Purchasing Meals as a Tax Exempt Entity in VA, What you Need to Know

Virginia Changes Sales Tax Policy on Meals Purchased by Tax Exempt Entities – Effective as of April 22, 2016, a change in policy by the Virginia Department of Taxation allows state and local governmental entities, nonprofit organizations and nonprofit churches in Virginia to purchase prepared foods, catering and related services without paying Virginia sales tax. Caterers and restaurants in the Commonwealth should take note of this development, as such entities will now present exemption certificates to make tax-free purchases.

Prior to the change in policy, the majority of catering and prepared food purchases made by exempt entities were subject to Virginia sales tax. The taxability of such purchases was based on the Department’s position that the purchases were for “taxable services,” which is generally outside the scope of the sales tax exemption for the tax exempt entities addressed in the ruling. Further, the Department will no longer take the position that food purchased by the exempt entities is being consumed by individuals, and not the exempt organization. The policy change does not impact food purchases made by the federal government, which are generally exempt from sales tax and will remain exempt.

The Tax Bulletin (16-3) that was issued on May 2, 2016, indicates the exemption from sales tax for nonprofit entities and state and local governments purchasing prepared food and catering services only applies if the Department’s new use and consumption test is met. Although the bulletin describes this test as a “bright-line test,” the first and third elements of the test are somewhat subjective in nature. The “use and consumption” test is satisfied if the following requirements are met:

1. The prepared food, meals, or catering purchased furthers a function or purpose of the governmental or nonprofit entity;
2. The charge for the food, meals, or catering is billed to and paid for by the entity claiming tax exemption with payment coming from the entity’s account, rather than using cash or an individual’s account; and
3. The entity claiming the exemption determines to whom, when and how the meals or food are served and consumed.

The bulletin does provide useful examples on the application of the test, but the examples also leave some questions unanswered. For example, will the purchase of a meal by a state and/or local government employee while traveling ever meet the test? One of the examples suggests that it will not because the governmental entity does not determine to whom, when and how the meal will be consumed. This is in contrast to an annual banquet honoring employees, which seemingly would meet this element of the test. The example addressing the annual banquet scenario, which concludes that the catering services purchased are not subject to sales tax, suggests the element of the test requiring that the purchase further the organization’s function, or purpose will be interpreted somewhat broadly. One could certainly make a reasonable argument that the function of a government agency is not furthered by the honoring of its employees.

Churches and federal government entities are not required to satisfy the use and consumption test in order to purchase meals, catering and related services for the exemption to apply. So long as the church or federal government entity issues the applicable exemption certificate to the seller, the purchase is exempt from Virginia sales tax.

Restaurateurs and caters need to ensure that they receive the sales and use tax exemption certificate from an exempt entity attempting to make a purchase tax free, and that the payment for the meals and catering services are being paid for directly by the entity claiming the exemption. If payment is made in cash, sales tax will generally apply even if an exemption certificate is provided. The exemption certificates and the records pertaining to payment should be retained for a minimum of three years in case a sales tax audit is conducted on your business.

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