Sales Tax State Activity Update November 2005

Cafeteria Services In-Line for Exemption in Virginia

The Virginia Department of Revenue conducted an audit of the Taxpayer, resulting in the assessment of tax on various items. At issue in this appeal is the assessment of tax on management fees charged by an outside provider in connection with the operation of two cafeterias.

Under the terms of its contract with the Taxpayer, the Provider is required to operate and manage manual food service for two employee cafeterias on a management fee basis. The management fee for providing this service is the cost of business plus four percent of net manual sales or $10,000 per year, whichever is greater. Net manual sales are defined in the contract as, "all sales made by the Provider on the premises, reduced by applicable sales taxes."

The Taxpayer is responsible for furnishing the Provider an adequate space and all necessary utilities and facilities. In addition, the Taxpayer is responsible for providing all food equipment necessary for efficient services, and for cleaning all dining room, cart and stand areas.

The Taxpayer and the Provider mutually determine the products to be sold and the price of the products sold. All products purchased and sold by the Provider remain the property of the Provider, with title vested in the Provider until sold.

The Taxpayer contends that the agreement is solely for the management of the cafeterias and not for the sale of tangible personal property and as a result contends the management fees are exempt from retail sales and use tax.

Determination

Virginia Code § 58.1-609.5 1 provides an exemption from the sales and use tax for, “professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . ."

A review of the agreements between the Taxpayer and the Provider reveals that the Provider is required to operate and manage a food service for the Taxpayer.

The menu selection and the prices at which items will be sold are subject to approval by the Taxpayer; however, the Provider bears the risk of profit and loss in the operation. The Provider collects all sales tax on sales of food to the Taxpayer's employees, visitors and other customers, and remits the tax to the Department. Based on the provisions of the contract, there is no transfer of food to the Taxpayer for a consideration. In fact, the Provider holds title to all food procured for subsequent sale to the ultimate consumer.

Based on the foregoing, it was determined that the agreements between the Taxpayer and the Provider are for the professional services to operate the Taxpayer's food service facilities. In consideration thereof, the Taxpayer pays a management fee. As such, the management fee represents an exempt charge in connection with the provision of a service, as set out in Va. Code § 58.1-609.5 1.

Ruling of the Tax Commissioner, P.D.05-155, Virginia Department of Taxation, 10/04/2005