Were contracted college and military food-service programs BPOL retail businesses or professional and specialized occupations?

Subject

Contracted meal programs were services, while direct patron sales could be retail

Plain-English summary

Virginia upheld professional-and-specialized-occupation treatment for the contracted food-service programs but remanded direct college retail activity. The operator managed dining programs at two colleges and a military installation.

For meal-plan and military contracts, the institution paid the operator and was the customer. The meals delivered to students, staff, guests, or service members were part of the managed business service rather than direct retail sales to the diners.

The colleges also had locations where individual patrons paid directly and catering charges were collected. Those transactions appeared to meet the BPOL definition of retail sales. Virginia returned the case to the county to determine whether those retail activities were substantial and independently operable businesses requiring separate classification and adjustment.

The military-installation program remained fully classified as a professional and specialized occupation for 2003-2007.

What this means for you

• BPOL classification followed who bought the service and how gross receipts were earned.
• A food operation could look like a cafeteria but still be a managed service when an institution was the customer.
• Direct individual meal and catering sales could create a separate retail business.
• Virginia rejected use of the sales-tax "true object" test as a BPOL classification rule.

Common questions

Why were institutional meal-plan receipts treated as services?

The college or military paid under the contract; individual diners were not the operator's customers for those meals.

Did Virginia finally classify the college retail programs?

No. It remanded them for the county to determine whether the retail activities could operate independently and to adjust assessments if appropriate.

Citations and references

• Va. Code §§ 58.1-3703.1 and 58.1-3706(A).
• 23 VAC 10-500-10 and 10-500-350.
• 1994 Op. Va. Att'y Gen. 99.
• P.D. 98-188 and 99-88.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-93

Original ruling text

June 11, 2009

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational Licenses Tax

Dear *:

This state determination is issued upon the application for correction filed by * (the "Taxpayer") with the Department of Taxation. You appeal assessments of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by *** (the "County"), for tax years 2002 through 2007. I apologize for the delay in this response.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. That is, the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer operated food service programs at * (College A), (College B), and ** (Installation A). The County conducted a business license tax audit and changed the business classification of these facilities from restaurants to "professional and specialized occupations." Such business services are taxed at a higher rate than businesses making retail sales, including restaurants.

The Taxpayer appealed the reclassifications to the County. The County issued a final determination upholding the change in classification. In its determination, the County, citing Public Document (P.D.) 98-188 (11/10/1998) in support of the change, concluded that the true object of the contracts between the Taxpayer and the owners of the food service facilities at issue was the management of food service operations. The Taxpayer appeals the final local determination to the Tax Commissioner asserting, that it runs all levels of the food service operations resulting in retail sales.

ANALYSIS

Classification

The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to the classification of an enterprise. See Va. Code § 58.1-3706 A. These classifications are regulated under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 et seq . Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:

1. What is the nature of the enterprise's business?

2. How the enterprise generates gross receipts.

3. Where the enterprise conducts its business.

4. Who are the enterprise's customers?

5. How the enterprise holds itself out to the public.

6. The enterprise's NAICS code.

The Taxpayer argues that it provides more than management services for the food service programs at College A, College B, and Installation A. The Taxpayer asserts that it runs all levels of a restaurant operation that result in retail sales.

The County defended its assessments explaining the difference between a retail sale and a service activity hinges on the true object of the contract, citing the "true object test" enumerated in P.D. 98-188. This ruling was issued by the Department to address an issue with the Virginia retail sales and use tax. The "true object test" is a retail sales and use tax principle under Title 23 VAC 10-210-4040. There is no such principle in BPOL statutes or regulations.

Under Title VAC 10-500-10, a "retail sale" is defined as "a sale of goods, wares and merchandise for use or consumption by the purchaser or for any purpose other than resale by the purchaser, but does not include sales at wholesale to institutional, commercial, industrial, and governmental users that are classified as wholesale sales." No single factor, such as price, purpose, or place, can always distinguish between wholesale and other types of sales. However, Title 23 VAC 10-500-350 states that consideration should be given as to whether a sale is "to an individual consumer for the consumer's own personal use" or "to another merchant for resale."

In this case, the Taxpayer was clearly not making sales for resale. Thus, the issue becomes whether the Taxpayer was making sales to individual consumers for their own personal use or providing services to College A, College B, and Institution A.

Multiple Businesses

Virginia Code § 58.1-3703.1 A 1 provides that a separate license shall be required for each definite place of business and for each business a taxpayer is operating. Local tax officials are responsible for making the determination as to whether a taxpayer is engaged in a single business or in two businesses, each of which could operate independently of the other. In order to make this determination, the local tax official must be provided with documentation demonstrating the substantiality of each business. See 1994 Op. Va. Att'y Gen. 99.

The Department has previously addressed a case in which a service provider was making retail sales. In P.D. 99-88 (4/23/1999), a case in which an automobile service station was engaged in both the servicing of automobiles; and the sale of automotive parts, the Department found that the sale of parts directly used in the servicing of the automobile were to be regarded as a part of the business service and assessed accordingly. Those parts sold directly to customers and not involved in the servicing of an automobile were to be regarded as retail sales for purposes of the BPOL tax.

College A

During the tax years at issue, the Taxpayer was contracted to operate and manage the food services program at designated facilities on College A's campus. Based on the information provided, there is no question that the Taxpayer's operations were essentially the same as a restaurant or cafeteria.

Under the contracts, College A paid the Taxpayer a fixed fee and variable fee based on performance incentives. College A was the Taxpayer's customer, but did purchase meals for its own personal use. As with P.D. 99-88, the meals provided as part of College A's food service program were part of the business service and assessed accordingly.

Although not specifically addressed, it appears that, on occasion, the Taxpayer made retail sales to students, faculty, staff, employees, visitors, and guests invited to College A, who were not covered by the contract. The information provided is not sufficient to make a determination that the Taxpayer is operating a second business that could be operated separately from each other.

In addition, one of the contracts provided for a retail sales program at one location on College A's campus. The Taxpayer rented space from College A to provide this program. Under this contract, the Taxpayer charged individual patrons directly for meals provided at this location. In addition, catering functions were included under the retail sales program. The Taxpayer was responsible for collecting charges for College A sponsored catered functions. Sales made under these provisions of the contract appear to meet the definition of a retail sale. However, students were also permitted to charge meals under College A's dining plan. Charges for these meals were invoiced to College A and would not be considered to be retail sales.

College B

For the 2005 through 2007 tax years, College B retained the Taxpayer to manage and operate a food service program for its students, faculty, staff, employees, visitors, and invited guests. The contract grants the Taxpayer the authority to act as an agent for College B in the management of the food service operation. The responsibilities set forth in the contract and the evidence provided indicate that the Taxpayer's operations were essentially the same as a restaurant or cafeteria.

The primary source of remuneration under the contract was based on a set price per patron of the food service program. Separate daily rates were established for students, guests, faculty and staff. For these meals, College B was the Taxpayer's customer, but did purchase meals for its own personal use. As such, the meals provided under these provisions of College B's food service program were part of the business service and assessed accordingly.

The contract also provided for a retail sales program at several locations on College B's campus. The Taxpayer charged individual patrons directly for meals provided under this program. In addition, catering functions were included under the retail sales program. The Taxpayer was responsible for collecting charges for College B sponsored catered functions. Under the contract, College B received a commission on sales under the retail sales program. Sales made under these provisions of the contract meet the definition of a retail sale.

Installation A

The Taxpayer was under contract to provide all management, personnel, supervision, subsistence, and other items and services connected with performing a food service program at various installations for a branch of the United States military. For the tax years 2003 through 2007, one of these installations, Installation A, was located in the County. The activities conducted by the Taxpayer under this contract were substantially the same as those conducted by a restaurant or cafeteria.

The Taxpayer was compensated for the food service program based on a set price for the number of meals served at the military installations. Based on the contract, the branch of the United States military was the Taxpayer's customer, not the individuals who consumed the meals provided at Installation A. As such, the Taxpayer was not selling meals to the United States military. Instead, the meals were provided as part of a business service and assessed accordingly.

DETERMINATION

Based on the analysis, the food service program provided at Installation A was properly classified as a professional and specialized occupation under the County's ordinance. The assessments issued to the Taxpayer for Installation A for the 2003 through 2007 tax years are, therefore, upheld.

Further, the evidence indicates that the Taxpayer's businesses conducted at College A and College B were properly classified by the County as a professional and specialized occupation. However, the Taxpayer is also making retail sales from these locations.

Accordingly, the case will be returned to the County to determine if retail business activities conducted at College A and College B could have operated independently from the food service program. Once the retail portion of the business has been evaluated, the County should make any appropriate adjustments to the assessments for the tax years at issue.

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2294291697E