Did a Virginia franchise-store operator prove that certain food sales qualified for the reduced sales-tax rate?

Subject

Taxpayer charged reduced sales tax rate on certain sales of food products at its locations

Plain-English summary

The franchise operator had not yet proved that the contested food sales qualified for Virginia's reduced rate. Under the law applied in the ruling, food sold by an establishment whose receipts from food prepared for immediate consumption exceeded 80% of total receipts was excluded from the reduced-rate definition.

The taxpayer supplied a study of packaged food, takeout, and phone-in orders, but did not give the auditor transaction-level records needed to verify it. Documents submitted on appeal also did not reconcile with the filed sales-tax returns or refute the assessment.

The Department nevertheless allowed another review. Audit staff would identify the necessary documents, and the taxpayer had 30 days after contact to provide them. The Department would also review proof that sales or use tax had already been paid on fixed-asset and purchase transactions and adjust the audit where supported.

What this means for you

• Eligibility for the reduced food rate was tested separately for each registered place of business under the cited rule.
• Summary studies were not enough when they could not be reconciled to returns and transactions.
• Detailed sales records were necessary to overcome the presumption that the audit was correct.
• Proof of tax already paid to vendors or directly to Virginia could support separate audit adjustments.

Common questions

Did the ruling finally deny the reduced food rate?

No. It found the existing proof insufficient but gave the taxpayer another 30-day documentation opportunity.

What happened if no further records were provided?

The assessment would be upheld as issued.

Citations and references

• Va. Code §§ 58.1-611.1, 58.1-612, 58.1-613, and 58.1-205.
• Virginia Tax Bulletin 05-7 and P.D. 07-122, cited by the taxpayer and discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-224

Original ruling text

September 22, 2010

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 2005 through December 2007. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates franchise stores in Virginia that sell a wide variety of food items, including dine-in meals. Relying on the determination in Public Document 07-122 (7/31/07), the Taxpayer contends that it correctly charged the reduced sales tax rate on certain sales of food products at its locations. The Taxpayer further contends there are transactions included in the audit on which it paid tax to its vendors or use tax directly to the Department.

DETERMINATION

80 Percent Exclusion Rule

The Taxpayer asserts that, pursuant to Va. Code § 58.1-611.1 and Virginia Tax Bulletin 05-7 (5/31/05), it is an eligible establishment selling qualifying food, and is thus entitled to charge the reduced food tax rate on eligible food sold at its establishments. Accordingly, the Taxpayer states that the tax assessed in the audit with respect to these sales is improper.

Virginia Code § 58.1-611.1 establishes the rate of tax on sales of food purchased for human consumption. Virginia Code § 58.1-611.1 C states:

For the purpose of this section, "food purchased for human consumption" shall not include food sold by any retail establishment where the gross receipts derived from the sale of food prepared by such retail establishment for immediate consumption on or off the premises of the retail establishment constitutes more than 80 percent of the total gross receipts of that retail establishment, including but not limited to motor fuel purchases, regardless of whether such prepared food is consumed on the premises of that retail establishment. For purposes of this section, "retail establishment" means each place of business for which any "dealer," as defined in § 58.1-612, is required to apply for and receive a certificate of registration pursuant to § 58.1-613.

Virginia Code § 58.1-205 states, "Any assessment of a tax by the Department shall be deemed prima facie correct." The burden of proving that the assessment of tax is incorrect rests with the taxpayer.

During the performance of the audit, the Taxpayer provided a study of several of its stores that provided the percentage of packaged food, take-out and phone-in orders sold. The Taxpayer did not provide detailed documentation regarding the transactions at issue, rendering the audit staff unable to verify the information presented in the study. Accordingly, the audit was assessed based upon the Taxpayer's sales tax returns. The Taxpayer provided documentation with its appeal to support its contention that the assessment related to the sales at issue is incorrect. However, the documentation provided by the Taxpayer does not refute the tax assessed in the audit, nor does the information reconcile with the sales tax returns filed by the Taxpayer. Accordingly, the Taxpayer has not met its burden of proving that the tax assessed, with respect to the transactions at issue, is incorrect.

The Taxpayer will be given the opportunity to provide additional detailed documentation regarding these sales transactions to the Department for review. The Taxpayer will be contacted by a member of the Department's audit staff regarding the documentation required for review. The Taxpayer will be required to provide the necessary documentation to the audit staff within 30 days from the date of such contact. The documentation will be reviewed and adjustments will be made to the audit assessment as warranted. If the documentation is not provided within the allotted time, it will be presumed that the Taxpayer has no further documentation to provide, and the assessment will be upheld as issued.

Assets and Purchases

The Taxpayer maintains that it paid sales or use tax on various transactions reflected in the Fixed Assets and Purchases exceptions lists. The Taxpayer has provided documentation to support its contention that the tax has been paid on the transactions at issue. The documentation will be reviewed by the Department's audit staff and adjustments to the audit assessment will be made as warranted.

The Code of Virginia sections, tax bulletin and public document 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,

Linda D. Foster

Deputy Tax Commissioner

AR/1-3659185840.P