Does a nonprofit "pay what you can" restaurant have to collect Virginia sales tax on the meals it serves?

Plain-English summary

A 501(c)(3) nonprofit planned to open a "donate what you can" restaurant in Virginia -- customers order from a menu and pay through either a monetary donation or volunteering their time. The nonprofit asked the Department whether it needed to collect and remit Virginia sales tax on these meals.

The Department explained that the nonprofit's own PURCHASE exemption certificate (issued under Va. Code § 58.1-609.11, which exempts a qualifying nonprofit's purchases for its own use) doesn't extend to the SALES the nonprofit itself makes -- prepared food and meals are tangible personal property and remain taxable unless a specific sales-side exemption applies. Virginia does have a separate exemption for nonprofit food/meal sales, but it's an "occasional sales" exemption -- it only covers sales happening on FEWER than 24 occasions in a calendar year. Because this restaurant would operate continuously (not just a couple dozen times a year), that exemption didn't fit, and the nonprofit would have to register as a dealer and collect sales tax on its meal sales like any other restaurant, unless a customer separately provides a valid exemption certificate for a specific transaction. The Department also flagged an important accounting wrinkle tied to the "donate what you can" model: Virginia's sales-price definition already excludes discretionary gratuities entirely, and mandatory gratuities/service charges up to 20% of the meal price -- but a customer's DONATION toward the meal itself isn't automatically treated the same way. If the restaurant takes a customer's payment as one undivided lump sum with no way to separate the taxable meal charge from a genuine donation, the entire amount would be subject to tax; to get any donation-based benefit, the restaurant needs an accounting method that clearly separates the sales price from the donation.

What this means for you

Nonprofits considering a "pay what you can" or donation-based restaurant model in Virginia

Don't assume nonprofit status, or a donation-based payment structure, exempts your meal sales from Virginia sales tax. The relevant nonprofit sales exemption only covers occasional sales (fewer than 24 occasions per year) -- a continuously operating restaurant doesn't qualify, and you'll need to register as a dealer and collect tax like any other restaurant.

Nonprofits with existing purchase exemption certificates

Your organization's Va. Code § 58.1-609.11 exemption certificate covers what you BUY for your own use, not what you SELL to others. Keep the two separate in your compliance planning.

Anyone structuring a donation-based pricing model for meals

Set up your accounting to clearly separate the taxable meal charge from any voluntary donation from the start. If you can't demonstrate that separation, the Department will tax the entire lump-sum payment, eliminating whatever benefit the donation framing was meant to provide.

Common questions

Q: Does a nonprofit's purchase tax exemption also cover sales tax on food or meals it sells?
A: No -- the nonprofit purchase exemption (Va. Code § 58.1-609.11) only covers what the organization buys for its own use, not sales it makes to customers.

Q: Can a nonprofit sell meals tax-free if the sales happen only occasionally?
A: Yes, if the sales occur on fewer than 24 occasions in a calendar year -- but a continuously operating restaurant doesn't meet that threshold.

Q: If customers pay through a "donation" instead of a fixed price, is that donation taxable?
A: If it's part of an undivided lump-sum payment for the meal with no accounting separation, yes -- the entire amount is treated as the taxable sales price. Only a portion genuinely and separately accounted for as a donation (distinct from the meal's sales price) could avoid tax.

Q: Are gratuities taxable in Virginia?
A: Discretionary gratuities are excluded from the taxable sales price entirely; mandatory gratuities/service charges are excluded up to 20% of the meal's price.

Citations and references

• Va. Code § 58.1-609.11 (nonprofit organization exemption for purchases)
• Va. Code § 58.1-609.10 (occasional-sales exemption for nonprofit food/meal sales)
• Va. Code § 58.1-612 (dealer registration and collection duty)
• Va. Code § 58.1-603 (imposition of sales tax on gross sales price)
• Va. Code § 58.1-602 (definition of "sales price"; gratuity carve-outs)
• Virginia Tax Bulletin 09-8, published as P.D. 09-99 (6/23/2009) (occasional-sales exemption for nonprofit food/meal sales)

Subject

Exemption: Nonprofit Organization - Sales Price: Meals - Nonprofit Restaurant, Gratuities and Donations

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-38

Original ruling text

April 12, 2023

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will respond to your letter submitted on behalf of * (the “Taxpayer”), requesting a ruling on the application of Virginia’s retail sales and use tax to a donation-based restaurant. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a nonprofit organization exempt from federal income taxation under Internal Revenue Code § 501(c)(3), plans to operate a “donate what you can” restaurant in Virginia. Meals will be offered to customers from a menu and customers are asked to either make a monetary donation or volunteer their time as payment. The Taxpayer requests a ruling on whether it is required to collect and remit sales tax on the transactions.

DETERMINATION

Virginia Code § 58.1-609.11 provides an exemption from Virginia’s retail sales and use tax on tangible personal property purchased by a nonprofit organization for its own use or consumption. In order to be eligible for the exemption, the nonprofit organization must meet certain statutory requirements, file an application, and be issued a certificate of exemption by the Department. The Taxpayer has been issued an exemption certificate under this section. However, the certificate does not exempt sales of tangible personal property made by the Taxpayer.

Prepared food and meals are tangible personal property and are generally subject to the retail sales and use tax unless a specific exemption applies. Virginia Code § 58.1-609.10 provides that a nonprofit organization that is eligible for an exemption on its purchases and is otherwise eligible for the occasional sales exemption, “shall be exempt … on its sales of (i) food, prepared food and meals and (ii) tickets to events that include the provision of food, prepared food and meals, so long as such sales take place on fewer than 24 occasions in a calendar year.” See also Virginia Tax Bulletin 09-8, published as Public Document 09-99 (6/23/2009). Because the Taxpayer’s restaurant is not limited to occasional sales, the transactions described by the Taxpayer are subject to retail sales and use tax, unless a customer furnishes a valid certificate of exemption for a specific transaction.

In addition, the Taxpayer is a dealer within the meaning of Virginia Code § 58.1-612, meaning that it must register with the Department and must collect and remit the retail sales and use tax due on its transactions. Virginia Code § 58.1-603 imposes the sales tax on, among other transactions, “the gross sales price of each item or article of tangible personal property when sold at retail or distributed within this Commonwealth.” Pursuant to Virginia Code § 58.1-602,

“Sales Price” means the total amount for which tangible personal property or services are sold…, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer… “Sales Price” does not include … (iv) that portion of the amount paid by the purchaser as a discretionary gratuity added to the price of a meal; or (v) that portion of the amount paid by the purchaser as a mandatory gratuity or service charge added by a restaurant to the price of a meal, but only to the extent that such mandatory gratuity or service charge does not exceed 20 percent of the price of the meal.

Because the Taxpayer must charge tax on the sales price of any nonexempt sales, it should have a method of accounting that separates the sales price from any donation received. Should the Taxpayer accept a donation in one lump sum amount with the sale of a meal, with no method of separating out the charge, the Taxpayer would be required to collect the tax on the entire amount.

The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at , or via email at **.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1834-C

Related Documents

09-8