What Virginia tax rate applied when a grocery store removed food from resale inventory and gave it away as customer samples?

Subject

Samples, giveaways of eligible food products are subject to a reduced tax rate.

Plain-English summary

Virginia applied the reduced food tax rate to eligible grocery products removed from resale inventory and given away as samples. The grocer used four preparation methods: serving food as-is, providing food that required utensils, heating food, and combining complementary products.

The method of preparation did not change the rate for an otherwise eligible food product. Eligible samples remained subject to the reduced rate, while ineligible food samples remained fully taxable.

Because the products were removed from resale inventory and given away rather than sold, the grocer measured the tax by its cost price and reported it on its sales tax returns.

What this means for you

• First determine whether the sampled product is eligible food under the applicable Virginia rule.
• For the products addressed here, heating, utensils, or combining foods did not change an eligible item's reduced-rate treatment.
• Ineligible food giveaways remained subject to the full tax rate.
• The tax base was the grocer's cost price, not a retail selling price charged to the customer.

Common questions

Did providing an eating utensil make an eligible sample fully taxable?

No. Virginia said preparation method did not change the treatment of an eligible food product in these facts.

Did the ruling provide the numerical reduced or full rate?

No. It identified which rate category applied but did not state the percentages.

Citations and references

• Virginia Tax Bulletin 99-11 (Oct. 1, 1999).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-26

Original ruling text

February 28, 2011

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of your client (the "Taxpayer"), in which you request a ruling on the application of the retail sales and use tax to food products removed from the Taxpayer's resale inventory and utilized for in-store samples. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer is a food grocer headquartered out-of-state with stores located in Virginia. Food items are selected (either by the corporate office or an individual store) for demonstration in the Taxpayer's stores. Once selected, the food item is removed from the Taxpayer's resale inventory and prepared for distribution as samples to the Taxpayer's customers. The degree of preparation can be segregated into four categories: (1) food items provided to customers on an "as is" basis; (2) food items that require an eating utensil to consume; (3) food items that are required to be heated before consumption; and (4) food items that complement each other and are combined to enhance the sampling experience. The Taxpayer does not provide a designated seating area to consume the samples and does not demand a consideration, as there is no sale occurring or obligation from the customers to purchase the samples.

The Taxpayer questions whether the eligible food items given away as samples by the Taxpayer in Virginia are subject to the full tax rate or the reduced rate. The Taxpayer also questions whether the application of the tax differs based upon how the food samples are prepared prior to being distributed as samples.

RULING

Virginia Tax Bulletin (VTB) 99-11 (10/1/99) provides guidance for taxpayers regarding the application of the reduced food tax rate. With regard to samples, VTB 99-11 states, "Samples, free distributions, and giveaways of eligible food products by food wholesalers and retailers are subject to the reduced sales and use tax unless otherwise exempt from the tax. The tax should be computed on the cost price of the food and reported on the sales tax return. Samples, free distributions, and giveaways of ineligible food products by food retailers remain fully taxable unless otherwise exempt from the tax."

In accordance with VTB 99-11, samples of eligible food products removed from the Taxpayer's resale inventory are subject to the reduced sales and use tax rate. The application of the tax does not differ for the eligible food products based upon the type of preparation required to make the products consumable by the Taxpayer's customers. Any samples of ineligible food products removed from the Taxpayer's resale inventory are subject to the full tax rate. In both instances, the tax should be computed on the cost price of the food and reported on the Taxpayer's sales tax returns.

I hope the foregoing responds to your inquiry. 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 tax bulletin cited and other reference documents 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, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4233418231.P