Could a restaurant use Virginia's reduced food sales-tax rate and avoid tax and interest because it had not collected the full rate?

Subject

Restaurant was excluded from Virginia's reduced food sales-tax rate

Plain-English summary

Virginia upheld the full-rate sales-tax assessment against a restaurant. Although qualifying food for home consumption received a reduced rate, the statute excluded a food establishment when more than 80% of its gross receipts came from food sold for immediate consumption. The Department said that exclusion applied to this restaurant.

The restaurant argued that it had not collected the higher tax from its customers. That did not remove the liability: Virginia law made the dealer responsible for tax it failed to collect. The Department also refused to waive interest because the statute required interest on the assessment and treated it as compensation for the use of money, not a penalty.

The ruling noted a separate collection option. If paying the assessment created financial hardship, the restaurant could submit an offer in compromise based on doubtful collectibility with the required financial information.

What this means for you

• A food item can fit the home-consumption definition yet lose the reduced rate because of the seller's restaurant or immediate-consumption receipts.
• Failing to charge a customer does not shift Virginia sales-tax liability away from the dealer.
• Audit interest was mandatory under the cited rule; financial hardship instead belonged in the offer-in-compromise process.

Common questions

Did cold or takeout food automatically receive the reduced rate?

No. The ruling described cold packaged food as potentially eligible food for home consumption, but the separate restaurant exclusion controlled this taxpayer's sales.

Why did the restaurant owe tax it never collected?

Va. Code § 58.1-625 made a dealer that failed to collect tax liable to pay it.

Could the Department waive the audit interest?

Not on the grounds presented. The ruling said Va. Code § 58.1-1812 mandated interest.

Citations and references

• Va. Code §§ 58.1-611.1, 58.1-625, 58.1-1812, and 58.1-105.
• 7 U.S.C. § 2012.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-32

Original ruling text

March 31, 2009

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 September 2004 through August 2007. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a restaurant and was assessed tax and interest 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 to its sales of food rather than the reduced rate. The auditor assessed the difference in the tax rates. The Taxpayer requests waiver of the tax and interest because it did not charge and collect the general sales tax from its customers.

DETERMINATION

Food Tax Reduction Program

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.

Exclusion for Certain Food Establishments

In 2002, the General Assembly amended Va. Code § 58.1-611.1 C to include 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 is not eligible for the reduced rate. This exclusion applies to the Taxpayer's business operation.

The Department notified taxpayers of the new rule through the ST-9 coupon booklet. The information was clearly stated in the coupon booklet and mailed to all registered dealers. The Taxpayer should have followed the instructions printed in the ST-9 coupon booklet and collected and remitted the full amount of tax on all its sales.

Taxpayer Responsibilities

Virginia Code § 58.1-625 states, "The tax levied by this chapter shall be paid by the dealer, but the dealer shall separately state the amount of the tax and add such tax to the sales price or charge." The statute further provides that "[a]ny dealer who neglects, fails, or refuses to collect such tax upon every taxable sale, distribution, lease, or storage of tangible personal property made by him, his agents, or employees shall be liable for and pay the tax himself . . . ." The Taxpayer received sufficient notification of the above tax application and is under a duty to ensure that the proper amount of tax is collected and remitted to the Department. Accordingly, the tax as assessed is correct.

Interest

Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. There is no basis to waive the interest assessed as a result of the Department's audit.

CONCLUSION

Based on the foregoing, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days from the bill date to avoid additional interest charges.

The Taxpayer claims that upholding the assessment may create a financial hardship. The Taxpayer may submit an offer in compromise to the Department based on doubtful collectibility pursuant to Va. Code § 58.1-105. Such offer must be submitted using the Department's Form OIC-BUS, which is available on-line at www.tax.virginia.gov in the Business Form and Instructions section of the Department's web site. The offer must be accompanied by a current financial information statement. If you have any questions about making an offer, you may contact the Department's Collections Unit at (804) 367-8045.

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 determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2241676630.T