or religious purposes. You note that the same activity, if engaged in by a for-profit business, would be subject to the collection of the local meals tax. You ask whether the selling of meals in these circumstances constitutes "fundraising activity" under § 58.1-3840(A)(b).

Response

It is my opinion that, in order to qualify for the tax exemption afforded meals sold as part of a fundraising activity, the meals must be sold by the qualifying entity to raise money exclusively for nonprofit educational, charitable, benevolent, or religious purposes. Virginia law does not make competition with private, for-profit businesses a factor to be used in determining tax status, nor does it differentiate between activities that are open only to members and activities that are open to the public. Also, Virginia law does not limit the frequency of such activities, but it does impose a statutory cap related to frequency. Finally, the IRS definition of "fundraising activity" is not applicable. Whether a particular activity satisfies the requirements for exemption is a factual determination to be made by the commissioner of the revenue or other appropriate tax official.

Applicable Law and Discussion

Section 58.1-3840 of the Code of Virginia authorizes localities, subject to certain restrictions, to impose an excise tax on, among other things, meals sold within their jurisdiction. Section 58.1-3840 further provides that no such taxes on meals may be imposed when sold or provided by

volunteer fire departments and rescue squads; nonprofit churches or other religious bodies; or educational, charitable, fraternal, or benevolent organizations, the first three times per calendar year and, beginning with the fourth time, on the first $100,000 of gross receipts per calendar year from sales of meals (excluding gross receipts from the first three times), as a fundraising activity, the gross proceeds of which are to be used by such church, religious body or organization exclusively for nonprofit educational, charitable, benevolent, or religious purposes . . . .[1]

Your inquiry involves the meaning of the term "fundraising activity" and whether meals sold under particular circumstances constitute such activity.

"Fundraising activity" is not defined in the Virginia Code. "When . . . a statute contains no express definition of a term, the general rule of statutory construction is to infer the legislature's intent from the plain meaning of the language used."[2] "Fundraising" generally means "the organized activity of raising funds (as for an institution or political cause)."[3] Thus, in order to qualify as a fundraising activity for purposes of exemption from the local meals tax, the meals must be sold to raise money for the qualifying entity for its use for a qualifying purpose. Whether a particular activity satisfies this condition requires a factual determination by the commissioner of the revenue or other appropriate tax official.[4] Accordingly, I am unable to provide a definite response to whether the exemption applies in the situations you present. Nonetheless, I note that, in making this determination, a prior Attorney General's Opinion concluded that Virginia law requires that "[i]f there is any doubt concerning the exemption, [such] doubt must be resolved against the party claiming the exemption."[5]

In response to your next inquiry, I conclude that "fundraising activity" as used in § 58.1-3840 does not follow the Internal Revenue Service's application of the term.[6] While the terms used in Chapter 3 of Title 58.1 of the Code Virginia, entitled "Income Tax," "shall have the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required,"[7] no similar conformity provision applies to terms used in § 58.1-3840. Thus, there is no requirement that "fundraising activity," as used in § 58.1-3840, be construed according to IRS standards.

Further, the language of § 58.1-3840(A) makes no distinction between activities that are open to the public and activities that are limited to members of the organization. Nor does the statute, in providing the exemption, refer to the frequency at which qualifying activities may occur. I also note that Virginia law does not make competition between activities of tax-exempt organizations and taxable private businesses a factor to be considered in determining whether particular activities of a tax-exempt organization should be taxed. Thus, provided the gross proceeds are used by the organization for its nonprofit charitable or benevolent purposes, nothing in § 58.1-3840 suggests there is a difference between "fundraising activity" and activities that occur on a regular and continuous basis. Rather, as discussed above, the determining factor is whether or not the activity is raising money for the qualifying entity to be used exclusively for nonprofit educational, charitable, benevolent, or religious purposes.

The availability of tax exemptions, however, as this Office expressly has stated in addressing exemptions in other contexts, "rests within the judgment of the commissioner of the revenue, after consideration of all attendant facts."[8]

Conclusion

For the reasons stated, it is my opinion that, in order to qualify for the tax exemption afforded meals sold as part of a fundraising activity, the meals must be sold by the qualifying entity to raise money exclusively for nonprofit educational, charitable, benevolent, or religious purposes. Virginia law does not make competition with private, for-profit businesses a factor to be used in determining tax status, nor does it differentiate between activities that are open only to members and activities that are open to the public. Also, Virginia law does not limit the frequency of such activities, but it does impose a statutory cap related to frequency. Finally, the IRS definition of "fundraising activity" is not applicable. Whether a particular activity satisfies the requirements for exemption is a factual determination to be made by the commissioner of the revenue or other appropriate tax official.

With kindest regards, I am

Very truly yours,

Mark R. Herring
Attorney General

[1] Va. Code Ann. § 58.1-3840(A) (2013) (emphasis added).

[2] Hubbard v. Henrico Ltd. P'ship, 255 Va. 335, 340, 497 S.E.2d 335, 338 (1998) (citing City of Va. Beach v. Flippen, 251 Va. 358, 362, 467 S.E.2d 471, 473-74 (1996) and Marsh v. City of Richmond, 234 Va. 4, 11, 360 S.E.2d 163, 167 (1987)).

[3] Merriam Webster's Collegiate Dictionary 473 (10th ed. 1996).

[4] See, e.g., 2013 Op. Va. Att'y Gen. 308, 309 (citing 2002 Op. Va. Att'y Gen. 338, 340; 1989 Op. Va. Att'y Gen. 338, 339). The Attorney General "refrain[s] from commenting on matters that would require additional facts[.]" 2010 Op. Va. Att'y Gen. 56, 58.

[5] 2002 Op. Va. Att'y Gen. 331, 335 (citing Westminster-Canterbury v. City of Va. Beach, 238 Va. 493, 501, 385 S.E.2d 561, 565 (1989)).

[6] I note that, although your request refers to an IRS definition of "fundraising activity," I can find no applicable federal or statutory definition of the term. Rather, the basis of your inquiry appears to come from the guidance IRS provides in its instructions for reporting "fundraising activity" expenses on certain tax returns. See Internal Revenue Service, 2013 Instructions for Form 990, Return of Organization Exempt From Income Tax at 59, available at http://www.irs.gov/pub/irs-pdf/i990.pdf.

[7] Section 58.1-301 (2013).

[8] 2002 Op. Va. Att'y Gen. 331, 336.