Could franchise food stores use Virginia's reduced food-tax rate when immediate-consumption sales did not exceed 80% of gross receipts?

Subject

Reduced rate to those food items qualifying under the Food Tax Reduction Program

Plain-English summary

Five Virginia franchise food stores charged the full rate on food eaten on the premises and the reduced rate on qualifying food for home consumption. An auditor applied the full rate to all food under the exclusion for restaurants and fast-food establishments deriving more than 80% of gross receipts from food for immediate consumption.

The stores' immediate-consumption food sales did not exceed 80% of total gross receipts. Virginia therefore allowed the reduced rate for qualifying items and revised the assessments. The ruling described eligible food as generally including staple groceries and cold prepared food packaged in a closed container, bag, or similar packaging for home or off-premises consumption, but not hot food.

What this means for you

• Under the version of the program addressed here, the 80% test used each establishment's gross-receipts mix.
• Product temperature, packaging, and whether the item was sold for immediate consumption affected eligibility.
• Maintain store-level sales records that distinguish immediate-consumption receipts from other food sales.

Common questions

Did selling dine-in meals automatically disqualify a store from the reduced rate?

No. These stores also sold dine-in meals, but their immediate-consumption receipts did not cross the more-than-80% threshold.

Did the customer's identity control whether packaged food qualified?

No. The ruling said the described food-for-home-consumption treatment applied whether the purchaser was an individual or a business.

Citations and references

• Va. Code § 58.1-611.1, the Food Tax Reduction Program applied in the audit periods.
• 7 U.S.C. § 2012, the Food Stamp Act definition incorporated by the Virginia provision.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-122

Original ruling text

July 31, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessments issued to * (the "Taxpayer") for the periods November 2004 through July 2006, December 2004 through July 2006, November 2005 through July 2006 and April 2006 through July 2006.

FACTS

The Taxpayer operates five franchise stores in Virginia that sell a wide variety of food items, including dine in meals. Pursuant to Va. Code § 58.1-611.1, the Taxpayer collected the full rate of tax on food for on-premises consumption and the reduced rate of tax on food for home consumption. As a result of the Department's audit, the auditor concluded that the Taxpayer should have applied the general retail sales and use tax rate of 5.0% to all its sales of food in accordance with the 80% rule for fast food establishments and restaurants. The auditor assessed the difference in the full tax rate and the reduced rate for food. The Taxpayer contends that it does not meet the requirements of the 80% rule and the assessments should be abated.

DETERMINATION

The Food Tax Reduction Program set out in Va. Code § 58.1-611.1 applies a reduced sales and use tax rate to sales of food purchased for home consumption as defined under the Food Stamp Act of 1977, 7 U.S.C. § 2012. This definition includes most staple grocery food items and cold prepared foods that are packaged for home consumption. The Food Stamp definition includes eligible foods that are packaged for home consumption or packaged for consumption away from the premises where such foods are sold or packaged on a "to go" basis. As such, for purposes of applying the Food Tax Reduction Program, any food (except hot food) that is packaged in a closed container, bag, or other similar packaging, and is not sold for immediate consumption falls in the category of eligible "food for home consumption." This applies regardless of whether the food is sold to an individual or a business.

Furthermore, the Food Tax Reduction Program provides an exclusion for fast food establishments and restaurants. The exclusion states that food sold by a retail establishment whose gross receipts derived from the sale of food for immediate consumption, constitutes more than 80% of the total gross receipts of the establishment, and is not eligible for the reduced rate.

Based on a review of net sales for the various locations, the Taxpayer's sale of food for immediate consumption does not total more than 80% of the total gross receipts. Therefore, pursuant to Va. Code § 58.1-611.1, the Taxpayer may apply the reduced rate to those food items qualifying under the Food Tax Reduction Program.

Based on this determination, the assessments will be revised to remove those sales qualifying for the Food Tax Reduction Program. Updated bills, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the assessments are paid within 30 days from the date of the bill.

The Code of Virginia section cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1198094666.i