Meals tax collection a problem in some towns

Under Virginia state law, localities are allowed to collect a tax on prepared meals, from sit-down establishments to fast food restaurants, if it so chooses.

For many towns in the Shenandoah Valley, the meals tax is a large portion of the towns’ revenues. A meals tax works similarly to a sales tax, in that the patron, not the establishment, pays it. Once a month, the restaurant files the tax with the town and if the restaurant is late in filing, it will generally incur some kind of penalty.

Because the tax is self-reported, some towns in the area have issues with collection while others do not.

In Strasburg, delinquent payments have become such a problem, the finance department is now posting a list of restaurants that owe the meals tax in the Town Hall lobby.

The town’s fiscal year 2014-2015 budget projected the town will collect $4.95 million in revenue, with the meals tax collecting $545,000 in revenue, about 11 percent of the general fund.

Dottie Mullins, Strasburg director of finance, estimates the town is owed $6,000 to $14,000 in meals taxes any given month. Mullins said posting the list of delinquent restaurants has helped in the battle to collect the taxes.

“It’s helped some because now the taxpayers see who has paid and who hasn’t, so the restaurants might start hearing it from their customers,” Mullins said.

There are 10 restaurants listed as delinquent in Strasburg as of Dec.16. A new list will be posted in mid-January.

New Market has a 5 percent tax on each meal with a 10 percent late penalty. According to the 2014-2015 fiscal year budgets, the town is expecting to collect about $1.53 million in revenue. The meals tax is expected to bring in $350,550 to the town, approximately 23 percent of the town’s budget.

Teresa Green, the New Market Treasurer, said because most of the restaurants are well established, the town does not have an issue collecting the tax.

“We are very fortunate to have people pay their taxes, because they’ve been doing it for so long, it’s become habitual,” Green said. “Once in a while one will forget to file, so we’ll have to remind them and it will never happen again.”

Woodstock also has a 5 percent tax with a 10 percent penalty fee. According to the Woodstock 2013-2014 fiscal year budget, the town was projected to take in about $6.667 million in revenue. John O’Neill, the Woodstock director of finance, said during that fiscal year, the town collected about $1.005 million in meals taxes, approximately 15 percent of the town’s projected revenue.

O’Neill said he is satisfied with the meals tax collection rate, which he attributes to the town taking a restaurant to court in 2004 for failing to pay their meals taxes.

“I think the word got out that we were serious about collecting the tax,” O’Neill said. “It is a critical piece of our cash flow and I am happy people are diligent about paying it.”

O’Neill added, “We don’t bat 100 every month, but even if the tax is still a week or two late, we still get it.”

In Front Royal, things couldn’t be more different. The meals tax rate there is about 4 percent, with a 10 percent penalty, making up 11.5 percent of the town’s 12.15 million general fund in the 2014-2015 fiscal year.

Kim Gilkey-Breeden, the Front Royal director of finance, said the impact of the town’s meals tax is huge for the budget.

“If we did not have that tax and had to make it up elsewhere, it would be the equivalent of raising the real estate taxes about 13 cents,” Gilkey-Breeden said.

Gilkey-Breeden estimates the town is owed about $8,000 in overdue meals taxes and takes about two to three delinquent restaurants a month to court.

“We have a lot of restaurants who pay on time, especially the chain facilities like McDonald’s, for example,” Gilkey-Breeden said. “But we do have our problem-childs and usually they’re the smaller, independently owned establishments.”

Gilkey-Breeden said the town normally takes a restaurant to court once it is 60 days late on its tax payment.

Contact staff writer Henry Culvyhouse at 540-465-5137 ext. 184, or hculvyhouse@nvdaily.com