May 24, 2018
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request the application of the Virginia retail sales and use tax to various products and services being offered by your client, ***** (the “Taxpayer”), to customers shopping in their retail establishments in Virginia. I apologize for the delay in responding to your request.
FACTS
The Taxpayer operates a chain of grocery stores in various states including Virginia. The Taxpayer is anticipating offering to their Virginia customers the option of personal shopping services (PSS). Under the proposed PSS program, the customer would place their order and pay for their groceries via the Internet or portable app provided by the Taxpayer. The Taxpayer's employees would shop for the items on the customer's list and load them into the customer's car at a curbside service offered by the Taxpayer. The Taxpayer would also accept credit/debit card payments at the curbside location or the customer could pay by cash or other means of payment inside the store.
For pricing points on each PSS order, the Taxpayer would charge both a “flat fee service charge” on the total invoice and a “fee per item surcharge.” The flat fee service charge would appear as a separate line item on the customers cash register receipt. The proposed per item surcharge fee will either be included in the price of each individual item purchased or would appear as an itemized line item on the register receipt.
The Taxpayer requests a ruling regarding the application of the Virginia retail sales and use tax to the proposed PSS service offered to the Taxpayer's Virginia customers and the pricing models the Taxpayer anticipates utilizing.
RULING
Flat Fee Service Charge
Virginia Code § 58.1-602 provides the definition of “sales price” as it relates to the retail sales and use tax and provides, in part, the following:
“Sales price” means the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, 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 material used, labor or service costs, losses or any other expense whatsoever. . ."
As provided above, the term sales price means the total amount, including any services that are part of the sale, for which tangible personal property is sold. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 sets out the Department's policy with respect to the retail sales tax application to services and Subsection A provides the following:
Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.
Transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. As explained in subsection D of this section, the “true object” test is used to determine the taxability of these transactions.
Subsection D of Title 23 VAC 10-210-4040 provides guidance to determine the true object of a transaction that contains both tangible personal property and a service element and provides, in part, the following:
In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the “true object” of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
Based on the cited authorities, the true object of the PSS program is for the customer to obtain their groceries (tangible personal property) in a convenient manner. The service fee would be of no value to the customer without the procurement of groceries; therefore, the separately stated flat service fee in connection with the sale of groceries would be subject to the sale tax. A separately stated flat service fee on the sale of food items that qualify for the reduced sales tax rate will likewise be subject to the reduced sales tax rate. However, a separately stated service fee on sales that contain mixed items, i.e. non-eligible food items and eligible food items would be subject to the full retail sales and use tax rate of 5.3%. A service fee on nontaxable items, i.e. qualifying exempt nonprescription drugs or prescriptions would likewise not be subject to the sales and use tax. The separately stated service fee is unaffected by the provision of a home delivery service.
Home Delivery Charge
Virginia Code § 58.1-609.5 3 provides a sales and use tax exemption for, “[t]ransportation charges separately stated.” Title 23 VAC 10-210-6000 interprets the exemption and states, “[t]he tax does not apply to transportation or delivery charges added to a taxable sale provided such transportation charges are separately stated on the invoice to the customer. If the transportation or delivery charges are not separately stated on the invoice, they will become part of the sales price of the property and will be subject to the tax.”
Based on these authorities, a separately stated charge for home delivery of groceries to the customer would not be subject to the sales tax. See Public Document 17-4 (2/2/17). However, a home delivery charge that is included in the flat fee service charge or the per item surcharge would be considered part of sales price and would be subject to the sales tax.
Surcharge
The Taxpayer is considering two pricing models for the fee per item surcharge. The first model (Model 1) would be “10% per item, capped at $2.00 per item,” to be included in the actual price of the individual item. The second model (Model 2) would be a flat fee per item, such as $0.25 per item, regardless of the price of the individual product, and would appear as a cumulative total separate line item on the customer's receipt. For example, if the customer purchased ten items under Model 2, the customer's register receipt would show a separate flat fee service charge and a separate line item total surcharge of $2.50.
Depending on what pricing model the Taxpayer chooses, the Taxpayer's marketing brochures and related materials would include one of the following statements:
- Individual items you select for your Personal Shopping order will be priced higher than if you shopped in our store yourself; or
- 10% surcharge per item capped at $2.00 per item for each item we shop for you; or
- $0.25 per item for each item we shop for you.
As provided in Virginia Code § 58.1-602, the term sales price means the total amount for which tangible personal property or services are sold, including any services that are a part of the sale. The Taxpayer's marketing materials setting forth the pricing structure will have no impact on the application of the Virginia sales tax to the separately stated surcharge fee or the per item surcharge summarized above. Thus, any surcharge for taxable items sold would become a part of the sales price and subject to the tax, whether included in the sales price or separately stated as a separate line item.
Model 1: A surcharge included in the price of each item is taxable based on the taxability of the respective item. For example, a surcharge included in the price of an eligible food item would be subject to the reduced sales tax rate. Likewise, a surcharge included in the price of a nontaxable prescription drug or qualifying nonprescription drug item would not be subject to the tax. Any surcharge on mixed items would be subject to the tax at the full sales tax rate.
Model 2: See answer to flat fee service charges addressed above. The separately stated surcharge fee in connection with the sale of groceries would be subject to the sale tax.
I trust the above responds to your inquiries. The Virginia Code sections, regulations, and public document 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 question concerning this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1174.T