Could an online seller exclude charges labeled shipping and handling from Virginia sales tax?

Plain-English summary

Virginia required the online apparel seller to prove that amounts labeled shipping and handling were actually exempt shipping-only charges. Separately stated delivery from the seller to the buyer can be exempt, but handling charges are not included in that exemption.

The audit spreadsheet used a column labeled “Order/S/H,” so the auditor treated the full amount as taxable combined shipping and handling. The seller's supporting invoice did not come from the audit period and appeared not to use Virginia's then-current 5% rate.

Because this was the seller's first audit, Virginia gave it one final opportunity to submit records. Audit staff would schedule a review, and the assessment would remain unchanged if the seller provided no adequate documentation within 30 days after contact.

What this means for you

• State shipping and handling separately on invoices and in accounting exports.
• Keep audit-period records showing that an exempt charge is solely transportation from seller to purchaser.
• A sample invoice from outside the audit period may not prove how audited transactions were billed.
• A first-audit opportunity to supplement records is discretionary and does not itself establish exemption.

Common questions

Q: Are separately stated shipping charges exempt in Virginia?
A: Transportation-out charges can be exempt, but handling charges are not part of that exemption.

Q: Did the seller's invoice prove its claim?
A: No. It was outside the audit period and appeared to use a tax rate other than Virginia's 5% rate.

Q: Was the assessment immediately final?
A: Virginia allowed one last documentation review; without adequate records after audit staff contacted the seller, the assessment would be upheld.

Citations and references

• Va. Code § 58.1-609.5 3.
• 23 VAC 10-210-6000.
• Virginia Public Documents 97-79, 08-74, and 11-126.

Subject

Assessment of shipping and handling charges on its sales to Virginia residents

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-37

Original ruling text

March 20, 2013

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

Dear *:

This reply is in response to your letter submitted on behalf * (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period March 2011 through July 2011. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer sells apparel via the Internet. The Department audited the Taxpayer and assessed additional tax and interest. The Taxpayer protests the assessment of shipping and handling charges on its sales to Virginia residents. The Taxpayer argues that although its sales transaction spreadsheet indicates charges for combined shipping and handling, it only bills its customers for shipping and presents an invoice to support its protest.

DETERMINATION

Virginia Code § 58.1-609.5 3 provides an exemption for separately stated transportation charges. Title 23 of the Virginia Administrative Code 10-210-6000 defines transportation charges as those charges for delivery from the seller to the purchaser, also described as "transportation-out," including postage or common carrier charges. The regulation further states that transportation charges do not include transportation charges from a manufacturer to a retailer's place of business for resale, nor do they include handling charges.

In Public Document (P.D.) 11-126 (7/6/11), the taxpayer was assessed for combined shipping and handling charges. The taxpayer argued that the charges were for shipping only and all handling charges were included in the sales price of the product. The taxpayer presented no additional documentation in the appeal. However, because it was a first audit of the taxpayer, the Tax Commissioner allowed the taxpayer additional time to provide documentation to the Department to support its argument. Also see P.D. 08-74 (6/16/08) and 97-79 (2/18/97).

During the audit, the Taxpayer provided a spreadsheet of its sales for the sample period. The spreadsheet contained a column labeled "Order/S/H." The auditor concluded that the column label identified combined shipping and handling charges. As such, all charges included in that column were held as taxable for the sample period and for the purposes of calculating the audit.

The Taxpayer argues that the charges are for shipping only and do not include handling. Although the Taxpayer presents an invoice to support its contentions, it is not for a sale included in the audit period. Additionally, based on the tax rate indicated on the invoice, the sale does not appear to charge the Virginia tax rate of 5%.

Notwithstanding the foregoing, in accordance with the cited public documents and because this matter involves a first audit of the Taxpayer, I will allow the Taxpayer one final opportunity to provide documentation supporting its position. The audit will be returned to the audit staff, who will contact the Taxpayer to schedule a mutually convenient time to the review the provided documentation. If no additional documentation is provided within 30 days of the date the audit staff contacts the Taxpayer, the assessment will be upheld as issued. In that event, an updated bill, with interest accrued to date, will be mailed, to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges.

The Code of Virginia section, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. 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/1-5073928320.M