Getting sales tax right on “easy return labels” is hard – Wacky Tax Wednesday

Sometimes seemingly simple tasks can be deceptively complex. Shipping clothes to customers typically isn’t too complicated; getting the sales tax right on shipping and handling fees can be.

For example, while charges to ship merchandise from a seller to a customer are generally exempt in Virginia, charges for a customer to return merchandise to the seller are usually taxable. And while separately stated shipping charges may be exempt, combined shipping and handling charges tend to be taxable. 

It's no wonder mix-ups happen.

Perhaps the only drawback of purchasing clothing online is the need to schlep it to the post office when you don’t like how it fits or looks.  An “easy return label” makes that process much simpler.

One retailer that does business in Virginia charged customers a flat fee if they used the easy return label provided with their purchases. Separately, it credited the account the sales price of the returned merchandise, along with the sales tax collected on the returned merchandise.

During an audit, the seller was found liable for sales tax on the easy return label fees. The seller hadn’t taxed the fees because they represented the postage cost to return the merchandise to the seller, and Virginia law provides an exception for separately stated transportation charges (Virginia Code § 58.1-609.5 3).

According to the Tax Commissioner, however, Virginia Administrative Code (VAC) 10-210-6000 (B) specifies that transportation and delivery charges are “charges for delivery from the seller to the purchaser.” The exemption doesn’t extend to transportation and delivery charges from a purchaser to a seller, or from a manufacturer to a retailer for resale. [Emphasis mine.]

Too bad that isn’t spelled out in Virginia Code § 58.1-609.5 3.

Furthermore, while it’s true separately stated shipping and handling fees are generally exempt in Virginia, the Tax Commissioner noted that any tax due to a dealer in the event purchases are returned “shall not … include the tax paid upon any cash retained by the dealer after such return of merchandise.” Since the seller retained fees for the easy return label, those charges “are subject to the tax.”

The auditor also assessed the retailer for sales tax on its shipping and handling fees. While fees to ship products to a customer are exempt from Virginia sales tax as explained above, handling fees are taxable. Under 23VAC10-210-6000(B), “transportation” and “delivery charges” do not include handling charges.

The retailer contested the assessment, arguing that although it used the term “shipping and handling” on customer invoices, the fees were in fact only for shipping. 

Not applying sales tax to easy return label fees “was a new issue in the Taxpayer’s audit,” as was mislabeling shipping fees as shipping and handling fees. As a result, the auditor provided the taxpayer with some relief.

The taxpayer was assessed the tax due on 57% of the easy return label and shipping and handling charges, although the entire charge for both are subject to Virginia sales tax. That saves the retailer from paying tax on 43% of the charges. Full details are available in Ruling 19-115.

Unfortunately, not all auditors are so generous, and since businesses often discover errors only after being audited, the uncollected sales tax and associated penalties and interest charges can add up.

Automating sales tax collection and remittance can’t make sales tax laws any less wacky, but it can help improve compliance. Learn more at avalara.com.