Could a seller accept nonprofit or school exemption certificates for bulk prepared food delivered without serving staff to schools and day-care providers?

Subject

Sells hot/cold bulk foods to private schools, church affiliated schools and day care providers.

Plain-English summary

Virginia treated the seller's hot and cold bulk food as tangible personal property, not a taxable catering service, so qualifying schools and day-care providers could use applicable exemption certificates. The seller prepared food in volume, delivered it in reusable bulk containers, and supplied no serving staff or individual portions. The customers then controlled, portioned, plated, and served the meals to children or students.

That level of dominion and control made the school or day-care provider the user or consumer of the food as part of its official function. The audit had to remove sales supported by valid exemption certificates accepted in good faith. Incomplete, invalid, infirm, or facially inconsistent certificates remained unacceptable.

The ruling distinguished resale. Meals included in tuition or general fees were not resold because the school or day-care provider was consuming the food while providing services. If meals were separately charged to students or children, the provider could be making retail food sales and could give the seller a valid Form ST-10. The government-subsidized school-lunch exemption applied to the school's sale to pupils and employees, not directly to the seller's sale to the school.

What this means for you

• Bulk preparation and delivery do not automatically make a food vendor a caterer when the customer takes control and performs the actual meal service.
• Confirm the purchaser's specific exemption and obtain a complete, facially valid certificate in good faith.
• Whether food is purchased for consumption or resale depends on how the school or day-care provider charges for and supplies the meals.
• Keep certificates and facts showing who portions, serves, supervises, and controls the food.

Common questions

Q: Why was the food treated as tangible personal property?
A: The seller delivered bulk food without service staff, while the schools and day-care providers controlled, portioned, and served it.

Q: Were all sales to nonprofit customers automatically exempt?
A: No. The customer had to qualify under an applicable exemption and provide a valid certificate accepted in good faith.

Q: Were meals included in tuition purchases for resale?
A: No. In that situation the school or provider consumed the food in delivering its educational or care services.

Q: When could the resale exemption apply?
A: When the school or day-care provider separately charged for meals and was itself making retail food sales, supported by a valid Form ST-10.

Citations and references

• Va. Code §§ 58.1-602, 58.1-623, and 58.1-609.10 8 and 16.
• 23 VAC 10-210-280.
• Chesapeake Hospital Authority v. Commonwealth, 262 Va. 551, 554 S.E.2d 55 (2001).
• Attorney General Opinion 67-70 (May 14, 1970).
• P.D. 96-196 (Aug. 14, 1996), P.D. 96-98 (May 24, 1996), and P.D. 87-245 (Nov. 4, 1987).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-158

Original ruling text

August 29, 2008

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 assessment issued to * (the "Taxpayer) for the period of January 2004 through June 2006. I apologize for the delay in responding to, your appeal.

FACTS

The Taxpayer contracts to sell hot and cold bulk foods to private schools, church affiliated schools and day care providers. Most of these customers are nonprofit organizations and qualify for exemption from income tax under Internal Revenue Code § 501(c)(3). The Department audited the Taxpayer and assessed retail sales tax on the Taxpayer's untaxed sales of food to customers that had claimed various exemptions from the sales and use tax. The auditor determined that the Taxpayer was operating as a caterer and treated the disputed transactions as sales of taxable services. Based on the Department's current policy, exemption certificates taken from many customers were not considered valid because the exemptions claimed were applicable to purchases of tangible personal property but not to services.

The Taxpayer also maintains that its treatment in this audit was not consistent with that of prior audits conducted by the Department on a predecessor company. In prior audits of the predecessor company, the Department treated the same types of transactions as sales of tangible personal property and accepted valid exemption certificates for untaxed sales.

DETERMINATION

Food Is Tangible Personal Property

The Taxpayer prepares food in volume batches at its facility. Food preparation includes cooking, counting and sorting food items and packaging the food in bulk containers. The volume of prepared food is based on the number of children or students for which each customer is responsible for providing meals. The Taxpayer delivers the bulk food to customers in reusable containers. The hot food is placed in warming units at the customer's location. Cold foods such as milk, fresh or canned fruit and bread are placed in the customer's refrigerator or on a counter, as appropriate. The Taxpayer does not provide staff to serve the food, and the food is not packaged or provided in individual servings to customers.

The primary issue in this appeal concerns the audit treatment of the Taxpayer's sales of bulk prepared food to schools and day care providers as sales of taxable services. The Taxpayer contends that its sales of food are sales of tangible personal property. If the Department agrees with the Taxpayer's contention, certain exemption certificates that were not allowed in the audit are valid and the audit should be adjusted.

The Virginia Attorney General has concluded that food items are tangible personal property. See Attorney General Opinion 67-70 (May 14, 1970). In Chesapeake Hospital Authority v. Commonwealth , 262 Va. 551, 554 S.E.2d 55 (2001), the Virginia Supreme Court concurred that food is tangible personal property. In Public Document ("P.D.") 91-140 (7/30/91), the Tax Commissioner states that food is tangible personal property. The Tax Commissioner also states in P.D. 84-227 (11/7/84) that meals are subject to the sales and use tax based on the definition of "sale" in Va. Code § 58.1-602. "Sale" is defined, in part, as "the furnishing, preparing, or serving for a consideration of any tangible personal property consumed on the premises of the person furnishing, preparing, or serving such tangible personal property." Clearly, the definition of sale contemplates food to be tangible personal property.

Taxation of Food

The Virginia Supreme Court's opinion in Chesapeake Hospital Authority v. Commonwealth noted that in rulings regarding the taxation of food or meals, the Tax Commissioner has looked to who was the actual consumer of the food or the meals to determine if the purchase of food qualifies for exemption. For example, in cases where catered meals are provided to state or local government agencies for banquets, meetings, parties or similar functions, the Tax Commissioner has ruled that the food served at such events is consumed by the individuals attending the event rather than the government agency holding the event. Thus, the food is subject to taxation.

However, the Tax Commissioner has agreed that exemptions for tangible personal property apply to food provided by a qualifying school, nonprofit organization or government agency to individuals as part of the official function of the school, organization or government agency. In such cases, the school, organization or government agency exercises sufficient dominion and control over the food to consider it the user or consumer of the food. This is because the organization is required to provide the food or meals to individuals as part of its official function or operation.

In P.D. 87-245 (11/4/87), the Tax Commissioner ruled a political subdivision of Virginia could purchase food served to jail inmates exempt of the sales and use tax. The local government was responsible for feeding the jail inmates. For this reason, the local government exercised sufficient rights or powers over the food to consider it the user or consumer of the food. Thus, the government exemption on purchases of tangible personal property applied to the purchase of the food.

In P.D. 96-196 (8/14/96), the Tax Commissioner ruled that the sale of box lunches to a church affiliated school that served the lunches to students qualified for the exemption for churches in Va. Code § 58.1-609.10 16 (formerly Va. Code 58.1-609.8 2). In P.D. 96-98 (5/24/96), the Tax Commissioner agreed that food purchased by a nonprofit college from a caterer would qualify for exemption when the food was provided to students as part of a meal plan that was included in the students' tuition. On the other hand, this same ruling explains that if the food purchased from the caterer is served at meetings, alumnae functions and similar activities, the purchase of the food is taxable because the college exercises no control over the food consumed by the individuals attending these events.

It is evident from the documents cited above, that when determining whether purchases of food qualify for a sales and use tax exemption, the Department looks to the degree of use or power exercised over the food. If substantial control over the food is exercised, the Department agrees that the food may be purchased under a retail sales and use tax exemption that applies to purchases of tangible personal property.

The food sold by the Taxpayer is not served to the persons consuming the food but is placed under the care and supervision of the school or day care that purchases the food. The school or daycare is then responsible for providing the food in the form of individual meals to the children or students under their care. The Taxpayer's customers prepare the food for individual consumption by determining the portions to be served, sorting the food into individual servings, placing the food items on plates or in containers and serving the food to the students or children. The schools and daycares exercise sufficient dominion and control over the food to qualify for applicable exemptions on their purchases of food. Based on the business functions of the Taxpayer's customers and the fact these functions include the provision of meals, the customers may purchase bulk food from the Taxpayer exempt of the tax if an applicable exemption applies to their purchases.

Good Faith Acceptance of Exemption Certificates

Based on the determination above, the Taxpayer may accept valid and complete exemption certificates for exempt sales of food to those customers that qualify for a sales and use tax exemption on purchases of tangible personal property. The proper use of exemption certificates is addressed in Title 23 of the Virginia Administrative Code (VAC) 10-­210-280. Paragraph A of this regulation provides that the dealer bears the burden of proving that the tax does not apply to retail sales unless the dealer takes, in good faith from the purchaser, an exemption certificate indicating that the property is exempt under the law. A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable. The same regulation states in Paragraph B that the dealer must exercise reasonable care and judgment when receiving certificates.

The Taxpayer accepted various exemption certificates from customers for sales that are included in the audit. Based on the regulation cited above, the Taxpayer's audit will be adjusted to reflect the removal of those sales in which the Taxpayer accepted valid exemption certificates in good faith from its customers. I will have the auditor contact the Taxpayer to facilitate the review of the exemption certificates. When this review is completed, the audit will be revised accordingly. The Taxpayer should note that exemption certificates received from customers that are incomplete, invalid, infirm or inconsistent will not be accepted and sales to those customers will remain in the audit.

Sales for Resale

The Taxpayer contends that its sales of food should qualify for the resale exemption. In cases where the cost of meals is included in the tuition or fees charged by the school or daycare provider, this is not the case. See P. D. 90-139 (8/29/90) and P. D. 02-125 (10/6/02). The schools and daycare providers are providing services and are considered the consumer of all purchases made to provide their services. The transfer of meals to children or students in this situation is not considered a retail sale. Thus, the Taxpayer's sales are not sales for resale.

In cases where meals are provided by a school or daycare provider to students or children for a separate charge, the school or daycare provider is considered to be making retail sales of food and may make exempt purchases of food items from the Taxpayer using the resale exemption. A valid Form ST-10 should be obtained from the customer at the time of the exempt sale in accordance with the provisions of Va. Code § 58.1-623 and Title 23 VAC 10-210-280.

Government Subsidized Meals

Virginia Code § 58.1-609.10 8 provides an exemption from the sales and use tax for "[s]chool lunches sold and served to pupils and employees of schools and subsidized by government . . . ." The Taxpayer maintains that this exemption extends to its sales of food to qualifying schools. However, this interpretation is incorrect. The exemption is applicable to sales of government subsidized meals by the schools. Although the Taxpayer sells food to schools, it is the schools that sell school lunches to pupils and employees. The Taxpayer receives payment from the schools for the schools' purchases of food. The pupils pay the schools for their meals. The exemption for school lunches relieves schools from the requirement to collect sales tax on their sales of school lunches and reduces the tax burden on the students. The Taxpayer's food sales to schools may qualify under exemptions for nonprofit organizations, churches and governments. In such cases, a valid exemption certificate should be obtained from the exempt customer.

CONCLUSION

The contested sales in which a valid exemption certificate was presented to and received in good faith by the Taxpayer will be removed from the audit. The other contested transactions for which an invalid exemption certificate or no certificate was received will remain in the audit. I note that the assessment has been paid in full. Accordingly, the audit liability will be recalculated and a refund of the overpaid tax and interest will be issued to the Taxpayer. Interest accrued from the date of the Taxpayer's payment will be added to the refund amount.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1094187538.S