The Washington Department of Revenue ("Department") recently released a tax determination finding that sales of wedding packages are subject to the retail sales tax and the Business and Occupations ("B&O") tax.
The taxpayer provided wedding packages that included venue rentals and catering services. Between January 2008 and June 2011, the taxpayer did not remit tax on the full contract price of such packages. The taxpayer believed that only the amount of its charges attributable to catering services was subject to tax because Washington exempts fees for the rental of real property from the B&O tax.
Washington imposes a tax on retail sales and a B&O tax for the privilege of engaging in business in the state. While income from the sale or rental of real estate is exempt from B&O tax, income from the license to use real estate is taxable under the "services and other activities" classification of the B&O tax. Catering services are subject to both the retail sales tax and the retailing classification of the B&O tax.
The Department found the venue rental component of the wedding packages was not an exempt rental of real estate. The venue rentals, unlike rentals of real estate, did not grant the purchaser an absolute right of control and occupancy; rather, control remained with the lessor (such as over lighting, heating, cleaning, repairing, opening, and closing). The venue rental was therefore subject to the services and other activities B&O tax. The catering component of the packages was clearly subject to both taxes.
The Department determined that the entire contract amounts were subject to the retail sales tax and the retailing B&O tax under both the "true object," and later the "bundled transaction," rules.
For sales made before the bundled transaction rules took effect in July 2008, the Department looked to what the true object of the transaction was. Under the "true object" test, the taxability of a transaction involving taxable and non-taxable components is determined by which component is the true object of the transaction. If the taxable component is the true object of the transaction and the non-taxable component is an incidental part of the same contract, tax will be computed on the price of the entire contract and will not be allocated between the taxable and non-taxable components.
The Department found that the venue rentals were incidental to the taxable catering services. Thus, the entire amount of the wedding packages sold prior to July 2008 followed the taxability of the catering services and was subject to the retail sales tax and the retailing B&O tax.
After July 2008, Washington's bundled transaction rules govern the taxability of combined transactions. Where any single component of the transaction was subject to tax, the entire transaction was taxable. Thus, because catering services are taxable, the Department found that the entire amounts charged on wedding packages, which included catering services, were subject to both of the taxes.