Meals tax singled out as ‘pass-through’ tax on customers
By Roger Bianchini
Warren County Report
Front Royal, VA – Anticipated for over two months, the lawsuit challenging inclusion of a Town of Front Royal meals tax in “PILOT” fees attached to commercial central water and sewer bills in the Route 522 North Corridor was filed in Warren County Circuit Court on Friday, Jan. 9.
The three plaintiffs are the primary national chain restaurants, Cracker Barrel, Applebee’s and TGI Friday’s, located in either the Riverton Commons or Crooked Run Commercial Centers on both sides of Route 340/522 just north of the Interstate 66 Front Royal interchange. The restaurants are not challenging the Corridor Agreement or PILOT fees in general, but rather have singled out the one fee – the meals tax – that is hitting them hardest in the pocket.
The suit states inclusion of the town meals tax component of the PILOT fees has raised the restaurants’ monthly water and sewer bills about 650 percent – from “under $1,000 to nearly $7,300” in one Applebee’s bill cited; from “approximately $2,000 to nearly $15,000” in a Cracker Barrel bill; and from “under $2,500 to over $12,000″ in a referenced TGI Friday bill.
In a mid-September press conference, town officials presented an April 2008 Cracker Barrel water-sewer bill totaling $13,674. Of that amount, $13,169 was in PILOT fees, with $12,330 of that total comprised of the meals tax component.
In September we asked lead attorney for the restaurants, William “Sandy” Rowe, why his clients had signed contracts that appear to include the town meals tax in the PILOT (Payment In Lieu Of Taxes) fees attached to town central water and sewer bills. Rowe responded that “a careful reading” of those service contracts reveal only agreement to provide revenue and tax information to the town upon which to base calculation of the various taxes included in the PILOT fees. He explained further that the restaurants believe the meals tax is a pass through tax to customers, rather than a tax on the business itself. So while the restaurants may have agreed to supply information on their food sales that a meals tax could be calculated from, Rowe contends the restaurants did not agree to pay the meals tax component of the fees.
Rowe categorizes a meals tax with others not included in the PILOT fees. In the suit such taxes are listed as employee withholding, the county’s meals tax, and state sales and use taxes – “None of these are taxes the Plaintiffs would pay to the Town if the Restaurants were located within the Town,” the suit states.
“If the restaurants were located within the Town, each would collect the Town’s Meals Tax from its customers and would remit the tax to the Town.”
The suit continues to cite the town’s own codes, Section 75-24, in upholding that argument.
“There is hereby imposed and levied by the Town on each person at the rate of (4%) on the amount paid for meals purchased from any food establishment, whether prepared in such food establishment … or not, and whether consumed on the premises or not.” (Bold typeface added by plaintiff),” the suit quotes from the town code.
The Front Royal Town Council meets Monday night, Jan. 12. One agenda item was a request for an official letter of support upholding a Resolution of support a split Warren County Board of Supervisors approved last year. A closed meeting to discuss the suit was added to the council’s Jan. 12 agenda.
The PILOT fees are designed to protect the town’s interest in not only covering the cost of providing central water and sewer to businesses located outside its limits, but also against potential lost tax revenues should in-town businesses suffer from the new county-based competition enabled by the agreement entered into by the town and county in 1998. The agreement was seen as a compromise that helped avoid a contested annexation of the corridor area the town would have filed to provide such services without the agreement.
Town Manager Michael Graham has pointed out the town has budgeted in the anticipated corridor fee revenues to support its current 2009 fiscal year budget. Town Finance Director Kim Gilkey-Breeden told council on Jan. 5, the loss of the meals tax component of the corridor fees would cost the town about $656,000 of total anticipated corridor revenues of $875,000 in the current budget year.
The 1998 corridor agreement was seen as a first of its kind in Virginia and was upheld by the state legislature and a special three-judge panel that reviewed its basic premises. While one small food operation, now Bullets, tied to the Quarles Truck Stop has paid the meals tax component of the fees since 2001, this is the first legal challenge of that aspect of the agreement.