Did a hotel's management arrangement, long-term guests, or Chapter 11 filing invalidate its Virginia sales-tax assessment and officer conversion?

Subject

The Taxpayer operates as a hotel. The Taxpayer has filed Chapter 11 bankruptcy

Plain-English summary

Virginia upheld the hotel's sales-tax assessment and the conversion of its unpaid liability to the responsible partner. The hotel supplied no documents proving a management company operated the property during the disputed period, so it did not overcome the assessment's presumption of correctness.

The hotel also used the wrong lodging threshold. Virginia taxed accommodations furnished to transients for less than 90 continuous days, not less than 30 days. The taxpayer did not identify or document guests staying at least 90 days. Its timeshare concern did not change the audit because the Department said no timeshare sales had been assessed.

Finally, the hotel had failed to file many sales-tax returns before and during Chapter 11 and had not listed the Department as a creditor. The partner knew the business and nonfiling history and had authority to prevent the failure, satisfying the responsible-officer definition in Va. Code § 58.1-1813.

What this means for you

• Keep contracts and operating records proving who controlled and operated a hotel during each tax period.
• Under the law applied, a guest needed 90 continuous days to fall outside transient-accommodation sales tax.
• Bankruptcy does not by itself erase trust-type collection duties or responsible-person exposure.
• A partner or manager with knowledge and authority can be personally assessed for willful nonpayment.

Common questions

Q: Did a 30-day hotel stay avoid Virginia sales tax?
A: No. The ruling applied a 90-continuous-day threshold.

Q: Was tax assessed on timeshare sales?
A: No. The audit records showed no such assessment.

Q: Why was the partner personally liable?
A: The record showed knowledge of the business and missing returns plus authority to prevent the failure.

Citations and references

• Va. Code §§ 58.1-205, 58.1-603 4, 58.1-602, and 58.1-1813 A and B.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-130

Original ruling text

July 30, 2008

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period January 2000 through July 2006. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a hotel. The Taxpayer has filed Chapter 11 bankruptcy. The Taxpayer presents four issues in which it contests the audit assessment for the aforementioned period. Each issue will be addressed separately below.

DETERMINATION

Issue 1

The Taxpayer contends that it was charged sales tax for a period in which it did not operate the property. The Taxpayer represents that during the period February 2002 through October 2003, it was under a lease/purchase contract with a management company, and the management company operated the property during this period. The Taxpayer further represents that the management company defaulted on the contract in late 2003.

Virginia Code § 58.1-205 states, "[a]ny assessment of tax by the Department shall be deemed prima facie correct." The burden is on the taxpayer to prove that the tax has been incorrectly applied.

In this instance, the Taxpayer has not provided any documentation to support its contention that it did not operate the property during the period at issue. A member of my staff made several attempts to contact you to obtain such information; however, those attempts were not successful. The Taxpayer has not met its burden of proving that the tax was incorrectly assessed. Accordingly, the tax as assessed in regard to this issue is upheld.

Issue 2

The Taxpayer contends that it was held liable for sales tax on sales of timeshares. Based on a review of the audit report and information provided by the audit staff, the Taxpayer was not held liable for sales of timeshares.

Issue 3

The Taxpayer contends that it was assessed tax on sales of hotel accommodations in which the customer resided at the hotel for more than 30 consecutive days.

Virginia Code § 58.1-603 4 provides, in pertinent part, that the retail sales and use tax applies to "the proceeds derived from the sale or charges for rooms, lodgings, or accommodations furnished to transients as set out in the definition of 'retail sale' in 58.1-602."

Pursuant to Va. Code § 58.1-602, the terms "retail sale" and a "sale at retail" specifically include "the sale or charges for any room or rooms, lodgings, or accommodations furnished to transients for less than 90 continuous days by any hotel, motel, inn, tourist camp, tourist cabin, camping grounds, club, or any other place in which rooms, lodging, space, or accommodations are regularly furnished to transients for a consideration." [Emphasis added.]

Pursuant to Va. Code § 58.1-602, the retail sales and use tax applies to accommodations furnished to transients for less than 90 continuous days. In other words, in order not to be deemed a retail sale subject to the retail sales and use tax, accommodations must be furnished to the transient for a period of 90 continuous days or more. Clearly, the 30-day standard advanced in your letter is not appropriate for purposes of the application of the retail sales and use tax. What is not clear from the information provided is whether the Taxpayer had customers who stayed at its property for 90 continuous days or more. Pursuant to Va. Code § 58.1-205, the burden is upon the Taxpayer to prove that an exemption applies. The Taxpayer has not met that burden in this instance. Accordingly, there is no basis to adjust the tax as assessed.

Issue 4

You contend that the Taxpayer's assessment has been improperly converted to you and request that it be reverted. You represent that the property at issue was acquired by the Taxpayer from bankruptcy in 1991. You further represent that you have personally worked to make the asset profitable. You contend that during the time that the Taxpayer owned the property, you never received a distribution as a limited partner.

The Taxpayer filed Chapter 11 (reorganization) bankruptcy in January 2006. At the time that the Taxpayer filed for bankruptcy, it had not filed sales and use tax returns for the following periods: January through May 2000, July 2000, September 2000, January 2001, June 2001, August 2001 through December 2001, January through December 2002, January through December 2003, January through December 2004, and January through December 2005. The Taxpayer also did not file returns for the period January through July 2006. Pursuant to the audit workpapers, the Department of Taxation was not listed as a creditor in the bankruptcy filed by the Taxpayer because the Taxpayer did not advise the court of its potential retail sales and use tax liability.

Virginia Code § 58.1-1813 A states, "[a]ny corporate, partnership or limited liability officer who willfully fails to pay, collect or truthfully account for and pay over any tax administered by the Department of Taxation, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty of the amount of the tax evaded, or not paid, collected or accounted for and paid over, to be assessed and collected in the same manner as such taxes are assessed and collected."

Virginia Code § 58.1-1813 B defines the term "'corporate, partnership or limited liability officer' as "an officer or employee of a corporation, or a member, manager or employee of a partnership or limited liability company, who as such officer, employee, member or manager is under a duty to perform on behalf of the corporation, partnership or limited liability company the act in respect of which the violation occurs and who (1) had knowledge of the failure or attempt as set forth here and (2) had authority to prevent such failure or attempt."

It is clear from your statement about working toward making the Taxpayer a profitable business that you had knowledge of the Taxpayer's business operations, and that the returns had not been filed and the tax not remitted to the Department. Our records indicate that correspondence was sent to the Taxpayer regarding its non-filer status for several tax periods. Additionally, you are the only partner listed in the Department's accounting records for the Taxpayer. Therefore, it is clear that you had the authority to prevent such failure. Based on these facts, I find that you are a "corporate, partnership or limited liability officer" as defined in Va. Code § 58.1-1813, and that the Taxpayer's assessment was properly converted to you.

CONCLUSION

Based on the foregoing, the assessment is correct as issued. An updated bill, with interest accrued to date, will be mailed to you. The outstanding balance must be paid within 30 days of the bill date to avoid the accrual of additional interest charges.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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