Did a granulated drink mix with a Supplement Facts panel qualify for Virginia's reduced food rate, and who owed undercollected tax?

Subject

Virginia Code provides that any dealer who fails to collect the tax on taxable sales becomes liable for and must pay the tax himself.

Plain-English summary

Virginia held that the drink mix was taxable at the full sales-tax rate and that the seller owed the tax it failed to collect. The granulated mix carried a Supplement Facts panel, so the Department treated it as a dietary supplement rather than conventional food for home consumption.

The product therefore did not qualify as an accessory food item or special dietary food under Virginia Tax Bulletin 05-7. The ruling contrasted Supplement Facts products with products carrying Nutrition Facts panels, which could qualify for the reduced food rate.

The audit showed that the seller had charged Virginia customers less than the correct tax. Under Va. Code § 58.1-625(D), a dealer that fails to collect tax on a taxable sale becomes liable for the tax itself. The paid assessments were upheld and no refund was due.

What this means for you

• A Supplement Facts panel can place a drink mix outside the reduced food-rate category applied in this ruling.
• Similar ingredients or dietary uses do not necessarily make a supplement equivalent to conventional food.
• Sellers remain liable when they undercollect sales tax from customers.
• Preserve labels and rate-mapping records for each product and audit period.

Common questions

Q: Why did the drink mix not qualify for the reduced rate?

A: Its Supplement Facts panel identified it as a dietary supplement, not food for home consumption under the ruling's analysis.

Q: Could the seller shift the back tax to its customers after the audit?

A: The ruling states that a dealer that failed to collect the tax was itself liable under Va. Code § 58.1-625(D).

Q: Did Virginia order a refund of the paid assessments?

A: No. The assessments were upheld as issued, and the ruling said no refund was due.

Citations and references

• Va. Code §§ 58.1-611.1(A)(1), 58.1-611.1(C), and 58.1-625(D).
• 7 U.S.C. § 2012.
• Virginia Tax Bulletin 05-7.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-102

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 June 2011 through May 2014. The assessments at issue have been paid in full.

FACTS

The Taxpayer sells * (the "Product"), a granulated drink mix in a stick pouch. 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 the Product is eligible for the reduced sales tax rate because the Product is an accessory food item as provided in Virginia Tax Bulletin (VTB) 05-7 (5/31/05). The Taxpayer further contends that the Product is also similar to the specialty dietary foods listed in VTB 05-7. Additionally, the Taxpayer does not agree that it should be liable for back taxes.

DETERMINATION

Reduced Sales Tax Rate

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 Product sold by the Taxpayer, a granulated drink mix, carries a "Supplement Facts" panel on its label. Like the fiber supplement in P.D. 14-98, the Product in this instance is considered a dietary supplement based on the "Supplement Facts" panel on its label. As such, the Product does not qualify as food for home consumption and is taxable at the current full sales tax rate. The Product is not similar to the accessory food items and specialty dietary foods listed in VTB 05-7 because those products carry "Nutrition Facts" panels on their labels. Accordingly, the assessments are correct as issued, and a refund is not due to the Taxpayer.

Dealers Collection of the Tax

Virginia Code § 58.1-625 requires dealers to charge and collect the retail sales tax. Virginia Code § 58.1-625 D states, in pertinent part:

Any dealer who neglects, fails, or refuses to collect such tax upon every taxable sale, distribution, lease, or storage of tangible personal property made by him, his agents, or employees shall be liable for and pay the tax himself, and such dealer shall not thereafter be entitled to sue for or recover in this Commonwealth any part of the purchase price or rental from the purchaser until such tax is paid.

In this instance, the audit showed that the correct amount of sales tax was not charged on purchases of the Product made by the Taxpayer's Virginia customers. Virginia Code § 58.1-625 D provides that any dealer who fails to collect the tax on taxable sales becomes liable for and must pay the tax himself. Accordingly, the Taxpayer is liable for the sales tax assessed in the audit.

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
TaxCommissioner

AR/1-5946633747.P