Does a Virginia resort owe sales tax when guests redeem donated gift certificates for lodging and when venue customers pay a garbage-disposal fee?

Plain-English summary

A Virginia resort donated gift certificates to nonprofits for fundraising. Guests later redeemed them for lodging, with no cash changing hands for the room charge. The resort also charged event customers a garbage-disposal fee when they failed to remove trash as required by the venue contract.

Virginia taxed both charges: a redeemed certificate is payment for taxable lodging, and garbage disposal was a service connected with the taxable venue package.

Gift certificates: tax applies at redemption

23 VAC 10-210-670 says the sale of a gift certificate is not taxable. But when the owner redeems it for taxable property, the underlying transaction becomes a taxable sale.

Virginia's retail-sale definition specifically includes transient lodging furnished for consideration for fewer than 90 continuous days (Va. Code § 58.1-602). The resort charged for rooms, and the guest paid with the certificate. The lack of cash did not eliminate consideration or the lodging charge.

The ruling's example shows a $600 certificate applied against a $600 room subtotal, leaving the guest to pay the sales tax separately. Tax is computed on the amount charged before the certificate credit.

Garbage disposal: a service tied to the venue package

The event contracts provided use of the lodge, tented deck, fireplace, lakefront, and picnic area, plus tangible items such as a lighted tent, chairs, tables, lanterns, and yard games. Customers had to remove garbage off site; if they failed, the resort removed it and charged a fee.

Services are generally exempt under 23 VAC 10-210-4040, but services provided in connection with a taxable sale or rental are included in the sales price. Because garbage removal arose from and was separately charged under the venue-package contract, Virginia treated it as a taxable connected service.

Financial hardship was a separate issue

The taxpayer had started an offer in compromise based on doubtful collectability, but it closed while the appeal was pending. The Department said the resort could resubmit updated financial forms within 30 days. That collection process did not change the taxability ruling.

What this means for you

• Gift certificates change payment timing, not taxability. Tax the taxable goods, lodging, or services when the certificate is redeemed.
• A donated certificate is still consideration when redeemed. The nonprofit fundraising context did not create an exemption.
• Contract-linked service fees can enter the taxable price. A service separately billed because of a venue-rental contract may still be taxable.
• Hardship relief does not alter the legal assessment. Offers in compromise address collectability separately.

Common questions

Q: Is selling a Virginia gift certificate taxable?

A: The certificate sale itself is not taxable, but redemption for taxable property or lodging is a taxable sale.

Q: What if the resort donated the certificate and received no cash?

A: The guest still used the certificate to pay a lodging charge. Virginia taxed the charge regardless of payment method.

Q: Why was garbage disposal taxable if services are usually exempt?

A: It was provided under and connected with the taxable event-venue package, so it was included in the sales price.

Citations and references

• Va. Code § 58.1-602 — retail sale, transient lodging, tangible personal property, gross proceeds, and sales price
• 23 VAC 10-210-670 — gift certificates
• 23 VAC 10-210-4040 — services connected with taxable sales
• 23 VAC 10-210-840 — leasing and renting tangible personal property

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-71

Original ruling text

July 15, 2019

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 contest the retail sales and use tax assessment issued for the period January 2014 through December 2016. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is in the lodging business and maintains a resort facility in Virginia. As a result of the Department’s audit, the Taxpayer was assessed the sales tax on sales of lodging paid for by the redemption of gift certificates. The Taxpayer provides that the gift certificates were donated to nonprofits for fund raising purposes and no cash was exchanged regarding the lodging transactions. Therefore, relying on Title 23 of the Virginia Administrative Code (VAC) 10-210-840, the Taxpayer maintains that the tax was assessed erroneously.

The Taxpayer was also assessed sales tax on garbage disposal fees charged in connection with the sale of event venue packages. Additionally, the Taxpayer contests the tax assessed on fees for the disposal of garbage when customers contract for the use of the Taxpayer’s venue. The Taxpayer does not offer a garbage disposal service to event customers and requests in the event contract that either the caterer or the customer handle the garbage removal. When customers do not dispose of the garbage off site, the Taxpayer charges a garbage disposal fee. Relying on Title 23 VAC 10-210-4040, the Taxpayer contends the tax was assessed incorrectly on the fees.

DETERMINATION

Virginia Code § 58.1­602 defines "retail sale", in part, as follows:

"Retail sale" or a "sale at retail" means a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter, and shall include any such transaction as the Tax Commissioner upon investigation finds to be in lieu of a sale.

The terms "retail sale" and a "sale at retail" shall specifically include the following: (i) the sale or charges for any room or rooms, lodging, or accommodations furnished to transients for less than 90 continuous days by any hotel, motel, inn, tourist camp, tourist cabin, camping grounds, club, or any other place in which rooms, lodging, space, or accommodations are regularly furnished to transients for a consideration....

Virginia Code § 58.1-602 defines “tangible personal property” as follows:

“Tangible personal property" means personal property which may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses. The term "tangible personal property" shall not include stocks, bonds, notes, insurance or other obligations or securities. The term "tangible personal property" shall include (i) telephone calling cards upon their initial sale, which shall be exempt from all other state and local utility taxes, and (ii) manufactured signs.

Gift Certificates

As referenced by the Taxpayer, Title 23 VAC 10-210-840 sets out that “[a]ny person engaged in the business of leasing or renting tangible personal property to others is required to register as a dealer and collect and pay tax on gross proceeds.”

Virginia Code § 58.1-602 defines “gross proceeds” as follows:

"Gross proceeds" means the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section…

The Taxpayer provides lodging and accommodations that are deemed the sale of tangible personal property and is properly registered as a dealer in Virginia. The issue at hand is that of a retail sale rather than the lease or rental of tangible personal property and the remittance of tax on gross proceeds.

Title 23 VAC 10-210-670 provides that the sale of gift certificates is not taxable; however, “when the owner of a gift certificate redeems it, in whole or in part, for tangible personal property, the transaction is a taxable sale.” As the provision of lodging and accommodations constitutes the retail sale of tangible personal property, the redemption of gift certificates for lodging and accommodations is taxable.

The Taxpayer assumes that because no cash was exchanged due to the redemption of the gift certificates then no tax would be due. While cash was not exchanged, there was a charge made for lodging and payment was provided in the form of the redeemed gift certificates. As such, the Taxpayer was required to collect the tax on the amount charged (a sale), regardless of the manner of payment.

An example of an invoice for a lodging and accommodation facility in a locality with a 5.3% tax and a customer paying with a $600 gift certificate and purchasing 3 rooms is shown below.

Example

Quantity Description Rate Total

3 Weekend, 4 Person room $200/night $600.00

Subtotal $600.00

Tax (5.3%) $31.80

Credits(-) $600.00

Total due $31.80

Based on the cited authorities, the auditor correctly assessed the sales tax on the sale of lodging paid for by the redemption of gift certificates.

Garbage Disposal Fees

Title 23 VAC 10-210-4040, referenced by the Taxpayer, provides that charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.

The Taxpayer contracts with customers to provide event venue packages. The contracts for these packages provide the use of the Taxpayer’s lodge, tented deck, fireplace, lakefront, and picnic area. Also included are a lighted tent, banquet chairs, banquet tables, picnic tables, lanterns, and various yard games. This constitutes the sale or rental of tangible personal property by the Taxpayer, as defined in Virginia Code § 58.1-602, in the same manner as the provision of lodging.

The customer is required in the contract to dispose of its garbage off site of the resort facility property after an event. When the customer fails to meet its contractual obligation, the Taxpayer disposes of the garbage and charges a fee for such disposal. Therefore, the Taxpayer is in fact providing the service of garbage disposal, for a separate charge, to its customer as part of the customer’s contract for the event venue package.

Virginia Code § 58.1-602 defines “sales price” to mean “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale. The fee for the garbage disposal is considered a taxable service provided in connection with the sale of tangible personal property, the event venue package. In this instance, the auditor correctly assessed the tax on the garbage disposal fees.

Financial Hardship

Based on conversation with the Taxpayer, it has been noted that the assessment may create a financial hardship for the Taxpayer. The Taxpayer filed an offer in compromise based on doubtful collectability, but the offer was closed due to the ongoing appeal review process. Should the Taxpayer still wish to move forward with the offer in compromise based on doubtful collectability, the Taxpayer should resubmit the offer in compromise forms with updated financial information to: Tax Commissioner, Virginia Department of Taxation, P.O. Box 2475, Richmond, Virginia 23218-2475. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based on doubtful collectability.

CONCLUSION

Based on this determination, the assessment is correct. A revised bill, with accrued interest to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections, regulations, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1439L