Must a Virginia restaurant copy diplomats' exemption cards, and which contested meals, purchases, penalties, and interest remained taxable?

Subject

Tax on meals sold to foreign diplomats; untaxed purchases of tangible personal property

Plain-English summary

The restaurant won part of its appeal, but not all of it. Virginia agreed that a dealer did not have to photocopy a diplomat's exemption card. The required record was the purchaser's exemption-card number. Because the restaurant had recorded numbers and later obtained U.S. Department of State validation for the sampled diplomats, the audit had to remove meals that could be identified as diplomatic sales.

Meals sold to churches stayed taxable. The cited nonprofit church exemption did not cover church meal purchases, and the restaurant's booklet did not let the auditor distinguish every church transaction from every embassy transaction.

The restaurant also failed to supply invoices and other proof needed to remove disputed purchases and assets. Disposable items furnished with meals can qualify for resale treatment, but taxable restaurant-use items do not; without an invoice allocating a combined purchase among chopsticks, tissue, and towels, the Department left it in the audit. Toiletries and other operating items remained taxable, as did assets unsupported by evidence of a business purchase or occasional sale.

The Commissioner conditionally waived the 20% post-amnesty penalty because the assessment had been appealed, provided the restaurant paid the revised tax and interest within 30 days of the revised bill or completed an approved payment plan. Interest itself could not be waived.

What this means for you

Restaurants serving diplomats

Record the exemption-card number with the transaction. Under the regulation applied here, keeping a photocopy of the card was not required.

Restaurants buying supplies and equipment

Keep invoices detailed enough to separate disposable items furnished with meals from toiletries, reusable supplies, equipment, and other items used by the restaurant. The taxpayer must prove an exemption.

Businesses contesting an amnesty-period audit

A penalty waiver may depend on prompt payment after the appeal is resolved. Mandatory assessment interest is different from a penalty and remained due here.

Common questions

Were all untaxed meals removed?

No. Only sales identifiable as validated diplomatic purchases were removed. Church meals remained taxable.

Were disposable chopsticks exempt?

They could be purchased exempt when furnished with meals, but the restaurant did not provide an invoice separating their price from the tissue and towels in the same purchase, so the purchase stayed in the audit.

Did the restaurant eliminate the post-amnesty penalty?

Conditionally. The 20% penalty was waived only if the revised liability was paid on the stated terms. Interest was not waived.

Citations and references

• 23 VAC 10-210-694.
• Va. Code § 58.1-609.10(16) and (2).
• 23 VAC 10-210-930 F.
• Va. Code § 58.1-1812.
• P.D. 09-140 and P.D. 09-175, as cited for the post-amnesty penalty.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-81

Original ruling text

May 26, 2011

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") to request correction of the retail sales and use tax assessment issued as a result of an audit for the period September 2007 through December 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a restaurant. An audit resulted in the assessment of use tax on untaxed purchases of tangible personal property. Sales tax was also assessed on untaxed meals sold to churches and foreign diplomats.

The Taxpayer contests the tax assessed on meals sold to foreign diplomats and asserts that it complied with the Department's diplomatic exemption regulation. The Taxpayer further asserts that the diplomatic exemption was disallowed by the auditor because copies of the diplomat's exemption cards were not in the restaurant's files. The Taxpayer also contests the expensed purchases and assets assessed in the audit.

DETERMINATION

Diplomatic Exemption

Title 23 of the Virginia Administrative Code (VAC) 10-210-694 is the Department's regulation on the diplomatic exemption and sets out the following:

Pursuant to the provisions of the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations, no sales or use tax is applicable to sales to or purchases by certain foreign diplomats or missions. Exemption cards are issued by the United States Department of State and bear a photograph and name of the diplomat eligible for exemption in the case of individual diplomat cards, and, in the case of mission cards, the person entitled to make official purchases for the mission. The extent to which an individual or mission is exempt from the tax is illustrated on the face of the card. 1

In order to qualify for exemption, the purchase must be made by the person to whom the card is issued. No exemption certificate is required; however, the record of the sale must indicate the exemption card number of the purchaser . 2 [Emphasis added.]

According to the Taxpayer, it verified the validity of each diplomat's exemption card and recorded the card's tax exemption number in a booklet. As a result of the audit, the Taxpayer contacted the U.S. Department of State (State) and validated the card users included in the two-month sales sample.

Based on the above cited regulation, it is not necessary for a dealer to make a copy of the diplomat tax exemption card and retain it. Rather, a dealer need only record the exemption card number of the purchaser on the record of the transaction, such as a copy of the invoice that it retains, or on an internal record for listing both the invoice number and the personal exemption card number of the foreign diplomat. Based on the State information provided, the audit will be revised to remove all meals sold to diplomatic personnel.

According to the auditor, the Taxpayer had informed him that some untaxed sales were made to churches. However, the nonprofit church exemption set out under Va. Code § 58.1-609.10 16 does not apply to meals purchased by churches. See Public Document 98-185 (11/5/98). Based on the Taxpayer's booklet used to record exempt sales, it was not possible for the auditor to differentiate between meals sold to churches and meals sold to embassy personnel. Only those sales exceptions that can be identified as sales to diplomatic personnel will be removed from the audit.

Expensed Purchases

In its appeal, the Taxpayer indicates that the other expenditures in question were submitted as Attachment #5. That attachment, however, was not furnished with the appeal. An analyst with the Department's Appeals and Rulings staff contacted the Taxpayer for a copy of such attachment but it has not been received. I understand that such attachment would have consisted of copies of the invoices for the expensed purchases included in the audit. Because the Department has not received this documentation, a decision cannot be made as to whether an exemption applies.

Title 23 VAC 10-210-930 is the Department's regulations on meals. Subsection F of such regulation sets out, in part, the following:

Paper doilies, paper placemats, plastic silverware, bags and similar items furnished with meals and which are disposed of after use by only one customer are also considered a part of a meal and can be purchased exempt under a Resale Certificate of Exemption. Other items purchased by a restaurant for its own use in preparing and serving meals, such as kitchen equipment, plates, glasses, silverware, tablecloths, and similar items are taxable and may not be purchased under a Certificate of Exemption.

The audit includes one purchase for chopsticks, tissue and towels. While the Taxpayer informed the Department's analyst that the chopsticks are disposable and furnished with meals, the Taxpayer is not sure about the other two items or how they were used. While such disposable chopsticks may be purchased exempt of the tax pursuant to the above cited regulation, such purchase cannot be removed from the audit without the purchase invoice showing the breakdown of the purchase price for each item. This information has not been provided. In regard to the tissue and towels, it is not known whether such items were disposable and furnished to customers as part of the meal. If so, they may be purchased exempt of the tax. If such items are reusable, they are taxable to the Taxpayer.

In regard to toiletries (bathroom tissue, soap, roll towels, paper or cloth towels, etc.), such items are not furnished with meals or billed separately. Rather, they are for the Taxpayer's use or consumption in operating a restaurant. As such, they are taxable to the Taxpayer. For the same reason, the other items (spoon covers, gas hose, skimmer, gas lighter, display cover, and guest check packets) are taxable to the Taxpayer.

Assets

The Taxpayer contests the tax assessed on several tangible assets, which were booked as a result of their initial purchase. While the Taxpayer claims these items were reflected in a 2007 settlement statement, there is no listing for furniture, equipment or any sort of tangible personal property on such settlement statement. Accordingly, no conclusive proof has been provided to establish that these assets were purchased as part of the purchase of the business. Furthermore, this is no evidence presented that these assets qualify for the occasional sale exemption set out in Va. Code § 58.1-609.10 2.

As a general rule, tangible assets purchased for use in a business are subject to taxation. It is the Taxpayer's responsibility to prove an exemption. Absent any convincing evidence that an exemption applies, the contested assets will remain in the audit.

Post-Amnesty Penalty

Pursuant to Section VI of P.D. 09-140 (9/28/09), any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% penalty. Section VI 1 of such public document provides that such penalty will not apply to assessments issued for additional amounts due on amnesty eligible returns, provided the liability is paid by December 5, 2009 or within 30 days from the date of assessment, whichever is later.

Because the Taxpayer had not paid the assessment within 30 days of the date of assessment, a 20% post-amnesty penalty was applied to the amnesty eligible tax liability. Notwithstanding, Section VI 6 of P.D. 09-140 (9/28/09), as amended by P.D. 09-175 (10/29/09), sets out that the 20% post-amnesty penalty will also not apply to:

Any assessment generated from a field audit of a business for an amnesty eligible period, provided that the audit is TAX's first audit of the taxpayer, no penalty has been applied to the tax deficiency, any uncontested liability is paid within 30 days from the date of assessment, and payment for any contested liability remaining upon resolution of an appeal under Va. Code §§ 58.1-1821 or 58.1-1825 is paid within 30 days from the date of the Tax Commissioner's final determination or the court's final determination.

Because the assessment was appealed, I will waive the 20% post-amnesty penalty applied in this case, provided the Taxpayer remits the revised liability (tax and interest) to the Department within 30 days of the revised bill date. If a payment plan is arranged with the Department, such penalty may be waived once all of the tax and interest owed is paid.

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 use of the money that was properly due the Commonwealth. Therefore, interest cannot be waived.

CONCLUSION

The audit will be revised in accordance with this determination. Once the revision is completed, an updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges and to receive the waiver of the post-amnesty penalty. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4533149328.R

1. In Public Document (P.D.) 09-179 (11/19/09), the Tax Commissioner noted that the Department of State had recently changed diplomat exemption cards so that the tax exempt information appears on the reverse side of tax exemption cards, rather than the front.

2. In P.D. 92-175 (9/10/92), the Tax Commissioner ruled that a Xerox copy of the diplomat exemption card must be kept by a hotel. In P.D. 95-17 (2/2/95), the Tax Commissioner reversed the policy of P.D. 92-175 by stating that a photocopy of the diplomat exemption card was not required by a hotel provided the personal exemption card number is indicated on the record of the sale. As such, the recordkeeping treatment of P.D. 95-17 is consistent with the regulation. Also see P.D. 95-322 (12/15/95).