Could Virginia separately assess a retailer's freight-in costs after those costs were included in the customer price already subjected to sales tax?

Subject

Sales tax collected and included the freight-in charges

Plain-English summary

A truck-and-trailer rental company also sold moving supplies and vehicle hitches. Its vendors charged freight to deliver resale merchandise to its business. The company included those freight-in costs in product cost, applied its markup to the total, and collected sales tax on the full customer price.

Virginia explained that freight-in, unlike separately stated delivery from seller to final customer, is not independently exempt. It is part of the product's taxable cost. But because this company had already rolled freight-in into the retail sales price and collected tax on that full amount, the audit's separate assessment of the freight-in costs was incorrect. Virginia abated the assessment and ordered a refund with interest.

What this means for you

• Incoming freight from a vendor to a retailer is generally part of taxable product cost.
• If freight-in is included in the marked-up retail price and sales tax is collected on that full price, separately assessing the same cost can duplicate the tax.
• Keep purchase, markup, invoice, and sales-tax records that trace freight costs into the taxable customer price.

Citations and references

• 23 VAC 10-210-6000, freight-in versus exempt separately stated transportation-out charges.
• P.D. 04-61, transportation-charge treatment.
• Va. Code § 58.1-15, interest on the refund described in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-73

Original ruling text

May 18, 2007

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

Dear *:

This is in response to the letter submitted on behalf of * (the "Taxpayer") in which the Taxpayer seeks correction of the retail sales and use tax assessment issued for the audit period April 2001 through March 2004, and refund of the tax and interest remitted with regard to the freight-in charges being contested in this appeal. I apologize for the Department's delay in responding to your appeal.

FACTS

The Taxpayer is in the business of short-term rental of trucks and trailers in the self-moving of household goods industry. In support of its rental business, the Taxpayer also sells moving supplies (boxes, tape, etc.) and vehicle hitches to its customers. The Department audited the Taxpayer and assessed tax on various items. The Taxpayer disagrees with the assessment of tax on retail freight-in charges. The Taxpayer contends that Title 23 of the Virginia Administrative Code 10-210-6000 and Public Document 04-61 (8/23/04) have been misapplied and that the assessment is erroneous.

DETERMINATION

Title 23 of the Virginia Administrative Code (VAC) 10-210-6000 sets out the policy regarding the application of sales and use tax to transportation and delivery charges. This regulation provides that separately stated transportation charges for delivery from the seller to the purchaser, commonly known as "transportation-out" charges, qualify for the exemption from the tax. The regulation further provides that transportation charges for the delivery of resale products from the manufacturer to a retailer's place of business, commonly known as "transportation-in" charges, do not qualify for the exemption.

Pursuant to Title 23 VAC 10-210-6000, the Taxpayer's incoming freight charges (freight-in charges) for the delivery of resale merchandise from its vendors to the Taxpayer's place of business do not qualify for an exemption from the sales and use tax. Such freight-in charges do not constitute delivery to the final consumer. The freight-in charges are part of the cost of the product and included in the sales price of the property subject to the tax.

Based on the information provided, the Taxpayer did not reduce the sales price of the items it sold for the freight-in charges. The Taxpayer properly treated the freight­-in charges as part of the cost of the items sold and based its markup on the total cost. The sales price charged to its customers, on which sales tax was collected, included the freight-in charges.

Accordingly, the assessment of tax on the freight-in charges at issue is incorrect and will be abated. Because the assessment has been paid in full, the Department will issue a refund for the tax paid on freight-in charges. The refund will take into account the over accrued use tax applied against the total assessment and will include accrued interest from the date of payment, in accordance with Va. Code § 58.1-15.

The Code of Virginia and regulation sections 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 determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/56335P