Could an ice cream parlor keep the difference after collecting Virginia's general sales tax rate but filing returns at the reduced food rate?

Subject

Ice cream parlor had to remit all sales tax it collected

Plain-English summary

Virginia upheld an assessment against an ice cream parlor that collected sales tax at the general rate but remitted tax as though the reduced food rate applied. Virginia Tax Bulletin 05-7 generally allowed ice cream shops to use the reduced rate for eligible food packaged for home consumption. Food sold for immediate consumption still required the general rate.

The decisive issue was not whether some sales qualified for the reduced rate. The Department's account review showed that the parlor actually collected the general rate from customers and then paid the Department only the reduced-rate amount. Under Va. Code § 58.1-625, all tax a dealer collects is held in trust for the Commonwealth and must be remitted. The assessment for the unremitted collections was therefore correct.

The Commissioner did not waive tax, interest, or penalties based only on the business's financial burden. The ruling instead explained how the business could submit Form CS-21 within 60 days for an offer based on doubtful collectibility.

What this means for you

• Eligibility for a reduced rate does not permit a dealer to keep tax already collected from customers at a higher rate.
• For an ice cream shop, the reduced rate discussed in this ruling applied to eligible food packaged for home consumption.
• Food sold for immediate consumption remained subject to the general sales tax rate.
• Sales tax collections are trust funds that must be paid over to Virginia.
• Financial hardship requires supporting evidence through the Department's collection process; it does not automatically erase an audit assessment.

Common questions

Was the ice cream parlor eligible for Virginia's reduced food rate?

Yes, for eligible food packaged for home consumption. The ruling said food sold for immediate consumption remained taxable at the general rate.

Why was the assessment upheld if the reduced rate could apply?

Because the business's records showed that it collected the general rate from customers but remitted only the reduced-rate amount.

Could the business keep the extra amount collected?

No. Va. Code § 58.1-625 treated all sales tax collected as held in trust for the Commonwealth and required full remittance.

Did the Commissioner reject all hardship relief?

The assessment remained correct, but the business was given 60 days to submit Form CS-21 so the Department could evaluate an offer based on doubtful collectibility.

Citations and references

• Va. Code §§ 58.1-625 and 58.1-105.
• Virginia Tax Bulletin 05-7 (May 31, 2005).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-129

Original ruling text

July 7, 2010

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 2007 through November 2009. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as an ice cream parlor. The Taxpayer contests the tax assessed in the audit. The Taxpayer asserts that it is eligible to charge the reduced food tax rate because it is an ice cream parlor. The Taxpayer contends that based on Virginia Tax Bulletin (VTB) 05-7 (5/31/05) it believes that it correctly filed its sales tax returns.

DETERMINATION

Reduced Food Tax Rate

Pursuant to VTB 05-7, ice cream shops are among the list of retailers that generally should charge the reduced sales tax rate on sales of eligible food and beverages. The reduced rate applies to all sales of food for home consumption. The definition of food for home consumption includes "most staple grocery food items and cold prepared foods packaged for home consumption."

The Taxpayer operates as an ice cream parlor, and pursuant to VTB 05-7 is eligible to charge the reduced sales tax rate on its sales of eligible foods. Eligible sales include sales of food that are packaged for home consumption. Any foods sold for immediate consumption are not eligible for the reduced food tax rate, and the general sales tax rate must be charged in these instances.

Sales Tax Collected

In this instance, the Department conducted an audit of the Taxpayer's Virginia sales tax account. Based on this review, it was determined that the Taxpayer collected tax on its sales at the general sales tax rate. The review further indicated that the Taxpayer remitted the tax to the Department based on the reduced food tax rate. Accordingly, the Taxpayer was assessed in the audit for the tax collected, but not remitted to the Department.

Virginia Code § 58.1-625 provides that all dealers must collect the tax on sales to purchasers, consumers, or lessees, and must pay the tax over to the Tax Commissioner. "All sums collected by a dealer . . . shall be deemed to be held in trust for the Commonwealth." Pursuant to Va. Code § 58.1-625, a dealer must pay over to the Tax Commissioner all tax that it collects.

In accordance with Va. Code § 58.1-625, the Taxpayer is required to remit to the Tax Commissioner the full amount of tax it collects on its retail sales. In this instance, the Taxpayer's sales tax account records indicate that the Taxpayer did not remit the full amount of the tax collected. Accordingly, the tax assessed in the audit is correct.

Financial Hardship

The Taxpayer indicates that the audit assessment has placed a financial burden upon the business. Accordingly, the Taxpayer requests that the tax, interest and penalties assessed be waived.

Virginia Code § 58.1-105 authorizes the Tax Commissioner to "compromise and settle doubtful or disputed claims for taxes or tax liability of doubtful collectibility." In order for an offer based on doubtful collectibility to be considered by the Tax Commissioner, evidence of doubtful collectibility must be presented to support your claim. If you wish to pursue an offer based on doubtful collectibility, please complete and return the enclosed Form CS-21, Collection Information Statement for Businesses. This form will allow the Department to review and analyze the Taxpayer's financial situation. Upon completion of the Department's review, a response will be issued based on the information presented. Please return the completed Form CS-21 to the Department's Collections Section, Offer in Compromise Team, Post Office Box 1880, Richmond, Virginia 23218-1880. You may also contact a member of this team at (804) 367-8045. If the Department does not receive the Taxpayer's completed Form CS-21 within 60 days from the date of this letter, it will be presumed that no additional information will be submitted, and the outstanding liability will become immediately due and payable.

The Code of Virginia sections and Virginia Tax Bulletin cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, your may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-4170182289.P