Were a resort's separately stated purchasing fees and combined shipping-and-handling charges taxable in Virginia?

Plain-English summary

The resort's 10% purchasing fees were taxable because they were charged in connection with retail sales of tangible personal property. Separately stating the fee did not turn it into exempt labor.

The resort hired a vendor during renovations to locate specified products at favorable prices. The vendor charged 10% of the product price as a purchasing fee and separately listed product prices, shipping fees, and purchasing fees.

Virginia's definition of sales price included services that were part of a sale and did not allow deductions for labor, service costs, or other expenses unless a statutory exclusion or exemption applied. Because the purchasing fee arose only with the property sale and no exemption covered it, the fee stayed in the taxable sales price.

The ruling distinguished transportation charges. A separately stated transportation charge could be exempt under Va. Code § 58.1-609.5(3), but combining shipping with taxable handling in one lump-sum charge made the entire shipping-and-handling charge taxable. The audit had already excluded shipping charges that did not include handling.

What this means for you

• Separately stating a service fee does not by itself make the fee exempt.
• A percentage-based procurement or purchasing fee tied to a property sale may be part of the taxable sales price.
• Separately state exempt transportation charges from taxable handling charges.
• The ruling upheld the assessment; it also clarified that the audit imposed no penalty.

Common questions

Q: Why was the purchasing fee taxable?
A: It was charged only in connection with the sale of tangible personal property and no statute excluded or exempted it.

Q: Are all shipping charges taxable?
A: No. The ruling recognized an exemption for separately stated transportation charges.

Q: What if shipping and handling are combined?
A: The combined charge was taxable because the exempt transportation amount was not separately stated.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-603.
• Va. Code § 58.1-609.5(3).
• 23 VAC 10-210-6000.
• P.D. 88-131 (June 13, 1988).
• P.D. 89-132 (April 27, 1989).

Subject

Gross sales price of tangible personal property: Statutes contain no exemption or exclusion from tax for purchasing fees.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-3

Original ruling text

January 10, 2013

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer"), as a result of an audit for the period March 2008 through February 2011.

FACTS

The Taxpayer operates a resort. The Department's audit resulted in the assessment of use tax on certain tangible assets and expensed purchases of tangible personal property. In addition, the use tax was assessed on certain fees, such as shipping and handling fees, setup fees and purchasing fees.

In the process of renovating its facilities, the Taxpayer engaged a vendor to find specified products at the best possible price. The Taxpayer agreed to pay a purchasing fee in which the vendor would charge 10% of the product price of such specified products. On the vendor invoices, the product prices, shipping fees, and purchasing fees are separately staffed. The Taxpayer claims that the purchasing fires held in the audit are exempt because they constitute labor and are separately stated on the vendor invoices. The Taxpayer requests the abatement of the tax and penalty assessed on such fees. It should be noted that no penalty was assessed in the audit.

DETERMINATION

The retail sales tax is applied to the gross sales price of tangible personal property when sold at retail or distributed in Virginia. See Va. Code § 58.1-603. The term "sales price" is defined by Va. Code § 58.1-602 to mean:

the total amount for which tangible personal property or services are sold, including any services that are a part of the sale , valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs , losses or any other expenses whatsoever . "Sales price" shall not include (i) any cash discount allowed and taken; (ii) finance charges, carrying charges, service charges or interest from credit extended on sales of tangible personal property under conditional sale contracts or other conditional contracts providing for deferred payments of the purchase price; (iii) separately stated local property taxes collected; (iv) that portion of the amount paid by the purchaser as a discretionary gratuity added to the price of a meal; or (v) that portion of the amount paid by the purchaser as a mandatory gratuity or service charge added by a restaurant to the price of a meal, but only to the extent that such mandatory gratuity or service charge does not exceed 20% of the price of the meal. Where used articles are taken in trade, or in a series of trades as a credit or part payment on the sale of new or used articles, the tax levied by this chapter shall be paid on the net difference between the sales price of the new or used articles and the credit for the used articles. [Emphasis added.]

Thus, any services that are a part of the retail sale of tangible personal property are subject to the retail sales and use tax computed on the sales price. The only exceptions to this requirement are for the exclusions specifically noted above and for specific statutory exemptions from the retail sales and use tax. For example, Va. Code § 58.1-609.5 sets out the exemptions that are applicable to certain services. Unless the service is expressly exempted by statute, it must be considered a taxable service when charged in connection with the sale of tangible personal property.

In regard to the shipping charges, subdivision 3 of Va. Code § 58.1-609.5 specifically provides an exemption from the retail sales and use tax for separately stated transportation charges. However, the combining of such exempt charge with a taxable charge (such as handling) into a lump-sum "shipping and handling" charge results in a taxable charge because the exempt charge is not separately stated. See Title 23 of the Virginia Administrative Code 10-210-6000 and Public Document (P.D.) 89-132 (4/27/89). In this audit, the shipping charges that did not include a handling charge were not included in the audit.

With respect to the purchasing fees, the statutes contain no exemption or exclusion from the retail sales and use tax for such fees. Accordingly, the purchasing fees charged in connection with the retail sale of tangible personal property are part of the sale and therefore taxable. In P.D. 88-131 (6/13/88), a purchasing fee, which was a fee based on a percentage of the tangible personal property sold, was imposed only when the decorator sold tangible personal property to its clients. As a result, the Tax Commissioner determined that the fee was a part of the sales price of the property and was correctly included in the taxable sales price. For these reasons, I find no basis for removing the purchasing fees from the audit.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to the address noted on the bill.

The, Code of Virginia sections, regulation and public documents cited are available on­line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5188477953.R