Does a restaurant have to charge sales tax or communications tax on premium content fees (games, news, songs) charged through tabletop ordering devices?

Plain-English summary

A restaurant rolled out Android tablets at each table so customers could view the menu, order food and drinks, and pay their bill. The devices also let customers pay extra for "premium content" -- unlimited access to games, current news and social media, or song selection to play in the restaurant -- with that fee added as a line item on the food and beverage bill. The device vendor charged the restaurant a monthly service fee and, in some structures, a commission on the premium content revenue; in an alternative arrangement, the vendor kept the premium content fees up to a cap and split anything above that with the restaurant.

The Tax Commissioner ruled the devices are not "coin-operated amusement machines" for local license tax purposes under Va. Code § 58.1-3720, because that statute is limited to machines that take coins and has not been extended to credit/debit card payment. On the premium content fees, the Commissioner held they are charges for a service (access to content), and while services are generally exempt from Virginia retail sales tax unless sold in connection with tangible personal property, the premium content charges are not made in connection with the sale of food and beverage -- so they are not subject to sales tax even though they appear on the same bill. The fees also are not Internet access or communications services under Va. Code § 58.1-647, and the restaurant is not a "communications services provider," so the communications sales and use tax does not apply either. Finally, because the vendor -- not the restaurant -- retains title to the devices and does not charge the restaurant for their sale or rental, the vendor (not the restaurant) is the user/consumer of the devices and owes use tax on their cost price; the restaurant is not subject to use tax on the devices in that scenario. Monthly service fees and commissions paid to the vendor were likewise found not subject to sales tax, and commissions specifically do not meet the definition of a taxable "sale" because no tangible personal property changes hands.

What this means for you

Restaurants using tabletop ordering/entertainment devices

If you charge customers separately for premium content (games, news/social media, music selection) through tabletop devices, and that content fee is not made in connection with the sale of food and beverage, the ruling supports treating those fees as exempt services -- not taxable sales, rentals, or communications services -- even if the charge is bundled onto the same bill as the meal.

Restaurants that own the devices outright

The analysis changes if the restaurant, rather than the vendor, owns the devices. In that case the restaurant becomes the user/consumer of the devices and must pay tax on their cost price -- either sales tax charged by the seller or self-accrued use tax if the seller did not collect Virginia tax.

Device vendors leasing or servicing devices to restaurants

If you supply the devices and retain title without charging the restaurant a separate sale or rental fee, you (not the restaurant) are the taxable user/consumer of the devices and owe use tax on their cost price. Monthly service fees and commissions you collect from the restaurant for premium content are not payments for a taxable lease.

Accountants and tax professionals

The ruling turns on Virginia's rule that services are exempt from sales tax unless provided "in connection with" a sale of tangible personal property (Title 23 VAC 10-210-4040 A) -- here, the premium content charge and the food/beverage sale are treated as separate, unconnected transactions despite appearing on one bill. It also confirms that coin-operated amusement machine license tax under Va. Code § 58.1-3720 has not been read to cover card-based devices, and that commissions (with no transfer of tangible personal property) fall outside the sales tax definition of "sale."

Common questions

Q: Are fees for games, news, or music on restaurant tabletop devices subject to Virginia sales tax?
A: No. The Tax Commissioner ruled these premium content fees are for a service, and because that service is not provided in connection with the sale of food and beverage, they are not subject to the retail sales and use tax even though they appear as a line item on the customer's food and beverage bill.

Q: Are these fees subject to Virginia's communications sales and use tax instead?
A: No. The fees are not for Internet access or communications services as defined in Va. Code § 58.1-647, and the restaurant is not a registered communications services provider, so the communications tax does not apply.

Q: Is a tabletop ordering device a "coin-operated amusement machine" subject to local license tax?
A: No, based on the facts presented. Va. Code § 58.1-3720 uses the term "coin-operated," which has not been extended to devices that take credit or debit card payment. The ruling notes that questions about local license tax should be directed to the commissioner of revenue in the locality where the restaurant operates.

Q: Who owes use tax on the devices themselves?
A: It depends on who holds title. If the vendor retains title and does not charge the restaurant for a sale or rental of the devices, the vendor is the user/consumer and owes use tax on the devices' cost price -- not the restaurant. If the restaurant instead owns the devices, the restaurant owes the tax (either sales tax charged by the seller or self-accrued use tax).

Q: Are monthly service fees or commissions paid to the device vendor taxable?
A: No. Monthly service fees are analyzed the same as the premium content fees (exempt services), and commissions do not meet the sales tax definition of a "sale" because there is no transfer of tangible personal property, so they are not subject to retail sales and use tax.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-3720 (local license tax on coin-operated amusement machines)
• Va. Code § 58.1-603 (imposition of retail sales and use tax)
• Va. Code § 58.1-602 (definitions of "sale" and "sales price")
• Title 23 VAC 10-210-4040 A (services generally exempt unless provided in connection with a sale of tangible personal property)
• Va. Code § 58.1-647 (definitions of communications services, communications services provider, and Internet access service)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-166

Original ruling text

September 15, 2020

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of an anonymous client (the “Taxpayer”), in which you request a ruling on the application of the retail sales and use tax and the communications sales and use tax to mobile devices used in its restaurants. I apologize for the delay in responding to your request.

FACTS

The Taxpayer operates as a restaurant. The Taxpayer initiated a program at its restaurants using mobile point of sale devices (the “devices”) that will accommodate tabletop menu, ordering and payment. An Android tablet is placed at each table and provides pictures and detailed descriptions of the menu items. It allows customers to place drink, appetizer and entrée orders. The Taxpayer’s customers are also able to pay their bills through the devices. The devices also allow the Taxpayer the option to enhance the customer experience by providing access to premium content located on the device. The Taxpayer will charge separate fees for access to games, access to current news and social media and for song selections. The premium content fee will be included as a line item on the customer’s food and beverage bill.

The owner of the devices (the “Vendor”) charges the Taxpayer a monthly service fee for the use of the devices. In accordance with the service agreement entered into by the Vendor and the Taxpayer, the Taxpayer is responsible for the collection of the revenue generated by accessing the premium content and for the collection and remittance of any applicable state or local taxes imposed on the transactions. Additionally, the Vendor may also charge monthly commissions to the Taxpayer as a percentage of the game fee and the song fee. In this instance, the Taxpayer would be required to pay the Vendor a portion (or potentially all) of the revenue generated from the premium content fees.

In the alternative, the Vendor would not charge the Taxpayer a monthly service fee, but would instead receive from the Taxpayer all of the premium content fees up to a maximum amount, at which point, the Vendor would share the excess fees with the Taxpayer.

The service agreement that governs the use of the devices sets the terms regarding fees and payments in Appendix One. The appendix provides that the Taxpayer shall pay service fees (based upon the number of devices installed in the Taxpayer’s restaurants during the billing period), premium content fees, WIFI network access fees (if this service is requested), and promotions fees. The Vendor sends an invoice to the Taxpayer for the fees listed above.

The Taxpayer presents a number of questions regarding the application of the Virginia retail sales and use tax and the communications sales and use tax to the transactions at issue. The questions are addressed separately below.

RULING

Question 1

Based upon the information provided, would the device be viewed as a coin-operated amusement machine for the purposes of a local license tax under Virginia Code § 58.1-3720?

Virginia Code § 58.1-3720 A states that:

Any license tax imposed on amusement machines by any county, city or town shall be imposed in any amount not exceeding the sum of $200 for the operation of ten or more coin-operated amusement machines. For the operation of less than ten coin-operated amusement machines, any county, city or town shall have discretionary authority to impose on the operator such license tax less than $200 as is deemed appropriate. The term "amusement operator" means any person leasing, renting or otherwise furnishing or providing a coin-operated amusement machine in the county, city or town; however, the term "amusement operator" shall not include a person owning less than three such machines and operating such machines on property owned or leased by such person. Notwithstanding the situs requirements of § 58.1-3707, any county, city, or town may impose the license tax on the amusement operator when his coin-operated machines are located therein.

Based upon the information provided, it appears that the device is not deemed a coin-operated amusement machine as considered in Virginia Code § 58.1-3720. The statute uses the language “coin-operated”, and it does not appear that “coin-operated” has been expanded to include credit and debit card payments. For further guidance regarding the application of this local license tax, the Taxpayer should contact local Commissioners of Revenue where the Taxpayer’s restaurants are located.

Question 2

Based upon the information provided, would the following fees charged [to the Taxpayer’s customers] for access to the premium content described below be subject to sales tax or the communications sales and use tax:

a) Fee for unlimited access to games that are stored on the device; if so, are such fees properly categorized as a rental or license to use tangible personal property?

b) Fee for unlimited access to current news events and social media; if so, are such fees properly categorized as either Internet access or a telecommunications service?

c) Fees for songs that are selected to be played in the restaurant; if so, are such fees properly categorized as a rental or license to use tangible personal property, a digital product, or a telecommunications service?

Retail Sales and Use Tax

Virginia Code § 58.1-603 imposes the sales tax on the sale of tangible personal property. The tax is imposed on the gross sales price of each item of tangible personal property when sold at retail or distributed in Virginia.

Virginia Code § 58.1-602 defines sale, in pertinent part, “as any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration….”

Virginia Code § 58.1-602 also defines sales price, in pertinent part, as “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise ….”

Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A provides that:

Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.

The fees described in subsections a, b and c of this question are for the purchase of a service, access to the premium content included on the device. While the fees are included on the customer’s bill with food and beverage purchases, the purchase of the premium content is not made in connection with the provision of such food and beverage. Accordingly, the fees are not subject to the sales tax and should not be included in the taxable sales price.

Communication Sales and Use Tax

Virginia Code § 58.1-602 defines Internet service as “a service that enables users to access proprietary and other content, information electronic mail, and the Internet as part of a package of services sold to end-user subscribers.”

Virginia Code § 58.1-647 defines communications services as:

The electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for the transmission or conveyance. The term includes, but is not limited to, (i) the connection, movement, change, or termination of communications services; (ii) detailed billing of communications services; (iii) sale of directory listings in connection with a communications service; (iv) central office and custom calling features; (v) voice mail and other messaging services; and (vi) directory assistance.

Virginia Code § 58.1-647 defines communications services provider as “every person who provides communications services to customers in the Commonwealth and is or should be registered with the Department as a provider.”

Virginia Code § 58.1-647 defines Internet access service as:

a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. "Internet access service" does not include telecommunications services, except to the extent telecommunications services are purchased, used, or sold by a provider of Internet access to provide Internet access.

The fees described in subsections a, b and c of this question are not for services that are deemed Internet access services or communications services as defined in the aforementioned authorities. Further, the Taxpayer is not a communications service provider as defined in Virginia Code § 58.1-647, and thus unable to provide communications services to its customers. Accordingly, the fees are not subject to the Virginia communications sales tax.

Question 3

If a single premium content fee is charged for unlimited access to games stored on the device and unlimited access to current news events and social media, how will the Department view this single charge?

The single premium content fee is for the purchase of a service (the premium content). While the fee is included on the customer’s bill with food and beverage purchases, the purchase of the premium content is not made in connection with the provision of such food and beverage. Accordingly, the fee is not subject to the sales tax and should not be included in the taxable sales price.

Question 4

Are the premium content fees paid to the Vendor, who retains title to the devices, subject to tax as the rental of tangible personal property? If so, and the Vendor is not registered to collect and remit this tax, can the Taxpayer self-accrue use tax on the amount deemed as rental payments to the Vendor?

The premium content fees are not subject to the tax as addressed in the responses to Questions 2 and 3.

Virginia Code § 58.1-603 imposes the use tax on the use or consumption of tangible personal property. The tax is imposed on the cost price of each item of tangible personal property used or consumed in Virginia.

The devices are provided by the Vendor in order to allow the Taxpayer’s customers to access the premium content. Based on the information provided, it does not appear that the Vendor makes a charge to the Taxpayer for the sale or rental of the devices. If the Vendor retains title to the devices, and offers the devices to the Taxpayer in order to provide the premium content or any other services, the Vendor is deemed the user and consumer of the devices and is subject to the use tax on the cost price of the devices. The Taxpayer is not subject to the use tax in this instance.

Question 5

If any of the premium content fees are determined to be taxable, does the Department consider the Taxpayer’s use of each device to include both a license to use the device and a taxable business use, in which case both revenue streams would be subject to the tax?

No. See response to Question 4.

Question 6

Would the Taxpayer be subject to any additional registration or licensing requirements for each device, outside of the general sales and use tax registration or license?

The Taxpayer is not subject to any additional registration or requirements for each device.

Additional Questions

The Taxpayer asks if monthly service fees and commissions paid to the Vendor would be viewed as fees for a lease and subject to the sales tax. If determined to be fees for a lease, the Taxpayer asks whether the Taxpayer can self-accrue and remit the tax to the Department if the Vendor is not registered for the tax in Virginia. The Taxpayer asks if the result will change if the device is owned by the Taxpayer and not the Vendor.

See response to Question 2 and Question 3 with respect to the monthly service fees. Commissions generally do not meet the definition of a sale because there is no transfer of tangible personal property. Therefore, the charges for such are not subject to the retail sales and use tax.

If the Taxpayer is the owner of the devices, the Taxpayer would be deemed the user and consumer of the devices in connection with providing the premium content and any services to enhance its customers’ experience. As such, the Taxpayer would be required to pay the tax on the cost price of the devices. If the seller of the devices does not collect the Virginia sales tax on the sale to the Taxpayer, then the Taxpayer would be required to accrue the use tax and remit the same to the Department. See response to Question 4.

If the Vendor does not charge the Taxpayer a monthly service fee, but instead will receive from the Taxpayer all of the premium content fees, up to a maximum amount, will the premium content fees be viewed as a payment for the lease of the devices? The Taxpayer asks if the result will change if the device is owned by the Taxpayer and not the Vendor.

See response to the previous question.

The Taxpayer asks whether the fee charged to its customers to access premium content will be viewed as a lease/license to use the device or instead the game or software on the device.

See response to Question 2.

The Taxpayer asks whether premium content will be viewed as downloaded software when accessed by its customers on the devices or as tangible personal property.

See response to Question 2.

I hope the foregoing responds to your inquiries. 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 sections and regulation cited 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 response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***

Sincerely,

Craig M. Burns

Tax Commissioner

AR/627P