Why did Virginia uphold sales tax on a caterer's meals sold to a federal agency and a nonprofit even though each customer claimed exemption?

Plain-English summary

Virginia upheld tax on two catered-meal transactions because the restaurant operator did not produce the documentation required for either claimed exemption.

For a February 25, 2015 federal-government banquet, the taxpayer had a valid exemption certificate but did not provide the required official purchase order or proof that the federal government paid directly. Virginia Tax Bulletin 16-3 did not change the federal rule: exempt federal meals and catering required direct government payment under an official purchase order.

For an October 28, 2017 nonprofit sale, the certificate had expired on March 15, 2017. It also reflected the older policy that excluded meals. After the April 22, 2016 policy change, the taxpayer needed an updated certificate and the Department's notice letter confirming that qualifying nonprofits could use their exemption for prepared meals and catering. Neither document was produced.

Because the required support was missing, both transactions properly remained in the audit and the assessment was upheld.

What this means for you

Restaurants and caterers should verify more than a customer's exempt identity. Federal transactions need an official purchase order and direct payment from federal funds. A nonprofit certificate must still be valid on the sale date and must be accompanied by any additional documentation required by the applicable Department policy.

Common questions

Was a valid federal exemption certificate enough by itself? No. The caterer also needed the official purchase order and proof of direct federal payment.

Did VTB 16-3 change the federal-government rule? No.

Why did the nonprofit sale fail? The certificate was expired, and the taxpayer provided neither an updated certificate nor the Department notice letter addressing the meals-policy change.

When did the new state/local government and nonprofit meals policy begin? April 22, 2016.

Citations and references

• Va. Code § 58.1-623 A and B — dealer burden and validity through a nonprofit certificate's stated expiration date.
• Va. Code §§ 58.1-609.1(4), 58.1-609.10(16), and 58.1-609.11 — exemptions cited in Virginia Tax Bulletin 16-3.
• 23 VAC 10-210-280 B — reasonable care and use limited to the exact certificate wording.
• 23 VAC 10-210-690 A and B — official purchase order and direct-payment requirements for federal government purchases.
• Virginia Tax Bulletin 16-3 — prepared meals, catering, and related services purchased by qualifying exempt entities after April 22, 2016.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-130

Original ruling text

July 21, 2020

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 assessment issued for the period January 2015 through December 2017.

FACTS

The Taxpayer operates restaurants with multiple locations in Virginia. The Taxpayer provides banquet and event catering services. The Department’s audit disclosed that the Taxpayer made untaxed sales of catered meals to customers with invalid exemption certificates. The transactions at issue involve sales made to a government entity and a nonprofit entity. The Taxpayer cites Virginia Tax Bulletin (VTB) 16-3 (5/2/2016) to contest the transactions at issue.

DETERMINATION

Exemption Certificates

Generally, Virginia Code § 58.1-623 A provides:

All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 B further explains that:

Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate. [Emphasis added.]

VTB 16-3

The Department issued VTB 16-3 to address the policy change related to the exempt purchase of meals and catering by nonprofit organizations, churches, and governmental entities. Prior to the Department’s policy change, nonprofit organizations, governmental entities, and churches were prohibited from using their sales and use tax exemption certificates to make exempt purchases of prepared meals and catering, as these categories of food were considered taxable services. Under the new policy, meals and catering are not subject to the tax in accordance with the statutory exemptions provided to state and local governmental entities and nonprofit organizations.

The Taxpayer cites the following portion of VTB 16-3 to support that the transactions at issue qualify for exemption.

Effective for purchases made on and after April 22, 2016, state and local governmental entities, nonprofit organizations, and nonprofit churches may use their Retail Sales and Use Tax exemption certificates issued pursuant to Virginia Code § 58.1-609.1(4), § 58.1-609.11, and § 58.1-609.10(16) to make exempt purchases of food and meals, as well as certain “taxable services” provided in connection with the provision of meals.

VTB 16-3 further provides the following:

Effective for purchases made on and after April 22, 2016, nonprofit organizations, state and local governmental entities, and churches may use their respective nonprofit exemption certificate, governmental exemption certificate, Form ST-12, and self-issued exemption certificate, Form ST-13A to purchase prepared foods, catering and related services provided in connection with the sale of food exempt of the sales and use tax.

Contested Transactions

* (Department of Defense)

This transaction involves the sale of catered meals to a federal government entity for a banquet that took place on February 25, 2015. The issuance of VTB 16-3 did not change the Department’s policy as it relates to federal government entities. VTB 16-3 states, in part, that “[f]ederal governmental entities and employees traveling on government business remain exempt from the tax on their purchases of meals and catering, provided payment for the meals is made directly by the federal government pursuant to a required official purchase order to be paid out of public funds.” This policy is codified in Title 23 VAC 10-210-690 A, which provides the following:

Sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable …

Subsection B states that:

Purchases of meals, lodging, and other accommodations, by the federal government or its employees traveling on government business are exempt from the tax provided payment for the meals, lodging, or other accommodations is made directly by the federal government pursuant to an official purchase order (e.g., by direct billing to government or use of government credit card).

For this transaction, a valid exemption certificate was provided for the government entity, but the required proof of federal government payment was not provided. The Taxpayer was given the opportunity during the audit to provide a purchase order and proof of payment by the federal government to determine the exempt status of this transaction. Neither the purchase order nor the proof of government payment were submitted during the audit or with the appeal. Accordingly, the transaction was properly included in the audit, and there is no basis to remove this line item.

* (Nonprofit)

The exemption certificate provided for this nonprofit entity was expired at the time of the transaction at issue. Specifically, the exemption certificate provided with the appeal expired on March 15, 2017, and the sale of catered meals was made on October 28, 2017. Virginia Code § 58.1-623 B provides, in part, that “[i]f an exemption pertains to a nonprofit organization, other than a nonprofit church, that has qualified for a sales and use tax exemption under § 58.1-609.11, the exemption certificate shall be valid until the scheduled expiration date stated on the exemption certificate.” Pursuant to Virginia Code § 58.1-623 B, an expired exemption certificate is not valid.

In addition, the expired exemption certificate does not reflect the Department’s policy change. The certificate still states that the “exemption is not applicable to the purchase of taxable services, such as meals or lodging.” The following section of VTB 16-3 is applicable for the exemption documentation provided for this transaction:

Although the current nonprofit exemption certificate explicitly prohibits the use of the certificate to purchase taxable services exempt of the tax, at this time, the Department will not issue a new nonprofit exemption certificate to any nonprofit organizations that purchase qualifying prepared food, catering, and other related services. Instead, the Department will issue a notice letter that qualifying nonprofit organizations may present, along with their exemption certificates, when making purchases of prepared meals, food and catering. [Emphasis added].

The Taxpayer was provided an opportunity during the audit to provide an updated exemption certificate and a notice letter from the Department following the April 22, 2016 policy change to determine the exempt status of the transaction at issue. Neither the updated exemption certificate nor the notice letter from the Department were submitted during the audit or with the appeal. Accordingly, the transaction was properly included in the audit and there is no basis to remove this line item.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections, regulations, and tax bulletin cited, along with other reference documents, 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 Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3244.G

Related Documents

16-3