Does a wedding venue owe sales tax on its whole rental fee if tables and chairs are included, even if the customer doesn't stay overnight?

Plain-English summary

A Virginia event venue that rented out its space for weddings and events -- including tables and chairs in the rental price -- appealed a retail sales and use tax assessment covering September 2012 through August 2018. The Tax Commissioner upheld the tax on the venue's charges, but narrowed the audit period.

Not an "accommodations" (overnight lodging) tax. The Department first clarified this wasn't a room/lodging tax situation. Virginia's accommodations tax under Va. Code § 58.1-603 4 requires an overnight stay by a "transient" for tax to apply to bare venue-space rental. Although cabins existed on the property, a different entity operated them as overnight accommodations -- the venue itself wasn't providing overnight stays, so this basis for tax didn't apply.

But taxable anyway, as a bundled tangible-property sale. The real basis for tax was different: the venue's rental contracts bundled the space rental together with tangible personal property -- tables and chairs -- for one lump-sum fee. Virginia taxes the sale or rental of tangible personal property, and when a taxable item (tables/chairs) and a nontaxable item (bare real estate rental) are billed as a single lump sum, Virginia's long-standing policy taxes the entire charge. The venue argued that not every event actually used the tables and chairs, but the Department held that what matters is what's included in the charge, not what a customer happens to use.

True object test didn't apply. The venue tried invoking the "true object test" (used to decide whether a mixed service-and-goods transaction is really a taxable sale or an exempt service). The Department rejected that argument outright because the transaction didn't involve a service at all -- just a rental of real property bundled with tangible personal property -- so the true object test, which is designed for service-vs-goods situations, was the wrong framework entirely.

Audit period narrowed. Because the venue never filed returns, the Department's auditors used social media research to conclude the business might have operated as early as 2008, and opened a six-year audit under Va. Code § 58.1-634. But the venue showed it was a corporate entity formed in August 2015 that didn't begin operating until January 2016, and wasn't a legal successor to any earlier business. Since a distinct legal entity can't be held liable for tax incurred before it existed and began operating, the Commissioner sent the case back to recompute the assessment, removing any liability for periods before the venue actually began operations.

What this means for you

Event venues, wedding venues, and similar space-rental businesses

If your rental fee includes any tangible personal property -- tables, chairs, linens, sound equipment -- bundled into one lump-sum charge, expect the entire charge to be taxable, even for events where the customer doesn't actually use those items. To keep part of your fee nontaxable, you'd need to separately state and itemize the tangible-property charge from the bare space-rental charge (and confirm you're not also providing overnight lodging, which would trigger the separate accommodations tax).

Newer business entities inheriting an older, informally-run predecessor

If your corporate entity was formed and began operating at a specific, documentable date, and you're not legally a successor to an earlier unincorporated or informal operation, you can push back against an audit period that reaches further back than your entity actually existed -- as this taxpayer successfully did here.

Accountants and tax professionals advising venues and event businesses

Two separate, independent tax issues are in play for a venue rental: (1) whether overnight lodging is provided (triggers the accommodations tax under a different statute) and (2) whether any tangible personal property is bundled into the fee (triggers ordinary sales tax on the whole lump sum, per longstanding Department policy, regardless of the true object test).

Common questions

Q: If my venue doesn't offer overnight lodging, is my rental fee automatically tax-free?
A: Not necessarily. Even without lodging, if your fee bundles in tangible personal property like tables or chairs, the whole lump-sum charge becomes taxable as a sale/rental of tangible personal property -- a completely separate basis for tax from the accommodations rule.

Q: Would itemizing the tables/chairs charge separately from the space rental change the result?
A: The Department's cited policy suggests that when taxable and nontaxable items are billed as one lump sum, the whole amount is taxed -- implying that a genuinely separate, itemized charge for the tangible property might allow the pure space-rental portion to escape tax. This ruling doesn't test that scenario directly, since this venue charged one bundled fee.

Q: Why didn't the "true object test" help the venue's argument?
A: That test exists to sort out mixed service-and-goods transactions (is the "true object" the exempt service, or the taxable goods?). Since this transaction never involved a service in the first place -- just a real property rental plus tangible property -- the test simply didn't apply.

Q: Can a new business be taxed for years before it existed?
A: No, according to this ruling -- a distinct corporate entity that isn't a legal successor to an earlier business can't be held liable for tax incurred before it was formed and began operating, even if an audit initially assumed a longer operating history based on indirect evidence like social media.

Citations and references

Statutes, regulations, and public documents:

• Va. Code § 58.1-603 (imposes retail sales tax on accommodations to transients and on tangible personal property)
• Va. Code § 58.1-602 (defines "retail sale," "accommodations," "transient," and "gross proceeds")
• Va. Code § 58.1-634 (six-year audit period when no returns were filed)
• 23 Va. Admin. Code 10-210-4040 (true object test)
• P.D. 87-69 (2/27/1987); P.D. 89-257 (9/25/1989); P.D. 95-158 (6/16/1995); P.D. 98-85 (5/7/1998); P.D. 02-38 (4/1/2002) -- accommodations/overnight-stay requirement
• P.D. 94-142 (4/29/1994); P.D. 95-223 (8/29/1995); P.D. 09-2 (2/4/2009); P.D. 20-177 (10/6/2020) -- lump-sum bundled-charge taxation
• P.D. 12-82 (5/11/2012) -- nontaxable bare real-property rental
• P.D. 20-28 (2/7/2020) -- this taxpayer's own earlier appeal in the same audit

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-74

Original ruling text

June 23, 2023

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

Dear *:

This will respond to your letter in which you seek correction of the retail sales and use tax assessments issued to *. (the “Taxpayer”) for the period September 2012 through August 2018. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, an event venue in Virginia, included tangible personal property, such as tables and chairs, as a part of its venue rentals. The Taxpayer charged one lump sum amount for rental of the venue and any tangible personal property.

During the Department’s audit, the Taxpayer did not provide any records, so assessments were issued based on the best available information. The Taxpayer appealed and the Department issued Public Document (P.D.) 20-28 (2/7/2020), determining that the assessments were properly issued. The Taxpayer was allowed one final opportunity to provide the necessary records. Subsequently, the Taxpayer provided additional information and the Department revised the assessments based upon the new information received.

The Taxpayer now appeals the revised assessments, alleging its transactions are not subject to Virginia’s retail sales and use tax because the provision of space is not taxable and any tangible personal property included in the transactions is not the true object of the transactions. In the alternative, the Taxpayer believes the assessment should be reduced because only a portion of the transactions are taxable, and the Taxpayer should only be liable for tax after it began operating in January 2016.

DETERMINATION

Accommodations

The Taxpayer first argues the auditor concluded that its transactions resulted from the sales of rooms, lodgings, or accommodations. Virginia Code § 58.1-603 4 imposes the retail sales tax on “the gross proceeds derived from the sale or charge for rooms, lodgings or accommodations furnished to transients as set out in the definition of ‘retail sale’ in Virginia Code § 58.1-602.” The Department has interpreted the definitions of “retail sale,” “accommodations,” and “transient” found in Virginia Code § 58.1-602 to require an overnight stay for tax to apply to the rental of venue space without the transfer of tangible personal property. See P.D. 87-69 (2/27/1987), P.D. 89-257 (9/25/1989) P.D.95-158 (6/16/1995), P.D. 98-85 (5/7/1998), and P.D. 02-38 (4/1/2002).

While cabins were located on the property, a different entity was operating them as overnight accommodations. Thus, the evidence provided shows the Taxpayer was not providing overnight stays at its venue.

Rental of Real Property

The Taxpayer further argues that it did not provide tangible personal property as part of its fee for the rental of its venue space. Virginia Code § 58.1-603 imposes the retail sales tax on the sale or rental of tangible personal property in Virginia. The tax is imposed on the gross proceeds derived from a lease or rental of tangible personal property. “Gross proceeds” includes the total amount charged for tangible personal property. See Virginia Code § 58.1-602.

The Department’s policy has been that, when a dealer charges one lump sum amount for both taxable and nontaxable items in a transaction, the tax is applied to the entire transaction. See P.D. 94-142 (4/29/1994), P.D. 95-223 (8/29/1995), P.D. 09-2 (2/4/2009), and P.D. 20-177 (10/06/2020). Conversely, the Department has ruled that fees charged for the use of real property, for which an overnight stay was not provided, were not taxable provided that no tangible personal property was included in the total amount charged. See P.D. 87-69, P.D. 98-85, P.D. 02-38, and P.D. 12-82 (5/11/2012).

Although the Taxpayer correctly argues that the rental of the venue alone would not be subject to the tax, the rental contracts indicate that its transactions included the provision of tangible personal property, such as tables and chairs. The Taxpayer explains that the tables and chairs are made available for customers if they wish, but the tables and chairs were not used for all the events held at the venue. As indicated above, however, the tax applies based on what is included in the fee or charge, not what is used or not used.

True Object Test

The Taxpayer argues that its transactions are still not subject to tax pursuant to the true object test described in Title 23 of the Virginia Administrative Code 10-210-4040. In accordance with the regulation, the true object test is applied in order to determine whether a particular transaction involving both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale. The test is not applicable to the Taxpayer’s situation because the transactions do not involve the provision of a service. Accordingly, the tax was correctly applied to the total lump sum charge.

Audit Period

The Taxpayer has filed no sales and use tax returns for the initial audit period. Based on an investigation, which included research on the Taxpayer’s social media pages, audit staff concluded the business could have been conducting business as early as 2008 and initiated a six-year audit as permitted under Virginia Code § 58.1-634. However, the Taxpayer, a corporate entity established in August 2015, asserts that it did not begin operations until January 2016, and does not appear to be a successor entity liable for the tax of another. As a separate and distinct business entity, the Taxpayer cannot be held liable for any tax incurred before it was created and began operations.

CONCLUSION

Based on the above analysis, this audit will be returned to the auditor to make a determination on when the Taxpayer began operations and to adjust the assessments by removing any liability incurred before that time. The auditor will issue a revised bill for the corrected tax liability, applicable penalty, and interest accrued to date. The Taxpayer will be given 60 days from the bill date to pay the assessment to avoid the accrual of additional interest and possible collection action.

The Code of Virginia sections, regulation, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) , or via email at **@tax.virginia.gov.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3665-C

Related Documents

87-69

89-257

94-142

95-158

95-223

98-85

02-38

09-2

12-82

20-28

20-177