Did a hotel buy guest toiletries for resale, and could it redact federal credit-card numbers to only the last four digits?

Subject

Hotel amenities were taxable purchases, and federal-card exemptions required account-number records

Plain-English summary

Virginia held that the hotel consumed guest-room amenities and had to pay sales or use tax when purchasing them. Toilet paper, tissues, shampoo, and similar toiletries were supplied as part of lodging; guests paid for accommodation, not those individual items. The resale exemption therefore did not apply.

The ruling separately addressed federal-government credit cards. A purchase was exempt only when the federal government's credit was directly bound and billing went to and was paid by the government. Virginia used the card account number to distinguish exempt and taxable cards.

The hotel proposed retaining receipts with every digit except the last four blacked out. Virginia found that inadequate for audit verification. The cited security standard allowed display of the first six and last four digits and recognized access by parties with a legitimate business need. The Department required the vendor to retain an imprint or an invoice or receipt containing the account number.

What this means for you

• Hotels generally consume room amenities rather than resell them to guests.
• Tax on the lodging charge does not make amenity purchases exempt for resale.
• Government-card exemption depends on who is legally billed and pays.
• Records must preserve enough account information for the exemption to be verified.

Common questions

Were toiletries purchased for resale?

No. The hotel used them in providing lodging.

Was showing only the final four card digits enough?

No, under the Department's record requirement in this ruling.

Did every government employee card purchase qualify?

Only a card transaction that directly bound the federal government's credit and was billed to and paid by the government.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, 58.1-604, and 58.1-609.1(4).
• 23 VAC 10-210-690 and 23 VAC 10-210-730(D).
• Virginia Public Documents 95-287, 98-117, 98-206, 02-105, and 03-94.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-2

Original ruling text

January 13, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which you request a ruling regarding the application of the retail sales and use tax to certain purchases made by hotels. You also request a ruling regarding what constitutes acceptable documents for tax exempt sales. I apologize for the delay in responding to your letter.

FACTS

* (the "Taxpayer") has opened a hotel in Virginia and seeks a ruling on the application of the retail sales and use tax to purchases of items provided as amenities to hotel guests as part of room accommodations. The Taxpayer also seeks a ruling on the retention of federal government credit card receipts, in which all but the last four numbers of the credit card sales receipt are blacked out, as documentation supporting the tax exempt status of such transactions.

RULING

Hotel Amenities

Virginia Code § 58.1-603 imposes the tax on the "[g]ross proceeds derived from the sale or charges for rooms, lodgings or accommodations furnished to transients...." Va. Code § 58.1-602 defines "gross proceeds" to mean "[t]he charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services ....

Title 23 of the Virginia Administrative Code (VAC) 10-210-730 D addresses purchases made by hotels and states, "Purchases of furniture, linens, carpeting, drapes, and other tangible personal property by such businesses are taxable at the time of purchase." Therefore, hotels may not purchase such items exempt of the tax for resale regardless that the total charge made to guests for accommodations is also taxable. This is the Department's longstanding policy.

Virginia Code § 58.1-604 imposes the tax on tangible personal property used or consumed in Virginia. The Department has also held that hotels are the users and consumers of amenities such as toilet paper, tissue paper, shampoo, and related toiletries when providing room accommodations to guests. Therefore, the purchase of such items by hotels is taxable (and not for resale) because charges paid by hotel guests are for lodging and accommodations and not for specific items found in the hotel room. The Department's policy with respect to this issue is well established as explained in the prior Public Documents (P.D.) 95-287 (11/8/95), 98-206 (12/16/98) and 98-117 (7/10/98). Based on the foregoing, the toilet paper, tissue paper, shampoo, and similar items provided to guests as part of the room accommodations do not qualify for the resale exemption. The Taxpayer should continue to pay sales and use taxes on its purchases of these items.

Credit Card Documentation

Virginia Code § 58.1-609.1 4 provides an exemption from the retail sales and use tax for "[t]angible personal property for use or consumption by ... the United States." Further, the regulation set out in Title 23 VAC 10-210-690 explains that federal government purchases are exempt provided payment "[i]s made directly by the federal government pursuant to an official purchase order ( e.g. , by direct billing to the government or use of government credit card). Only credit card purchases for which the credit of the federal government is bound and billings are sent directly to and paid by the government, are exempt from the tax." (Emphasis added.)

For some time, the Department has allowed the use of an official purchase order or an exemption certificate as sufficient documentation for exempt purchases made by the federal government. Because the taxable or exempt status of federal government credit cards can be determined by the card account numbers (see P.D. 03-94 (12/12/03)), it is no longer necessary that federal government agencies provide a purchase order or an exemption certificate to vendors when making exempt purchases using such credit cards.

The Department currently relies on the credit card number to determine whether a particular transaction qualifies as an exempt purchase by the federal government. In auditing vendors, the Department verifies that an exempt credit card number has been used to pay for an exempt transaction. Vendors, in accepting these credit cards, must make a determination of the taxable or exempt status of the transaction based on the card account number.

The Taxpayer states that credit card company data security standards require the blacking out of the Primary Account Number (PAN) with the exception of the last four digits. A review of the data security standards indicates that the actual numbers of the PAN that should be displayed are the first six and the last four numbers of the credit card. Within this same requirement, however, the data security standards specifically note that the foregoing requirement does not apply to employees and other parties with a legitimate business need to see the full PAN. Accordingly, the Department's

requirement that vendors retain in their records an imprint of the credit card number or a copy of the purchase invoice or receipt that includes the credit card account number constitutes a legitimate business need. The retention of such information is the Department's established policy as reflected in P.D.'s 02-105 (6/28/02) and 03-94.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2552082937.Q