Were a nonprofit elderly-housing provider's below-cost dining-room and cafeteria meals exempt under section 6374?

Plain-English summary

A redacted nonprofit operated seven apartment houses and had four more under construction solely for housing low-income elderly people. The source says the organization was funded by the Housing Urban Development 236 program.

At one location, rent included five evening meals per week for tenants only. A noon cafeteria served tenants and elderly members of the public, and about six to eight employees also bought lunch there. All meals were sold below cost. At the time of the request, the organization reported and paid sales tax on every meal sale.

The bookkeeper argued that former Regulation 1603(m), which restated section 6374, exempted the dining-room and cafeteria meal and food-product sales. Tax Counsel Donald J. Hennessy disagreed.

The opinion read section 6374 as requiring state or federal funding specifically to provide meals and food products at or below cost to low-income elderly persons. A check with the Sacramento Federal Housing Administration office reportedly confirmed that its loan insurance and other programs did not specifically fund meal programs. The described federal support concerned loans for construction of housing and other facilities, so it did not meet section 6374's funding requirement.

California therefore applied sales tax to the organization's cafeteria and dining-room meal and food-product sales. The live annotation separately states that meals sold to employees or members of the general public who did not meet the low-income-elderly definition were taxable.

Source and live-annotation limits

The official PDF does not include the February 21 request, nonprofit or governing records, federal program agreement, funding application or award, loan or insurance documents, Federal Housing Administration communication, apartment or construction records, leases or rent allocations, tenant income or age qualifications, dining-room or cafeteria records, menus, meals or food products, customer or employee records, below-cost calculations, prices, invoices, returns, reported-sales detail, tax calculations or payment proof, audit, assessment, claim, appeal, or later outcome. The organization, bookkeeper, local Board office, tenants, elderly public, employees, funders, properties, meals, transactions, prices, costs, funding amounts, and tax amounts are redacted, unidentified, or undocumented.

The live annotation expressly frames section 6374 as requiring funds from California or the United States and adds the separate employee and nonqualifying-public sales rule. The supporting opinion refers generally to funding required by section 6374 and concludes all described meal sales were taxable because the meal-specific funding requirement failed. The live annotation preserves the nonprofit housing purpose, dining room and cafeteria, meals and food products, below-cost condition, funding failure, FHA housing-and-facility loan insurance, date, and tax result. It omits the request and counsel, apartment counts, construction status, named program wording, five tenant evening meals included in rent, noon access, six-to-eight employee count, existing reporting and payment, former Regulation 1603(m), Sacramento FHA check, local-office referral, missing records, redactions, and absent outcome.

What this means for you

Elderly-service providers, housing operators, and tax professionals

Preserve the exact state or federal funding instrument and restricted purpose, resident and customer income-and-age qualifications, leases and meal components, menus and food classifications, dining-room and cafeteria access, employee purchases, meal prices and cost calculations, invoices, returns, exemption documents, tax calculations, and payments. Housing or facility funding is not automatically meal-program funding.

Common questions

Did nonprofit status make the meals exempt?

No.

Was selling meals below cost enough?

No. The opinion required qualifying government funding specifically for the meal program.

Why did the described federal housing support fail?

It related to housing construction and facilities rather than funding the provision of meals.

How many properties did the organization operate?

Seven apartment houses, with four more under construction.

Who used the cafeteria?

Tenants, elderly members of the public during lunch, and approximately six to eight employees.

Were any meals included in rent?

Yes. At one location, rent included five evening meals per week for tenants only.

Was the organization already reporting tax?

The source says it then reported and paid sales tax on all meal sales.

Did the source include the federal funding documents or resident qualifications?

No.

Citations and references

• California Revenue and Taxation Code § 6374
• California Code of Regulations, title 18, former § 1603(m)
• February 21 request; Sacramento FHA confirmation; federal funding, housing, resident, meal, employee, and tax records; and outcome — described or implicated but not documented

Verbatim support

From the official Tax Counsel opinion:

The funding required by section 6374 must be specifically for the purpose of providing meals and food products at or below cost to low-income elderly persons.

The FHA funding relates to loans for construction of housing and other facilities. Such funding does not satisfy the requirements of section 6374.

Therefore, in our opinion sales tax applies to REDACTED TEXT’s sales of meals and food products in its cafeteria and dining room.

From the live annotation:

Furthermore, meals sold to employees or the general public not meeting the definition of "low-income elderly persons" are subject to the sales tax.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/390-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/390-0090.pdf

Original ruling text

390.0090

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

March 14, 1973

REDACTED TEXT

Attn: REDACTED TEXT
Bookkeeper
Gentlemen:
We are replying to your letter of February 21, 1973 concerning the application of sales tax to sales of meals and food products in the dining room and cafeteria operated by REDACTED TEXT. You have concluded that such sales are exempt from sales tax under regulation 1603(m), which restates section 6374 of the California Revenue and Taxation Code. As we understand the facts, REDACTED TEXT operates seven apartment houses, and has four more under construction, solely for housing the low-income elderly. REDACTED TEXT is a nonprofit organization, funded by the Housing Urban Development 236 program. Included in the rent at one of the locations are five evening meals per week provided for tenants only. The cafeteria is also open during the noon lunch hour, and its facilities are available to tenants and elderly citizens of the public. Approximately six to eight employees also purchase their lunches in the cafeteria. All meals are sold at below-cost prices. Presently, sales tax is reported and paid by REDACTED TEXT on all sales of meals. Given the above facts, we do not agree with your conclusion that REDACTED TEXT’s sales of meals and food products are exempted from sales tax by section 6374. The funding required by section 6374 must be specifically for the purpose of providing meals and food products at or below cost to low-income elderly persons. To our knowledge, funding by the Housing Urban Development 236 program is not for such purposes. Our check with the Sacramento office of the Federal Housing Administration (FHA) confirmed that their insurance of loans and other programs are not specifically for the funding of meal programs. The FHA funding relates to loans for construction of housing and other facilities. Such funding does not satisfy the requirements of section 6374.

REDACTED TEXT

-2-

March 14, 1973

Therefore, in our opinion sales tax applies to REDACTED TEXT’s sales of meals and food products in its cafeteria and dining room. If you have further questions on this matter, feel free to write us. You may also wish to discuss the matter with the board’s local office at REDACTED TEXT. Very truly yours,

Donald J. Hennessy
Tax Counsel
DJH:ab