Did a country club owe use tax when employees ate leftover banquet food for free and the club recorded an internal $2 meal allowance?

Subject

Free leftover employee meals created no second taxable transaction

Plain-English summary

Virginia found no additional taxable transaction when country-club employees ate leftover buffet and banquet food for free. The meals sold to patrons had already been subject to retail sales tax.

The club recorded a $2 meal allowance based on employee hours, whether or not an employee ate. Employees were not charged and their wages were not adjusted. Virginia treated the bookkeeping entry as an internal cost adjustment, not a separate sale, wage payment, or taxable use of the food.

The Department therefore abated the remaining assessment. It distinguished meals actually sold to employees, which the cited regulation treated differently.

What this means for you

• An internal accounting entry does not by itself create a taxable transaction.
• Free leftovers were different from meals sold to employees or furnished as compensation.
• Document that the underlying customer meals were taxed and employees paid nothing.
• Changes to pricing, wages, or employee meal policies can change the analysis.

Citations and references

• Va. Code §§ 58.1-602, 58.1-604.3, and 58.1-609.3 7.
• 23 VAC 10-210-930.
• Public Documents 94-60 and 01-94, discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-235

Original ruling text

December 19, 2013

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

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period August 2009 through December 2012.

FACTS

The Taxpayer operates a country club. The Taxpayer's facilities include a golf course, pro shop, museum and restaurant. The Department's audit disclosed untaxed assets, expenses and purchases. The expenses at issue are expenses the Taxpayer creates based on the number of employees working a set number of hours during group meal events. The Taxpayer allowed employees working during buffet and banquet events to consume the leftover food. The Taxpayer multiplies the number of employees present for the hours worked times a specific meal allowance amount of $2, regardless of whether the employees consumed the leftover food or not. The Taxpayer then makes adjusting journal entries to cost of food sold and employee meals. The employee is not charged the $2 meal charge and no adjustments are made to employee wages.

The Taxpayer disagrees with the auditor's taxation of the expenses at issue based on Public Documents 94-60 (3/15/94), 01-94 (8/2/01), and Title 23 of the Virginia Administrative Code (VAC) 10-210-930. The Department's auditor concluded that the Taxpayer's adjusting expenses were separate and distinct transactions from the previously taxed meals and subject to the use tax. The Taxpayer contends that the meals have been previously taxed as retail sales and any additional taxation is a duplicate tax on that food.

DETERMINATION

Virginia Code § 58.1-602 defines "use" to mean "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." Virginia Code § 58.1-604.3 provides that a tax will be imposed on the use or consumption of tangible personal property within the Commonwealth. Virginia Code § 58.1-604.3 3 also states that a transaction taxed under Va. Code § 58.1-603 (sales tax) should not also be taxed under this section, and the same transaction shall not be taxed more than once under either section.

The Taxpayer's sales of banquet or buffet style meals to restaurant patrons and guests were properly subjected to the retail sales tax. In most instances there was leftover food from these meals. The Taxpayer provided the leftover food to the employees free of any charges. The Taxpayer did not charge the employee for the leftover food and, in providing the meals free of charge to the employees, has no cost which can made a part of employees' wages. Since the employees are not charged for the meals and there are no costs as part of the employee's wages, the Taxpayer's adjustment of its books for the meal expense is an internal adjustment that is not a separate and distinct transaction and is not subject to the application of the retail sales or use tax. Based on the foregoing, the Taxpayer's expense created on its books does not represent any transaction that requires the application of the retail sales or use tax. Additionally, since the Taxpayer cannot exercise a right or power over food that has already been sold and taxed at the retail level, there is no basis for the application of the use tax.

Public Documents 94-60 and 01-94 and Title 23 VAC 10-210-930 address meals that are sold to employees and state that such meals are subject to the tax. Meals and drinks provided to employees free of charge are not subject to the tax. In this case, the food is not sold to the employees.

The audit also cites Va. Code § 58.1-609.3 7 as a basis for imposing the tax. This provision provides that meals furnished by restaurants and food service operators to employees as a part of wages are exempt from the tax. The fact that the meals at issue are not part of the employees' wages does not, in this case, render them taxable. There is no separate and distinct transaction between the Taxpayer and the employees on which to impose the tax. As previously mentioned, the meals were sold to the Taxpayer's customers at the retail level and the Taxpayer could not exercise a right or power over the food.

Based on the foregoing, I find cause in this instance for the abatement of the balance of the Department's assessment.

The Code of Virginia sections, regulations and public documents cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov . If you have any questions regarding this determination, please contact * of the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5408735949.Q