Was a private country club's mandatory 20% service charge on banquet meals subject to Virginia sales tax?

Subject

Country-club banquet service charge was exempt up to 20%

Plain-English summary

Virginia held that the private country club's mandatory 20% banquet service charge was not subject to sales tax. The audit had wrongly treated the club's banquet activity as catering outside the restaurant exclusion.

Virginia's restaurant definition included any place where food is prepared for public service or where food is served, and the meals regulation applied broadly to businesses selling meals. The exclusion therefore covered the club's qualifying banquet service charges.

Only the portion of a mandatory gratuity or service charge above 20% of the meal price was taxable. Because the club had paid the audit bills, the assessments were returned for revision and the overpayments were to be refunded with interest.

What this means for you

• The ruling did not restrict the exclusion to conventional restaurants.
• A qualifying mandatory charge at 20% or less was excluded from taxable sales price.
• Only the excess above 20% was taxable under the rule applied here.

Citations and references

• Va. Code §§ 58.1-602 and 35.1-1 9; 23 VAC 10-210-930.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-10

Original ruling text

January 12, 2015

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

Dear *:

This will reply to your letter in which you seek the correction of assessments issued to * (the "Taxpayer") for the periods May 2010 through March 2014.

FACTS

The Taxpayer is a private country club. The Department audited and assessed the Taxpayer retail sales tax on untaxed mandatory service charges that were billed to banquet customers. The Taxpayer adds a 20% mandatory service charge to charges billed for all banquet and special events. The Taxpayer contests the assessment of sales tax on the mandatory service charges.

DETERMINATION

The contested service charge transactions were assessed in the Department's audit because the Taxpayer was deemed to be engaged in catering services with respect to the banquet sales made during the audit period. The Taxpayer's banquet sales of food, meals and beverages were not considered sales made by a restaurant in accordance with the statutory definition of sales price, which excludes from taxation certain mandatory gratuity and service charges. "Sales price" is defined in Va. Code § 58.1-602, in part, as:

the total amount for which tangible personal property or services are sold, including any services that are a part of the sale .... "Sales price" shall not include ... (v) that portion of the amount paid by the purchaser as a mandatory gratuity or service charge added by a restaurant to the price of a meal, but only to the extent that such mandatory gratuity or service charge does not exceed 20% of the price of the meal. (Emphasis added.)

The Taxpayer maintains that there is no statutory basis to assess the retail sales tax on mandatory service charges that do not exceed 20% of the total charge that is billed to customers for banquets and similar events. The Taxpayer contends that the Department's audit improperly limits the exemption for mandatory gratuity and service charges to restaurants only.

The Department recently issued Public Document (P.D.) 14-150 (8/27/14), which clarifies the application of the retail sales tax to mandatory gratuity and service charges. P.D. 14-150 discusses a taxpayer that was assessed retail sales tax on mandatory gratuity charges added to bills for banquets and similar events. This determination is on point with the Taxpayer's situation in that it addresses an assessment that was made by the Department based partly on the fact that the taxpayer was not a restaurant.

P.D. 14-150 states that the term "restaurant" is not defined in Title 58.1 of the Code of Virginia . However, P.D. 14-150 refers to the statutory definition of restaurant found in Va. Code § 35.1-1 9, which provides that a restaurant includes "any place where food is prepared for service to the public on or off the premises, or any place where food is served." Further, P.D. 14-150 cites the Department's meals regulation, Title 23 of the Virginia Administrative Code 10-210-930, and explains that the meals regulation is broadly applied to all types of businesses that sell meals. The policy set out in the meals regulation includes the application of the tax to gratuity and service charges billed by establishments that sell and serve food and meals.

Based on the statutory definition of restaurant, the Department's meals regulation and P.D. 14-150, the retail sales tax assessments on the mandatory service charges billed to customers by the Taxpayer is erroneous. Mandatory gratuity or service charges in excess of the statutory limit of 20% are taxable. In such cases, only the mandatory gratuity or service charges in excess of the 20% limit are subject to the tax.

CONCLUSION

Based on this determination, the audit will be returned to the appropriate field audit staff for revision. The audit staff will make the adjustments to the audit assessments as set out in this determination. The Department's records indicate that the Taxpayer has paid the audit bills in full. Therefore, refunds of the overpaid bill amounts, plus applicable interest, will be issued as soon as practicable.

The Code of Virginia sections, regulation and public document cited, along with other reference documents, are available on line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5874204205.S