How did Virginia tax dietary supplements, mixed product packages, shipping-and-handling charges, and distributor renewal fees?

Plain-English summary

Virginia taxed the dietary supplements, vitamins, toothpaste, cream, combination package, and combined shipping-and-handling charge, but treated the annual distributor renewal fee as a nontaxable service.

Supplements and vitamins did not qualify as exempt nonprescription drugs or as food eligible for the reduced rate. They could be exempt when sold under a written physician's prescription. Toothpaste and cream were taxable personal-care or cosmetic items.

The package combined taxable products with training booklets, CDs, and brochures, so the package remained taxable at the full then-current 5% rate.

Separately stated transportation could be exempt, but handling was taxable. Combining both in one “shipping and handling” amount made the entire charge taxable. The annual renewal fee paid for support services and was nontaxable, while the company remained liable for tax on property furnished in performing those services.

What this means for you

• Marketing an item as a supplement or vitamin did not make it an exempt drug or reduced-rate food.
• A mixed package containing taxable items remained taxable.
• Shipping and handling should be separated if transportation treatment matters.
• A service fee can be exempt while the service provider's own property purchases remain taxable.

Common questions

Were supplements exempt as nonprescription drugs?

No, unless sold pursuant to a qualifying written prescription under the ruling.

Was a separately stated shipping-and-handling charge exempt?

No. Combining taxable handling with transportation made the full amount taxable.

Was the annual renewal fee taxable?

No. It paid for the described support services.

Citations and references

• Va. Code §§ 58.1-602, 58.1-609.10(14), 58.1-611.1, and 58.1-609.5(1), (3).
• 23 VAC 10-210-6000 and 23 VAC 10-210-4040(E).
• Virginia Tax Bulletins 98-4 and 99-11; P.D. 89-132 and 91-223.

Subject

Combination packages, shipping and handling charges, and annual renewal fee

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 06-147

Original ruling text

December 8, 2006

Re: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you request a ruling on the application of the retail sales and use tax to sales of dietary supplements, vitamins and personal care products by an anonymous client (the "Taxpayer"). I apologize for the delay in the Department's response.

FACTS

The Taxpayer is a seller of dietary supplements, vitamins and personal care products. The products will be distributed and sold by independent sales contractors throughout the United States. The Taxpayer requests a ruling regarding the application of the retail sales and use tax to a variety of products. In addition, the Taxpayer requests a ruling on the application of the retail sales and use tax to combination packages, shipping and handling charges and an annual renewal fee.

RULING

Dietary Supplements 1 through 9 and Vitamins

Virginia Code § 58.1-609.10 14 provides an exemption from sales and use tax for nonprescription drugs and proprietary medicines. Virginia Tax Bulletin 98-4 (5/15/98) defines nonprescription drugs as any substances or mixture of substances containing medicines or drugs for which no prescription is required and which are generally sold for internal or topical use in the cure, mitigation, treatment or prevention of disease in human beings. In addition, Virginia Tax Bulletin 98-4 states that the exemption in Va. Code § 58.1-609.10 14 does not apply to food products and supplements, or vitamins and mineral concentrates sold as dietary supplements.

These products are exempt only when sold pursuant to a written prescription by a licensed physician.

Vitamins, minerals and nutritional items are generally, under the Food and Drug Administration's guidelines, classified as food or dietary supplements. As noted above, the exemption outlined in Va. Code § 58.1-609.10 14 does not apply to food products and supplements, or vitamins and mineral concentrates sold as dietary supplements. The products sold by the Taxpayer as dietary supplements and vitamins do not qualify for the retail sales and use tax exemption in Va. Code § 58.1-609.10 14. Furthermore, as dietary supplements and vitamins the products do not qualify for the reduced state sales tax rate on food for human consumption. See Va. Code § 58.1-611.1 and Tax Bulletin 99-11 (10/1/99). Accordingly, sales of these products by the Taxpayer are taxable at the full sales tax rate of 5.0% (4.0% state and 1.0% local).

Toothpaste and Cream

Virginia Tax Bulletin 98-4 states that the exemption in Va. Code § 58.1-609.10 14 does not apply to cosmetics, including body lotions and cold creams, and toilet articles, including toothpastes. Accordingly, sales of these products by the Taxpayer are taxable at the full sales tax rate of 5.0% (4.0% state and 1.0% local).

Combination Package

In this instance, the Taxpayer's combination package contains taxable items (including supplements, vitamins, toothpaste and cream) as well as training booklets, CDs and brochures. As indicated above, these items are taxable and when sold in combination would remain taxable at the full retail sales and use tax rate of 5.0%.

Shipping and Handling Charges

Virginia's retail sales tax is computed on the "sales price" of an item. Virginia Code § 58.1-602 defines "sales price" as the "total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . ."

Virginia Code § 58.1-609.5 3 provides an exemption for separately stated transportation charges. Title 23 Virginia Administrative Code (VAC) 10-210-6000 interprets the exemption and states, "The 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." The regulation specifically excludes "handling charges" from the definition of "transportation charges" because handling does not constitute part of the actual transportation of the product to the customer.

When a taxable handling charge and an exempt transportation charge are combined into a single charge, the combined "shipping and handling" charge is taxable, even if such lump sum is separately stated. This policy is longstanding and has been consistently applied as demonstrated by Public Documents (P.D.) 89-132 (4/27/89) and 91-223 (9/23/91). In addition, handling charges in connection with the sale of tangible personal property are subject to the tax.

Annual Renewal Fee

You represent that the Taxpayer charges an annual renewal fee to distributors for specific support services. Based on the information presented, the Taxpayer is providing a nontaxable service pursuant to Va. Code § 58.1-609.5 1. Accordingly, the renewal fee charged by the Taxpayer to its distributors is not taxable.

However, as a service provider, the Taxpayer is liable for the tax on all purchases of tangible personal property furnished in connection with its services. See Title 23 of the Virginia Administrative Code 10-210-4040 E.

This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations, Tax Bulletins and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-683340965.i