My conference center's all-inclusive room-and-meal package got hit with use tax on food purchases and employee meals, my vendor's custom-table charge got taxed a second time, and the Department extended my audit period past three years -- which of these can I actually fight?

Plain-English summary

A Virginia conference center sold every room as part of a package: a daily room rate plus a minimum $55/day meal package (covering coffee, breakfast, lunch, and dinner buffets), with meals not billed separately except for private catered events. The center also provided meals to its own employees, prepared the same way from the same inventory. An audit assessed use tax on the center's untaxed food purchases and sales tax on a purchase of two conference tables, and the center appealed on five separate fronts.

Guest meals: Virginia Code § 58.1-603(4) taxes charges for transient lodging, and 23 VAC 10-210-930 makes hotel/restaurant meal sales taxable -- but if meals are effectively "complimentary" (bundled into the taxable room charge rather than separately billed), a hotel can buy the underlying food under a resale exemption certificate, per an earlier ruling on complimentary hotel breakfasts (P.D. 87-269). Since every guest here got the buffet package as part of one bundled daily rate, the Department found this matched the complimentary-meals precedent, and items clearly identifiable as guest meals were removed from the audit during the process.

Employee meals: This is where the center lost. Virginia's narrow exemption (Va. Code § 58.1-609.3(7)) only covers meals furnished by restaurants/food-service operators to employees AS PART OF WAGES -- and the center provided no documentation (an employee handbook policy, compensation records, point-of-sale tracking) proving these meals were part of employee compensation. Exceptions that couldn't be clearly separated from employee meals stayed in the audit.

The conference tables: The center said its vendor's estimate already included sales tax and that any liability should fall on the vendor, not the center. But the "invoice" turned out to be an unclear cost ESTIMATE for custom-built tables, not a proper invoice with a real tax calculation, and Virginia's own records showed no return filed by the vendor for tax collected on the sale. Under long-settled law (citing United States v. Forst), Virginia can pursue either the seller or the purchaser for unpaid sales tax -- so the center couldn't simply point to the vendor and walk away.

Sample methodology: The center wanted the error-rate calculation based on lower 2014 revenue rather than a later, higher-revenue year, but the Department found the auditor properly used 2016 (since the audit period didn't cover the full 2014 year) after the center itself declined to provide an alternative basis. The sample was upheld.

Statute of limitations -- the center's real win: Virginia Code § 58.1-634 generally limits an audit to a three-year look-back, absent fraud or a failure to file. The center argued the audit had been improperly stretched beyond that window (April 2014 through March 2018, rather than April 2014 through January 2017) with no documented agreement to extend it. The Department agreed: absent evidence the center and the auditor mutually agreed to bring the audit period current, the audit had to be pulled back to the original three-year period, dropping the 2017 and 2018 periods entirely from this assessment.

What this means for you

Hotels, resorts, and conference centers bundling meals into a package rate

If every guest's stay includes meals as part of one bundled charge (rather than a separate meal bill), you may be able to buy the underlying food under a resale exemption certificate -- but keep clear records distinguishing guest meals from any employee meals prepared the same way, since the burden is on you to separate the two.

Businesses providing free or discounted meals to employees

To claim the narrow "meals as part of wages" exemption, you need real documentation -- an employee handbook policy, a stated value in compensation packages, or point-of-sale records tracking the meals -- not just the fact that employees eat from the same kitchen as guests.

Businesses whose vendor's invoice supposedly already included sales tax

Don't assume that shifts the liability entirely to the vendor. Virginia can pursue either the buyer or the seller for unpaid tax, and a vague estimate document (rather than a proper itemized invoice, backed by evidence the vendor actually remitted the tax) won't protect you from being assessed directly.

Businesses whose audit period stretches past three years

Check whether you actually signed an agreement extending the audit beyond the standard three-year statutory window. If the Department extended the look-back period on its own, without your documented agreement, you may be entitled to have the audit -- and the resulting assessment -- pulled back to the original three-year period, as happened here.

Common questions

Q: If my hotel bundles meals into one package rate rather than billing separately, can I buy the food tax-exempt for resale?
A: Potentially yes, following the "complimentary meals" precedent -- but you'll need to clearly separate guest meals (which may qualify) from employee meals (which need their own, narrower proof) in your records.

Q: What proof does Virginia require for the "meals furnished to employees as part of wages" exemption?
A: Documentation showing the meals were actually part of employee compensation -- an employee handbook policy, a stated value in compensation packages, or point-of-sale records -- not just that employees ate meals prepared the same way as guest meals.

Q: Can Virginia assess ME for sales tax if my vendor's invoice said tax was included but never actually remitted it?
A: Yes. Virginia can seek the tax from either the seller or the purchaser, and a vague estimate document without proof the vendor filed a return for the tax collected won't shield the purchaser from assessment.

Q: Can a sales tax audit period be extended beyond the standard three years?
A: Only with the taxpayer's actual agreement. Absent a documented mutual agreement to extend the period, Virginia's three-year statutory limitation controls, and any extension beyond that must be removed from the audit and assessment.

Citations and references

• Va. Code § 58.1-603(4) (retail sales tax on gross proceeds from rooms/lodgings/accommodations furnished to transients)
• Va. Code § 58.1-602 (defines "retail sale" to include transient lodging charges for stays under 90 continuous days)
• 23 VAC 10-210-930 (retail sales of meals by restaurants, hotels, motels, and caterers are taxable)
• Va. Code § 58.1-609.3(7) (exemption for meals furnished by restaurants/food service operators to employees as part of wages)
• Va. Code § 58.1-625 (the sales tax is the legal debt of the purchaser, though the seller is obligated to collect it)
• Va. Code § 58.1-634 (three-year statute of limitations to assess sales/use tax; records can't be examined beyond that period absent fraud or a failure to file)
• P.D. 87-269 (11/24/1987) (complimentary breakfast/beverages bundled into a taxable room charge qualify for the resale exemption on the underlying food)
• P.D. 98-206 (12/16/1998) and P.D. 92-120 (6/29/1992) (consumable guest amenities not separately billed are taxable, since they're purchased for the taxpayer's own use)
• P.D. 94-60 (3/15/1994) (the employee-meals exemption is limited to meals furnished to restaurant/food-service employees as part of wages)
• P.D. 20-97 (6/2/2020) (examples of acceptable documentation for the employee-meals-as-wages exemption)
• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978) (Virginia's sales tax is the legal debt of the purchaser even though the seller must collect it)

Subject

Audit: Sample Period, Statute of Limitations Purchases: Assets, Custom Products Hotel/Motel Accommodations, Meals & Lodging Sales; Free Meal Tickets, Meals Furnished to Employees

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-141

Original ruling text

November 9, 2021

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 April 2014 through March 2018. I apologize for the delay in responding to your letter.

FACTS

For the period at issue, the Taxpayer, a Virginia conference center, offered overnight accommodations, meeting facilities and dining services to its guests for a combined daily rate. Guest meals were not billed separately, unless served as part of private catered meals in the meeting rooms. The Taxpayer also provided meals to its employees, which were prepared from the same inventory, in the same manner, and in the same location as guest meals. Under audit, the Taxpayer was assessed use tax related to the untaxed purchase of food and sales tax related to the purchase of two conference tables.

The Taxpayer appeals, contending that the purchases of food were exempt under the resale exemption, and that sales tax was paid to the vendor on the purchase of several conference tables. The Taxpayer also contests the audit sample methodology, contending the error factor calculation should be based on the percentage of revenue from 2014, rather than an average of later years where revenue was higher. The Taxpayer further notes that the audit period was improperly extended beyond the original three-year period and should be limited to April 2014 through January 2017.

DETERMINATION

Taxability of Food Purchases

Virginia Code § 58.1-603 4 imposes the retail sales tax on “the gross proceeds derived from the sale or charges for rooms, lodgings or accommodations furnished to transients as set out in the definition of ‘retail sale’ in § 58.1-602.” Virginia Code § 58.1-602 defines “retail sale,”, in part, as follows:

The terms “retail sale” and a “sale at retail” shall specifically include the following: (i) the sale or charges for any room or rooms, lodgings, 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…

Title 23 of the Virginia Administrative Code (VAC) 10-210-930 addresses meals and provides that retail sales of meals by restaurants, hotels, motels, caterers, etc. are taxable. Cover, minimum and room service charges in connection with the provision of meals are a part of the sales price and are taxable.

The question for this audit period is whether the meals provided to the guests by the conference center are retail sales subject to the tax. If so, the underlying food purchases made by the Taxpayer may be made under a resale certificate of exemption. If not, such food purchases by the hotel would be subject to the retail sales and use tax.

Guest Meals

The Department has previously addressed the issue of a hotel providing a complimentary breakfast in the morning and nonalcoholic beverages in the evening to registered guests in Public Document (P.D.) 87-269 (11/24/1987). The Department found that when the cost of the food and nonalcoholic beverages provided to a guest on a “complimentary” basis was included in the taxable room rental charge, a hotel may purchase such food and beverage under a resale certificate of exemption, Form ST-10.

In contrast, in P.D. 98-206 (12/16/1998), the Department reviewed the taxability of consumable amenities provided to guests by a full service resort, which included soaps, sponges, lotions, shower caps, bath oils and chocolates. Here, the Department found that purchases of amenities for use in guest rooms are taxable because there is no separate charge on the guests’ bill. P.D. 98-206 went on to explain that because such items are provided as an integral part of the accommodations offered by the taxpayer, they are purchased for the taxpayers own use or consumption and therefore may not be purchased exempt for resale. See also P.D. 92-120 (6/29/1992).

According to the Taxpayer, every room in their facility is sold as part of a package, and every guest staying in their facility is entitled to the buffet breakfast, coffee break station, lunch buffet and dinner buffet. In addition to the daily room fee, guests are billed a minimum of $55 per day for a meal package. This covers coffee usage at $10, breakfast at $10, lunch at $15 and dinner at $20. The description provided by the Taxpayer is more analogous to the facts in P.D. 87-269 as related to complimentary meals and beverages.

During the audit, items that could be identified as complimentary meals and beverages were removed from the exceptions list. Exceptions, which could not be clearly distinguished from employee meals, however, remain in the audit.

Employee Meals

Virginia Code § 58.1-609.3 7 provides an exemption from the sales tax for “meals furnished by restaurants or food service operators to employees as part of wages.” The Department has clarified this exemption is specifically limited to meals furnished to restaurant employees as part of wages. See P.D. 94-60 (3/15/1994). Meals provided by restaurants that is not included as a part of employee compensation, and meals provided to employees other than restaurant or food service operation employees are subject to the sales and use tax.

The tax on employee meals was assessed because no documentation was provided by the Taxpayer to demonstrate that these meals were being provided as a form of compensation during work shifts. Appropriate evidence would include information from an employee handbook outlining the policy regarding free meals, the value of free meals in employee compensation packages, or records from a point of sale system to record and account for the cost of the meals. See P.D. 20-97 (6/2/2020).

Asset Purchase

The Taxpayer contends the charge from * (the “Vendor”) was for the refurbishing and repair of tables, not the provision of new items and asserts the applicable taxes were included in the price stated on the invoice. Upon reviewing the documentation provided, it appears the Vendor was building custom tables, rather than refurbishing tables supplied by the Taxpayer. Additionally, the document provided is not an invoice, but an estimate that includes the cost price for various different design elements from which the Taxpayer could choose a final combination of items. While the estimate mentions the inclusion of sales tax, it fails to include sufficiently detailed line items on which to base a tax calculation. Further, the Department’s records do not contain a return from the Vendor for taxes collected from this transaction.

The Taxpayer argues that the Department should pursue this liability with the Vendor and the purchase should be removed from the audit. However, under long settled principles of sales and use tax law, the Department may seek payment of the tax from either the seller or the purchaser of tangible personal property. In the case of United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977) aff’d, 569 F.2d 811 (4th Cir. 1978), the court held that while “the seller is legally obligated to collect the tax from the purchaser, the statute [ Virginia Code § 58.1-625] makes the tax the legal debt of the purchaser.” Thus, the courts fully recognize that legal obligations apply to both the seller and the purchaser.

Audit Sample

Sampling is an audit technique of significant value that is widely used in both the public and private sectors. The Department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the final results should be within a narrow percentage range of the actual amount that would have been determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Every effort is made to select objectively the sample periods that are representative of the period being audited.

Upon review of the audit report and the information presented, I find no basis to invalidate the sample and extrapolation. The auditor did not use 2014 because the audit period does not cover the full year. Instead, the auditor used 2016 for sample and extrapolation purposes. The auditor notes that a different basis was offered but the Taxpayer refused to provide additional information. The sample and error factor were applied in accordance with established audit procedures.

Statute of Limitations

Pursuant to Virginia Code § 58.1-634, “the taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable... The Tax Commissioner shall not examine any person’s records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so.”

The Taxpayer argues the audit should be limited to the three-year period of April 2014 through January 2017. The Taxpayer believes the extrapolation should be restricted to this period and all periods for 2017 and 2018 should be used for a subsequent audit. Upon review of the audit report, it appears that the audit was extended forward beyond the statutory three-year period in order to bring the Taxpayer as up to date as possible. The audit report, however, does not include an agreement between the Taxpayer and the Department regarding an extension of audit period. Absent documentation as evidence the Taxpayer and auditor mutually agreed to bring the audit period current, the audit must be limited to only include the statutory three-year period.

CONCLUSION

Based on the evidence and information provided, the Taxpayer has been unable to clearly show that a portion of its food purchases were provided complimentary to guests or qualify as exempt employee meals. In addition, the Taxpayer has not met that burden in regards to tangible personal property (conference tables) purchases included on the exception list. Further, the Taxpayer has provided no basis for recalculation of the error factor. However, because the audit period was extended beyond the statutory period and no basis has been provided for the extension, the audit and resulting assessment should be restricted to the original audit period of April 2014 through January 2017.

In accordance with this determination, the Department's audit will be returned to the appropriate field audit staff for a revision of the Department's assessment. A copy of the revised audit report and a revised bill, including interest to date, will be sent to the Taxpayer as soon as possible. To avoid the accrual of additional interest, the Taxpayer should pay the bill within 60 days of the date of this letter.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1737.A

Related Documents

87-269

98-206

92-120

94-60

20-97