Jun 25, 2018
From KPMG TaxWatch
The Virginia Department of Taxation recently issued a policy document addressing the taxability of charges associated with a grocery store chain’s proposed “personal shopping services” (PSS). Under the proposed PSS program, a customer could order and pay for groceries via the Internet or portable app. The taxpayer's employees would then shop for the items on the customer's list and transfer them to the customer’s vehicle curbside. The taxpayer planned to charge customers both a “flat fee service charge” and a “fee per item surcharge.” The flat-fee service charge would appear as a separate line item on the customer’s receipt. The taxpayer was considering two pricing models for the “fee per item surcharge.” This surcharge would either be included in the price of each individual item purchased (10 percent per item, capped at $2.00 per item) or would be a flat per-item fee (e.g., $.25 per item) appearing as an itemized line item on the receipt.
Under Virginia law, sales tax is imposed on the “sales price” of retail sales. “Sales price” means the total amount for which tangible personal property is sold, “including any services that are a part of the sale.” In the policy document, the Department explained that transactions involving both the sale of tangible personal property and the provision of services are generally either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. The taxability of such a bundled sale depends on the “true object” of the transaction. The Department concluded that the true object of the PSS program was for the customer to obtain his/her groceries (tangible personal property) in a convenient manner. The Department reasoned that the service fee would never be charged absent the procurement of groceries. Therefore, the flat fee service charge would be subject to tax, even if separately stated. Moreover, the fee per item surcharge would also be taxable, regardless of whether it was separately stated or embedded in the price of the item sold. The Department caveated that if a separately stated fee applied entirely to food items that qualified for a reduced sales tax rate, the fee would likewise be subject to the reduced rate; and if the fee applied entirely to nontaxable items (e.g., prescription drugs), then the fee would likewise be nontaxable. However, a separately stated fee on sales that contained a mix of items would be subject to tax at the full rate. Similarly, a surcharge embedded in the price of an item would be taxable based on the taxability of the respective item. For more information on this policy document, please contact Sarika Bakshi at 703-286 8467.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.