Could a restaurant use Virginia's reduced food rate for hot takeout meals after collecting the full rate from customers?

Subject

Restaurant owed full tax collected on hot takeout food, plus penalties and interest

Plain-English summary

Virginia upheld the entire assessment because the restaurant sold hot meals and beverages, collected sales tax at 5%, and remitted only the 2.5% reduced food rate. Takeout status and the customer's choice to reheat the food did not turn hot prepared meals into food for home consumption.

All sales tax collected by a dealer was held in trust for the Commonwealth. Confusion about the return or the Department's failure to identify the reporting error earlier did not excuse underremitting tax. The Form ST-9 instructions directed hot prepared food to the general-rate lines and provided a customer-service number.

Virginia also sustained every addition and collection step. The compliance penalty was mandatory for collected tax not remitted. A 20% amnesty penalty applied to unpaid eligible periods through March 2009. Interest was required because the restaurant retained money due the state.

The Department had sent a bill notice warning of collection action, waited beyond 30 days, and then placed a lien on the restaurant's bank account. The lien was authorized, and the bank's administrative charge was a matter between the restaurant and the bank.

What this means for you

• Hot prepared meals do not qualify for the reduced home-consumption food rate under the rule applied here.
• Tax collected from customers must be remitted even if the underlying rate was misunderstood.
• Filing confusion does not shift the dealer's compliance responsibility to the Department.
• Collected-but-unremitted tax can trigger mandatory penalties, interest, and collection action.

Common questions

Did takeout food qualify for the reduced rate?

No. The meals and beverages were hot when sold for immediate consumption.

Why was the compliance penalty not waived?

The regulation made it mandatory when a dealer collected sales tax but failed to remit it.

Was the bank lien premature?

No. Virginia issued it after notice and more than 30 days after the assessment became due.

Citations and references

• Va. Code §§ 58.1-611.1, 58.1-625, 58.1-1840.1, 58.1-1812, and 58.1-1805.
• 23 VAC 10-210-2032.
• Virginia Tax Bulletin 05-7 (P.D. 05-78).
• 7 U.S.C. § 2012, as cited in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-106

Original ruling text

June 14, 2011

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

Dear *:

This reply is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period August 2007 through December 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a restaurant. The Taxpayer collected sales tax at the 5% rate on its sales of food and remitted tax at a 2.5% rate to the Department. The Taxpayer was assessed for the difference between its collected and unremitted sales tax.

The Taxpayer contends that it only sells food for home consumption and is being assessed as a restaurant in error. In addition, the Taxpayer states that it was confused as to the correct filing procedures and believes its reporting error should have been discovered earlier by the Department, thereby avoiding the assessment of penalties and interest.

DETERMINATION

Reduced Sales and Use Tax Food Rate

Virginia Code § 58.1-611.1 provides that food purchased for home consumption has the same meaning as "food" defined in the Food Stamp Act of 1977, 7, U.S.C. § 2012. Virginia Tax Bulletin 05-7 (Public Document 05-78 5/31/05) generally excludes from the definition of food for home consumption, hot meals and hot beverages sold for immediate consumption on or off the premises.

Although the Taxpayer argues that its food is sold as take-out and must be reheated by the customer to enjoy its full flavor, this has no bearing on whether it is considered to be for home consumption. The Taxpayer sells meals and beverages that are hot when purchased. As directed in the cited tax bulletin, hot meals and beverages sold for immediate consumption do not qualify for the reduced food tax rate.

Tax Collected but Not Remitted

During the audit, it was determined that the Taxpayer collected sales tax at the general 5% sales tax rate. However, the Taxpayer remitted the sales tax at the reduced food tax rate.

Virginia Code § 58.1-625 instructs that all dealers must collect the tax on sales to purchasers, consumers or lessees and must remit the tax to the Department. "All sums collected by a dealer ... shall be deemed to be held in trust for the Commonwealth." In accordance with Va. Code § 58.1-625, a dealer must remit to the Department all tax that it collects.

Although the Taxpayer does not agree with the assessment, it argues that if it did underreport sales tax, it was the Department's responsibility to notify it of its error. The Taxpayer believes the Department's failure to recognize its reporting error within a reasonable time caused it to be assessed additional penalties and interest.

The Taxpayer's argument that it was unaware of its reporting error does not relieve it of the responsibility to correctly report and remit all tax collected. The Taxpayer should have proper controls in place to ensure the correct remittance of all taxes collected. Further, it is the responsibility of every registered dealer to be aware of the law and understand their reporting requirements. Based on the foregoing statute, the Taxpayer is required to remit the entire amount of tax collected to the Department. Accordingly, the tax assessed in the audit is correct.

Sales and Use Tax Return (ST-9)

Virginia Form ST-9 instructs "Food for home consumption by humans, as defined under the Food Stamp Act of 1977, 7 U.S.C. § 2012, qualifies for the reduced sales tax rate ... [S]pecifically excluded from the definition of food for home consumption are ... prepared hot foods sold for immediate consumption on and off the premises." The instructions direct the taxpayer to the Department's website for additional guidance regarding food for home consumption. The instructions also provide the contact number for Customer Service (804) 367-8037 if filing assistance is needed.

The Taxpayer contends that its reporting errors were due to the Virginia Form ST-9's unclear filing instructions. As the Taxpayer's food sales do not qualify for the reduced food tax rate, those sales should be included on Line 1 of the ST-9. Gross Purchases Subject to Use Tax on Line 2, are added to Gross Sales to arrive at the gross taxable amount. Exempt State Sales and Other Deductions entered on Line 3, reduce the gross taxable to amount to arrive at Total Taxable Sales on Line 4. The sales tax is calculated at the general rate on Lines 6 and 7. The instructions for completing the Form ST-9 are clear. If the Taxpayer became confused, the Customer Service number for assistance is included in the instructions.

Penalties

Compliance Penalty

In accordance with Title 23 of the Virginia Administrative Code 10-210-2032, the audit penalty is mandatory if the taxpayer has collected sales tax but failed to remit it to the Department. Because the Taxpayer failed to remit all the sales tax it collected, there is no basis to remove the compliance penalty from the assessment on this first generation audit.

Amnesty Penalty

Virginia Code § 58.1-1840.1 establishes that:

If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains any outstanding balance after the close of the Virginia Tax Amnesty Program because of nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply.

The amnesty eligible periods include any periods up to and including March 2009. Because the Taxpayer was found to be liable for unremitted taxes during these periods, the amnesty penalty was properly applied.

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. In this case, the Taxpayer had the use of money that was properly due the Commonwealth. Therefore, I find no basis to waive the interest assessed as a result of the Department's audit.

Tax Lien

Virginia Code § 58.1-1805 authorizes the imposition of alien for the collection of all taxes, penalties and interest assessed by the Department. The statute instructs that the lien may be filed 30 days after the assessment becomes due.

The Taxpayer protests the lien placed on its bank account for the collection of assessed amounts, as well as the fee charged by the bank to execute the lien of the Taxpayer's account.

The assessment issued to the Taxpayer was dated March 31, 2010. A consolidated bill notice requesting immediate action was sent to the Taxpayer on April 15, 2010. The notice informed the Taxpayer that pending legal actions were imminent if the assessment was not paid or the Department contacted immediately. On June 2, 2010, a lien was issued on the Taxpayer's bank account.

The Taxpayer failed to contact the Department regarding the assessed amounts due or of its intent to file an appeal. Accordingly, after the 30-day grace period, the Department was authorized to begin collection actions. The subsequent administrative fee charged by the bank for the execution of the lien is a matter between the Taxpayer and its bank. Therefore, I find no basis to return the assessed amounts or reimburse the Taxpayer for the fee charged by its bank.

CONCLUSION

Based on the foregoing, the assessment is correct as issued and there is no basis for relief. The Taxpayer will receive an updated bill for the outstanding balance, with interest accrued to date. The bill should be paid within 30 days from the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections, regulation and tax bulletin cited are available on­ line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4481567266.M