What does Virginia Ruling of the Tax Commissioner P.D. 20-190 conclude about Use Tax: Fixed Asset Purchases - Legal Obligation Applies to Both Dealer and Purchaser, Purchases - Caterer Audit: Records - Expenses, Sampling Exemptions: Catering - Nonprofit Organizations, Churches, and Governments, Certificates - Reasonable Care Administration: Penalty - First Audit, Interest?

Plain-English summary

This ruling addresses an appeal by a Virginia restaurant that also does catering, after a retail sales and use tax audit of April 2015 through March 2018 found problems in three areas: fixed asset purchases, general expense purchases, and exempt sales. The taxpayer had already paid the assessment in full but appealed for a correction, and the Tax Commissioner upheld the audit in every respect the taxpayer raised.

On fixed assets, the taxpayer had bought many items from an online vendor that did not charge Virginia sales tax, and argued the vendor — not the taxpayer — should be on the hook. The Commissioner rejected this, citing United States v. Forst and Va. Code § 58.1-625 for the settled rule that while the seller is obligated to collect the tax, the tax itself is the purchaser's legal debt. Because the online sellers never collected the tax, the purchaser (the Taxpayer) remained responsible for it, and that part of the assessment was upheld.

On general expense purchases, the taxpayer wanted certain sampled items reclassified as fixed assets/leasehold improvements (to remove them from the sampling calculation) and separately argued that rented catering items like plates and flatware should not be taxable to a caterer. The Commissioner found the taxpayer never produced invoices proving the disputed items were isolated, non-recurring purchases, so there was no basis to pull them out of the sample. On the catering rental items, the regulation (23 VAC 10-210-930) confirms that renting such serving items to a customer isn't taxable to the caterer — but because the taxpayer again failed to produce supporting documentation, those purchase exceptions were upheld anyway for lack of proof.

On exempt sales, the audit flagged untaxed catered-meal sales to tax-exempt entities made before Virginia's April 22, 2016 policy change (announced in Virginia Tax Bulletin 16-3), which first allowed nonprofits, churches, and governments to use their exemption certificates for prepared meals and catering. Before that date, the exemption certificates on file didn't cover catering by their exact wording, so the Commissioner held the taxpayer had not exercised the "reasonable care" required by 23 VAC 10-210-280 and upheld those exceptions. The Commissioner also upheld the auditor's sample month and sample period as representative, upheld the interest under Va. Code § 58.1-1812 (mandatory, not a penalty), and noted that no compliance penalty had applied because it was the taxpayer's first audit, with the amnesty penalty already reversed once the taxpayer paid the assessment in full.

What this means for you

Restaurant and catering business owners

If your online vendors don't charge Virginia sales tax on purchases you use in your business, you — not the vendor — remain legally responsible for the unpaid use tax. This applies even to routine online purchases of equipment or supplies. Keep in mind that renting plates, flatware, and similar serving items to a catering customer is not itself taxable to you as the caterer, but you must be able to document that fact (and any other exception you dispute) with actual invoices — the Commissioner will uphold an assessment against undocumented claims even where the underlying legal point is correct.

Businesses that accept exemption certificates from nonprofits, churches, or governments

Before April 22, 2016, exemption certificates from nonprofits, churches, and governmental entities did not cover meals or catering by their exact wording, so accepting them for catered-meal sales before that date was not "good faith" reliance under 23 VAC 10-210-280 and left the seller liable for the tax. Since the policy shift (announced in VTB 16-3), those same entities may use their certificates for meals and catering — but always compare the class of items sold against the exact wording of any certificate you accept.

Accountants and tax professionals advising audited clients

To remove an item from an audit sample, a client must show with actual documentation (invoices, records) that the transaction was isolated and not part of normal operations — general assertions on appeal are not enough. Likewise, disputing a sample period or sample month requires evidence that the Department's chosen period is unrepresentative, not just an alternative calculation. Also note: an assessment is prima facie correct under Va. Code § 58.1-205 1, so the burden is on the taxpayer to disprove it, and interest under § 58.1-1812 is mandatory and not waivable as a "penalty."

Common questions

Q: If an online seller fails to charge Virginia sales tax, who owes the use tax?
A: The purchaser does. The Commissioner cited United States v. Forst and Va. Code § 58.1-625 for the rule that although the seller is legally obligated to collect the tax, the tax is the purchaser's legal debt, so Virginia can and did assess the use tax against the taxpayer here.

Q: Is renting plates and flatware to a catering customer taxable to the caterer?
A: No — 23 VAC 10-210-930 treats such items as used or consumed by the caterer (taxed when the caterer buys or leases them), not as a taxable rental to the customer. In this case, however, the taxpayer still lost on this point because it failed to provide invoices proving which purchases were the disputed rental items.

Q: Could the taxpayer use nonprofit/church/government exemption certificates for catered meals?
A: Only after April 22, 2016. Before that date (per Virginia Tax Bulletin 16-3), those certificates did not cover meals and catering by their exact wording, so accepting them for catered sales before the change was not accepted in good faith, and the resulting untaxed sales were properly assessed.

Q: Did the taxpayer get any relief in this ruling?
A: No penalty was imposed for it being the taxpayer's first audit, and an amnesty penalty was reversed once the taxpayer paid in full — but those outcomes predated the appeal. On every issue actually raised in the appeal (fixed assets, sampling, catering purchases, exempt sales, and interest), the Commissioner upheld the Department's original determination.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-625 (use tax is the legal debt of the purchaser)
• Va. Code § 58.1-623 A (burden of proof for exemption; exemption certificates)
• Va. Code § 58.1-205 1 (assessments deemed prima facie correct)
• Va. Code § 58.1-1812 (mandatory interest on assessments)
• 23 VAC 10-210-930 (taxable meals; tangible personal property used to serve meals)
• 23 VAC 10-210-280 A, B (exemption certificates; reasonable care)

Case law:

• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd 569 F.2d 811 (4th Cir. 1978)

Related Department guidance cited in the ruling:

• Virginia Tax Bulletin 16-3 (5/2/2016)
• Public Document 89-167 (5/22/1989)
• Public Document 16-194 (related document)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-190

Original ruling text

November 24, 2020

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax audit assessment issued to * (the "Taxpayer"), for the period of April 2015 through March 2018. I apologize for the delay in responding to your appeal. The assessment at issue has been paid in full.

FACTS

The Taxpayer is a restaurant that also provides catering services and is located in Virginia. The Department’s audit found exceptions in the following areas: fixed asset purchases, general expense purchases, and exempt sales. The Taxpayer disagrees with the tax assessed in these areas and raises many concerns about the audit findings. First, the Taxpayer believes that the use of the sampling methodology does not accurately reflect its general expense purchases and exempt sales. The Taxpayer believes that some of its general expense purchases should be reclassified as fixed assets or leasehold improvements to eliminate the sampling methodology. In addition, the Taxpayer takes issue with the application of various Virginia retail sales and use tax laws. Lastly, the Taxpayer believes its tax liability should not be subject to penalty and interest.

DETERMINATION

Fixed Asset Purchases

The Taxpayer affirms that many of its asset purchases during the audit period were made from an online vendor. The Taxpayer claims that it was unaware that sales tax was not being charged. The Taxpayer takes issue with the fact that the purchases become a buyers’ responsibility and believes that the vendor should be responsible for collecting the tax. Specifically, the Taxpayer asserts that online sellers should be responsible for collecting and remitting the appropriate tax on their sales.

Under long settled principles of sales and use tax law, the Department may seek payment of the tax from either the seller or the purchaser of tangible personal property. The case of United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977) aff'd, 569 F.2d 811 (4th Cir. 1978) held that while "the seller is legally obligated to collect the tax from the purchaser, the statute [ Virginia Code § 58.1-625] makes the tax the legal debt of the purchaser." Thus, the courts fully recognize that legal obligations apply to both the seller and the purchaser.

In this instance, the online sellers failed to collect and remit the tax on sales to the Taxpayer. Therefore, as the purchaser and in accordance with the cited case law and statute, the Taxpayer is legally responsible for the unpaid tax. As such, the use tax assessed in the audit with respect to these purchases is upheld.

General Expense Purchases

Purchases/Sampling

The Taxpayer believes that certain purchases included as exceptions and sampled within the audit should have been detailed as fixed asset purchases. The Taxpayer states that these purchases were used during a restaurant build out and the purchases would not occur on a recurring basis. The Taxpayer claims that the auditor did not consider the nature of the charges, only the taxation. The Taxpayer asks that the purchases be reclassified as leasehold improvements for the sake of eliminating the sample methodology.

The auditor entered purchase exceptions for credit card charges without proper documentation, untaxed combined shipping and handling charges, and untaxed purchases from both out-of-state and Virginia vendors. The Taxpayer was given six weeks to provide documentation showing proper taxation. In some instances, invoices were not provided to show the nature of the charge. The auditor notes that the line items listed as assets within the audit were items that the Taxpayer classified as assets on its federal income tax return or its internal general ledger. The items classified as purchases were retrieved from expense accounts during the audit.

For an item to be removed from the audit sample, the taxpayer must show that the transaction was isolated in nature and not a normal part of the taxpayer's operation.

In this case, the Taxpayer did not provide invoices with detailed information to determine the nature of each purchase. It cannot be determined whether these items are isolated in nature and unusual to the Taxpayer’s business operations. In the absence of evidence that the purchases are isolated in nature and not a normal part of the taxpayer’s business operations, I do not find a basis to eliminate the sample methodology in order to perform a detailed review.

Purchases/Catering

The Taxpayer also claims that $* of the purchase exceptions were for items rented in Virginia for one time catering. The Taxpayer asserts that plates and flatware rented for catering are not subject to tax to the caterer. The Taxpayer contends that the tax was ultimately billed to the Taxpayer’s client and were filed and paid.

Title 23 of the Virginia Administrative Code (VAC) 10-210-930 addresses meals and provides that retail sales of meals by restaurants, hotels, caterers, etc. are taxable. This regulation provides that tangible personal property used in preparing and serving meals, such as plates, glasses, silverware, tablecloths, etc. are for the use or consumption by the restaurant or caterer and subject to the tax at the time of purchase or lease. Therefore, the rental of these items to a customer would not be subject to the sales tax. See Public Document 89-167 (5/22/1989).

The Taxpayer was given ample time during the audit to provide invoices and other documentation related to the purchases in question and failed to do so. The Taxpayer has not met its burden of proof. Accordingly, the purchase exceptions are upheld.

Exempt Sales

Exempt Sales/Catering/Exemption Certificates

The Department issued Virginia Tax Bulletin (VTB) 16-3 (5/2/2016) 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.

In this case, the Taxpayer accepted exemption certificates for untaxed sales of catered meals, prior to the policy change, which were not covered by the exact wording on the certificates. The auditor’s notes and the audit report indicate that this measure was only extrapolated through March 2016 to account for the Department’s change in policy regarding the purchase of catered meals. As this change was effective April 22, 2016, it was appropriate for the Department to audit the Taxpayer concerning its sales tax compliance before the policy change.

The Taxpayer also takes issue with and lists other exceptions, such as gift certificate sales and tips to service staff. The auditor notes that all other exempt sales exceptions mentioned in the Taxpayer’s appeal were removed from the audit exception list prior to the close of the audit. A review of the audit report also indicates that the only remaining exceptions for exempt sales include untaxed sales of catering to two entities before the April 2016 policy change.

The Taxpayer believes that the organization who provides an invalid exemption certificate should be responsible for the tax liability associated with the untaxed sale. Title 23 VAC 10-210-280 A interprets Virginia Code § 58.1-623 A and states, in part, that:

"All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law . . . However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice."

Title 23 VAC 10-210-280 B requires legitimate use of an exemption certificate and provides that:

"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."

The aforementioned statute and regulations require that the Taxpayer review the exemption certificate presented and compare the language of such certificate to the items sold. The Taxpayer is expected to review the certificates for completeness, and to have an understanding that the class of items being sold falls within the scope of the wording of the exemption certificate. In this case, the untaxed sales of catered meals included in the exceptions list were not covered by the wording on the certificates accepted by the Taxpayer. Thus, the exemption certificates were not accepted in good faith and the sales were properly included in the audit.

Exempt Sales/Sampling

Lastly, the Taxpayer takes issue with the sample period chosen to develop an error factor. The Taxpayer claims that the auditor reviewed a period, from April 2015 to December 2016, and chose the month with the greatest gross sales and the greatest exempt sales. The auditor notes that a 36-month period, from April 2015 to March 2018, was reviewed and the sample month chosen was the closest to average sales month for gross sales that also showed exempt sales.

Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are properly applied, the final results are usually within a narrow percentage range of the actual amount that would have been determined by a detailed audit.

The purpose of an audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Every effort is made to objectively select the sample periods that are representative of the period being audited and to reach a consensus with the taxpayer concerning the validity of the sample.

After reviewing the audit report, I find that the sample month selected by the auditor was proper. The selected month represents the closest to average gross sales and reflects the Taxpayer’s exempt sales. There is no evidence that the Taxpayer’s recalculation of the error factor accurately represents the Taxpayer’s sales tax compliance. Accordingly, the chosen sample period is upheld.

Pursuant to Virginia Code § 58.1-205 1, any assessment issued by the Department is deemed prima facie correct. This means that the burden of proving an error in the assessment is upon the Taxpayer. In regard to the tax assessed in this audit, the Taxpayer has not met this burden.

Penalty

Regarding the request for the waiver of penalty, this was the first audit of the Taxpayer and compliance penalty was not applied. In addition, the amnesty penalty was reversed when the Taxpayer entered into a payment plan with the Department and paid the balance of the assessment in full.

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 the use of the monies that were properly due the Commonwealth. Therefore, I find no basis to waive the interest assessed as a result of the Department's audit.

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

The Code of Virginia sections, regulations, 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 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/1819.G

Related Documents

16-194

16-3

89-167