After Virginia let governments and nonprofits buy meals exempt in 2016, what documentation does a caterer still need to treat those sales as tax-exempt?

Plain-English summary

The taxpayer runs a restaurant with a Virginia location and provides banquet and event catering. An audit found untaxed sales of food and catered meals made on invalid exemption certificates to a government entity and two nonprofits. The taxpayer relied on Virginia Tax Bulletin 16-3 (the 2016 policy that first allowed governments, nonprofits, and churches to buy prepared meals and catering exempt under §§ 58.1-609.1(4), 58.1-609.11, and 58.1-609.10(16)). The Commissioner upheld the tax on all three transactions because the documentation fell short.

• General rule. Under Va. Code § 58.1-623 A, every sale is taxable until the contrary is established, and the dealer bears that burden unless it holds a valid exemption certificate; a certificate can't be used beyond its exact wording (23 VAC 10-210-280 B).
• Federal (DOD) employee. VTB 16-3 did not change the rules for federal entities. A federal purchase of meals is exempt only if paid directly by the federal government on a required official purchase order or government credit card (23 VAC 10-210-690). The taxpayer offered only an employee ID card — no exemption certificate, purchase order, or proof of government payment — so the sale stayed taxable.
• Nonprofit #1. The certificate still carried the old language that the "exemption is not applicable to the purchase of taxable services, such as meals or lodging." After the April 22, 2016 change, the Department does not reissue nonprofit certificates for meals; instead a qualifying nonprofit must present a Department notice letter along with its certificate. No notice letter was provided, so the sale was taxable.
• Nonprofit #2. Only a partial exemption certificate was provided, and it was dated before VTB 16-3 — so it, too, needed a valid, complete certificate plus a Department notice letter. Missing that, the sale remained in the audit.

The assessment was correct (and had already been paid in full).

What this means for you

The 2016 change made prepared meals and catering eligible for exemption when sold to governments, nonprofits, and churches — but eligibility is not the same as proof. To keep a meal sale off your audit, collect the right paperwork at the time of sale:

• Federal government: an official purchase order and evidence the government itself paid (direct bill or government card). An employee's ID or a personal payment doesn't qualify.
• Nonprofits (for meals/catering): a valid, complete exemption certificate and the Department notice letter confirming the organization may buy prepared food exempt — especially where the certificate predates April 22, 2016 or still says it can't be used for "taxable services."

Keep these together with the invoice; a certificate that is incomplete, outdated, or unaccompanied by the notice letter will not protect the sale.

Common questions

Q: VTB 16-3 lets nonprofits buy meals exempt. Isn't their exemption certificate enough?
A: Not by itself for meals. The Department doesn't reissue nonprofit certificates for prepared food; the nonprofit must present a Department notice letter with its certificate, particularly if the certificate predates the April 22, 2016 change.

Q: A federal employee showed me a government ID. Can I sell the meal tax-free?
A: No. A federal purchase is exempt only if the government pays directly on an official purchase order or government card. An ID card, without proof of government payment, does not establish the exemption.

Q: My customer really was exempt. Why did I still owe the tax?
A: Because you couldn't document it. Sales are taxable until proven otherwise (§ 58.1-623 A), and the required certificates/notice letter and proof of government payment weren't provided at audit or on appeal.

Citations and references

• Va. Code § 58.1-623 A — all sales are taxable until the contrary is established; the dealer bears the burden absent a valid exemption certificate
• Va. Code § 58.1-609.1(4), § 58.1-609.11, § 58.1-609.10(16) — exemptions for government entities, nonprofit organizations, and nonprofit churches
• 23 VAC 10-210-280 B — reasonable care and judgment; a certificate cannot be used beyond its exact wording
• 23 VAC 10-210-690 — sales to the federal government exempt only when paid out of public funds on an official purchase order
• Virginia Tax Bulletin 16-3 (5/2/2016) — 2016 policy allowing exempt purchases of prepared meals/catering, with a Department notice letter for nonprofits

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-129

Original ruling text

July 21, 2020

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

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period January 1, 2015 through December 31, 2017.

FACTS

The Taxpayer operates restaurants with one location in Virginia. The Taxpayer provides banquet and event catering services. The Department’s audit disclosed that the Taxpayer made untaxed sales of food and catered meals to customers with invalid exemption certificates. The transactions at issue involve sales made to a government entity and two nonprofit entities. The Taxpayer cites Virginia Tax Bulletin (VTB) 16-3 (5/2/2016) to contest the transactions at issue.

DETERMINATION

Exemption Certificates

Generally, Virginia Code § 58.1-623 A provides:

All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 B further explains that:

Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate. [Emphasis added].

VTB 16-3

The Department issued VTB 16-3 to address the policy change related to the exempt purchase of meals and catering by nonprofit organizations, churches, and governmental entities. Prior to the Department’s policy change, nonprofit organizations, governmental entities, and churches were prohibited from using their sales and use tax exemption certificates to make exempt purchases of prepared meals and catering, as these categories of food were considered taxable services. Under the new policy, meals and catering are not subject to the tax in accordance with the statutory exemptions provided to state and local governmental entities and nonprofit organizations.

The Taxpayer cites the following portion of VTB 16-3 to support that the transactions at issues are exempt from the tax:

Effective for purchases made on and after April 22, 2016, state and local governmental entities, nonprofit organizations, and nonprofit churches may use their Retail Sales and Use Tax exemption certificates issued pursuant to Va. Code § 58.1-609.1(4), § 58.1-609.11, and § 58.1-609.10(16) to make exempt purchases of food and meals, as well as certain “taxable services” provided in connection with the provision of meals.

VTB 16-3 further provides the following:

Effective for purchases made on and after April 22, 2016, nonprofit organizations, state and local governmental entities, and churches may use their respective nonprofit exemption certificate, governmental exemption certificate, Form ST-12, and self-issued exemption certificate, Form ST-13A to purchase prepared foods, catering and related services provided in connection with the sale of food exempt of the sales and use tax.

Contested Transactions

* (Department of Defense)

This transaction involves the sale of catered meals to a civilian DOD employee. The issuance of VTB 16-3 did not change the Department’s policy as it relates to federal government entities. VTB 16-3 states, in part, that “[f]ederal governmental entities and employees traveling on government business remain exempt from the tax on their purchases of meals and catering, provided payment for the meals is made directly by the federal government pursuant to a required official purchase order to be paid out of public funds.” This policy is codified in Title 23 VAC 10-210-690 A, which provides the following:

Sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable …

Subsection B states that:

Purchases of meals, lodging, and other accommodations, by the federal government or its employees traveling on government business are exempt from the tax provided payment for the meals, lodging, or other accommodations is made directly by the federal government pursuant to an official purchase order ( e.g. , by direct billing to government or use of government credit card).

For this transaction, the Taxpayer did not provide an exemption certificate or the required proof of government payment. The Taxpayer provided a copy of an employee identification card, but this is not sufficient to determine whether this transaction is exempt. The Taxpayer was given the opportunity during the audit to provide an exemption certificate, purchase order, and proof of payment to determine the exempt status of this transaction. The necessary documents were not provided during the audit, nor were they submitted with the appeal. Accordingly, the transaction was properly included in the audit.

* (Nonprofit)

For this transaction involving the sale of catered meals, the documentation provided does not reflect the Department’s policy change. The certificate still states that the “exemption is not applicable to the purchase of taxable services, such as meals or lodging.” The following section of VTB 16-3 is applicable for the exemption documentation provided for this transaction:

Although the current nonprofit exemption certificate explicitly prohibits the use of the certificate to purchase taxable services exempt of the tax, at this time, the Department will not issue a new nonprofit exemption certificate to any nonprofit organizations that purchase qualifying prepared food, catering, and other related services. Instead, the Department will issue a notice letter that qualifying nonprofit organizations may present, along with their exemption certificates, when making purchases of prepared meals, food and catering. [Emphasis added].

The transaction was properly included in the audit. Pursuant to VTB 16-3, a notice letter from the Department following the April 22, 2016 policy change should accompany the exemption certificate.

* (Nonprofit)

For this transaction involving the sale of food and wine, only a portion of the exemption certificate was provided to the auditor and again with the appeal. This documentation is insufficient to determine the nature of the tangible personal property covered under the exemption certificate. In addition, because the certificate was prepared and dated prior to the issuance of VTB 16-3, a notice letter from the Department following the April 22, 2016 policy change should accompany a valid and complete exemption certificate. Accordingly, the transaction was properly included in the audit.

CONCLUSION

Based on this determination, the assessment is correct. No further action is required as the assessment has been paid in full.

The Code of Virginia sections, regulations, and tax bulletin 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 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/3290.G

Related Documents

16-3