Did Virginia's reduced food-tax rate apply to hospital meal-management fees or raw ingredients?

Plain-English summary

Virginia applied the general sales-tax rate to management fees tied to prepared patient meals, while raw ingredients could qualify for the reduced food rate when the facility retained title. The contractor operated patient and cafeteria food services for for-profit healthcare facilities.

The facilities were consumers of meals furnished as part of patient care. Prepared hot food sold for immediate consumption did not qualify for the reduced food rate, so management fees directly connected with those meals were taxed at the general rate.

Raw food used to prepare the meals could be purchased at the reduced rate when the healthcare facility—not merely the contractor—retained title to that food.

What this means for you

• Separate prepared-meal charges from raw-food purchases.
• Confirm who holds title to ingredients under the contract.
• Management fees directly connected with taxable prepared meals can follow the general rate.
• The ruling is specific to for-profit healthcare-facility meal arrangements.

Common questions

Q: Did patient meals qualify for the reduced food rate?
A: No. The ruling treated the prepared hot meals as immediate-consumption food at the general rate.

Q: When could raw ingredients use the reduced rate?
A: When the healthcare facility retained title to the food.

Citations and references

• Va. Code § 58.1-611.1.
• Virginia Tax Bulletin 05-7 (May 31, 2005).
• Virginia Public Documents 96-93 (May 16, 1996) and 01-10 (February 20, 2001).

Subject

Reduced rate for raw food applies when the facility retains title to the food

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-188

Original ruling text

November 28, 2011

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This reply is in response to your letter submitted on behalf of * (the ("Taxpayer"), in which you request a ruling regarding the proper tax rate applicable to management and labor fees charged to for-profit hospitals in conjunction with patient and cafeteria food services. I apologize for the delay in responding to your request.

FACTS

The Taxpayer provides food and facilities management services to for-profit healthcare facilities. The Taxpayer contracts with a healthcare facility to provide patient meals and cafeteria services. The Taxpayer's billings to the healthcare facility include labor charges for food preparation and management fees for the following services: operating and managing the nutrition and housekeeping departments, purchasing all food and food supplies, securing all permits, insurance and licenses and collecting and remitting all applicable taxes on behalf of the healthcare facility. Daily patient billings by the healthcare facility include the cost of the meals.

The Taxpayer cites Public Document (P.D.) 96-93 (5/16/96) and questions whether the labor and management fees it bills the healthcare facility for the preparation of patient meals qualify for the reduced sales tax rate under the Food Tax Rate Reduction Program.P. D. 11-188

RULING

Virginia Code § 58.1-611.1 establishes a reduced food tax on the sale of food purchased for human consumption as defined by the federal food stamp program. The federal definition includes most staple and grocery food items and cold prepared foods. Virginia Tax Bulletin 05-7 (5/31/05) asserts that food for human consumption shall not include "prepared hot foods sold for immediate consumption on and off premises."

In P.D. 96-93, the taxpayer, a for-profit hospital, was charged a management fee by a provider who operated and managed the taxpayer's food service facilities. The public document provides that management fees are taxable when they relate to the direct provision of food to for-profit hospitals that furnish meals to its patients as part of its overall services.

For-profit healthcare facilities are the consumers of the meals they provide to their patients as part of patient care. Accordingly, the Taxpayer is correct in its understanding that the general sales tax rate applies to its management fees billed in connection with the provision of patient meals because they are billed in conjunction with the sale of prepared hot meals sold for immediate consumption by the healthcare facility.

Although meals sold for immediate consumption do not qualify for the reduced rate, raw food products used by the Taxpayer to prepare meals for for-profit health care facilities may be purchased at the reduced food tax rate when the facility retains title to the food. See P.D. 01-10 (02/20/01).

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia section and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you haves any questions about this letter, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4100853407.M