Did nutritional shakes labeled with a Supplement Facts panel qualify for Virginia's reduced sales-tax rate for food?

Subject

The Taxpayer maintains that its Shakes are eligible for a different tax rate based on “special dietary foods"

Plain-English summary

Virginia held that the shakes were taxable at the full sales-tax rate applicable to the audit. Their labels carried Supplement Facts panels, which identified them as dietary supplements rather than conventional food for home consumption.

The Department contrasted those shakes with products carrying Nutrition Facts panels. Under the ruling's FDA-label analysis and Virginia Tax Bulletin 05-7, Nutrition Facts products could qualify for the reduced food rate, while Supplement Facts products did not. The seller's other products bearing Nutrition Facts panels had not been held taxable at the full rate.

The seller also argued that some Nutrition Facts products may have been included accidentally in the audit exceptions. The Department directed field audit staff to review the supporting documents and revise the audit or issue refunds if warranted.

What this means for you

• For the products and periods in this ruling, the label panel was decisive: Supplement Facts meant full rate; Nutrition Facts could support the reduced food rate.
• Marketing a product as a meal substitute or special dietary food did not override its Supplement Facts classification.
• Keep the exact product label and formulation for every audit period.
• Separate potentially misclassified products in the exceptions schedule and provide their labels to the auditor.

Common questions

Q: Did the Department accept the shakes as special dietary foods?

A: No. It found they were dietary supplements because they carried Supplement Facts panels.

Q: Were all of the seller's nutritional products held taxable at the full rate?

A: No. The ruling said two products with Nutrition Facts panels had not been held taxable at the full rate.

Q: Was a refund still possible for audit mistakes?

A: Yes. Audit staff was instructed to review whether Nutrition Facts products had been included inadvertently and to revise the audit or issue refunds if warranted.

Citations and references

• Va. Code § 58.1-611.1(A)(1) and (C).
• 7 U.S.C. § 2012.
• Virginia Tax Bulletin 05-7.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-101

Original ruling text

May 12, 2015

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 assessments issued for the period March 2011 through June 2013 and July 2013 through February 2014. The assessments at issue have been paid in full. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer develops and distributes anti-aging personal care products and nutritional supplements. At issue are the Taxpayer's sales of the * (the "Shakes"). The sales tax was assessed in the audit based upon the difference between the amount of tax charged and the general Virginia sales tax rate. The Taxpayer contends that it should not be assessed the general Virginia sales tax rate on its Shakes. The Taxpayer states that it has followed the criteria in Virginia Tax Bulletin (VTB) 05-7 (5/31/05) regarding the application of the sales tax on these products.

DETERMINATION

Reduced Virginia Sales Tax Rate

The Taxpayer maintains that its Shakes are eligible "special dietary foods" as considered in VTB 05-7. The Taxpayer further states that the Shakes are intended to substitute, in whole or in part, the food in an ordinary diet. The Taxpayer asserts that its Shakes contain the essential nutrient and appetite suppressants as those products listed as examples in the VTB 05-7. The Taxpayer further maintains that its products perform the same dietary functions and contains similar, if not the same, ingredients as those special dietary goods listed in the VTB 05-7. The Taxpayer provides product information to be considered by the Department.

Virginia Code § 58.1-611.1 A 1 provides for a reduction in the Virginia sales tax levied on eligible food products.

Virginia Code § 58.1-611.1 C states that "As used in this section, 'food purchased for human consumption' has the same meaning as 'food' defined in the Food Stamp Act of 1977, 7 U.S.C. § 2012, as amended, and federal regulations adopted pursuant to that Act, except it shall not include seeds and plants for human consumption."

VTB 05-7 states that "Food for home consumption by humans, as defined under the Food Stamp Act of 1977...qualifies for the reduced sales tax rate. The definition includes most staple grocery food items and cold prepared foods packaged for home consumption."

Under the FDA guidelines, conventional foods are foods that are not dietary supplements. A dietary supplement is a product taken by mouth that is intended to supplement the diet and contains one or more "dietary ingredients". Dietary supplements must be labeled as such and must not be represented for use as a conventional food or as the sole item of a meal or the diet. Therefore, conventional foods must have a "Nutrition Facts" panel on their labels whereas dietary supplements must have a "Supplement Facts" panel on their label.

In Public Document (P.D.) 14-98 (7/2/14), the taxpayer questioned whether the fiber drink mix qualified as a food and was subject to the reduced sales tax rate based on the "Nutrition Facts" panel on its label in contrast to the "Supplement Facts" panel on the label of the fiber supplement. The eligibility for the reduced sales tax rate on the fiber drink mix and the fiber supplement was determined based upon the FDA labels the products carried. The fiber drink mix was deemed eligible for the reduced sales tax rate because the product carried a "Nutrition Facts" panel on its label. The fiber supplement was deemed ineligible for the reduced sales tax rate because the product carried a "Supplement Facts" panel on its label.

In this instance, the Shakes carry "Supplement Facts" panels on their labels. Like the fiber supplement in P.D. 14-98, the Shakes in this instance are considered dietary supplements based on the "Supplement Facts" panels on the labels. As such, the Shakes at issue do not qualify as food for home consumption and are taxable at the current full sales tax rate. The Shakes are not similar to the specialty dietary foods listed in VTB 05-7 because those products carry "Nutrition Facts" panels on their labels. The Taxpayer's products, * and ***, were not held taxable in the audit because they carry "Nutrition Facts" panels on their labels and are eligible for the reduced sales tax rate. Accordingly, the assessment of sales tax in the audit is correct as issued.

Source of Document

The Taxpayer questions the source of a document used in the audit to support the assessment. Unfortunately, I am unable to provide you with the source of this document. The document is not one that was issued by the Department, and is not a basis for upholding the assessment in this instance. I apologize for any confusion that this document may have caused the Taxpayer. Please note that while the Department has adopted the Food Stamp Act of 1977 definition of "food purchased for human consumption", the Department has not adopted any other provisions of the Food Stamp Act in determining the application of the sales tax on food in the Commonwealth.

Audit Exceptions

The Taxpayer contends that some of the products with nutrition labels may have been inadvertently included in the audit exceptions. Based upon the documentation provided by the Taxpayer with its appeal, the Department's field audit staff will contact the Taxpayer within 30 days from the date of this letter to confirm the accuracy of the exceptions list. The aforementioned documentation will be provided to the audit staff as well for the review. Following the review, revisions will be made to the audit and refunds issued, if warranted.

The Code of Virginia sections, tax bulletin and public document cited 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 determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissione r

AR/1-5803069576.P