Are prepaid grocery-delivery memberships and separately stated delivery charges taxable in Virginia?

Subject

The transaction for the purchase of prepaid delivery service does not provide any tangible personal property,and the transaction is not subject to the Virginia retail sales tax

Plain-English summary

An internet grocery company offered customers three-, six-, or twelve-month prepaid delivery service. Customers bought that service separately from groceries and then received unlimited deliveries during the purchased period.

Virginia ruled that the prepaid service was an exempt transportation or delivery charge. It was purchased in a separate transaction, satisfying the separately stated requirement, and the customer received no tangible personal property from buying the service itself.

The same rule applied to ordinary delivery charges on orders containing both food and non-food products. Although those products could face different tax rates, the delivery charge was not taxable if it was separately stated on the customer's invoice or receipt.

Citations and references

• Va. Code §§ 58.1-609.5(3) and 58.1-603.
• 23 VAC 10-210-6000 A-B.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-140

Original ruling text

June 27, 2016

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you request a ruling on the application of the retail sales and use tax to prepaid delivery charges and to delivery charges associated with the sale of grocery products. It is my understanding that the Taxpayer is registered for the tax and is filing returns with the Department.

FACTS

The Taxpayer is an internet grocery delivery company that sells a variety of grocery staple products, to include both food and non-food products. Customers use the Taxpayer's website to purchase grocery products online. To fulfill orders, the Taxpayer pulls inventory from grocery stores that it is affiliated with, and then packages and delivers the orders to customers in the Taxpayer's trucks. The customers are charged a delivery fee for the delivery of the orders.

The Taxpayer offers its customers the option of purchasing a * (the “prepaid delivery service”), which allows the customers to purchase prepaid delivery service for a three month, six month, or twelve month period. The Taxpayer requests a ruling regarding the application of the tax on the sale of the prepaid delivery service to its customers.

The Taxpayer also requests a ruling regarding the application of the tax on delivery charges when food and non-food products are sold to the Taxpayer's customers in the same transaction.

RULING

Prepaid Delivery Service

Virginia Code § 58.1-609.5 3 provides that the retail sales and use tax does not apply to “[t]ransportation charges separately stated.”

Title 23 of the Virginia Administrative Code (VAC) 10-210-6000 A states that:

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.

Title 23 VAC 10-210-6000 B further provides that “As used in this section the terms ‘transportation’ and ‘delivery charges’ mean charges for delivery from the seller to the purchaser, commonly known as ‘transportation-out,’ and include postage or common carrier charges.”

The prepaid delivery service is purchased by customers through the Taxpayer's website, separately from the purchase of grocery products. Purchasing the prepaid delivery service entitles the customers to unlimited delivery services throughout the time period purchased. The customers do not incur a delivery charge when purchases of grocery products are made during the time period purchased. The purchase of the prepaid delivery service does not provide any tangible products to the Taxpayer's customers.

The charge for the Taxpayer's prepaid delivery service is considered a transportation or delivery charge as defined in Title 23 VAC 10-210-6000 B. Also, the “separately stated” criteria of Va. Code § 58.1-609.5 3 is met because the purchase of the prepaid delivery service is made in a separate transaction from the purchase of grocery products. In accordance with the aforementioned authorities, the charge for the prepaid delivery service in a separate transaction from the purchase of the grocery products (or any other tangible personal property) constitutes an exempt transportation or delivery charge that is not subject to the Virginia retail sales tax.

Additionally, Va. Code § 58.1-603 imposes the sales tax on the sale or distribution of tangible personal property in Virginia. In this instance, the transaction for the purchase of prepaid delivery service does not provide any tangible personal property. Accordingly, the transaction is not subject to the Virginia retail sales tax as imposed in Va. Code § 58.1-603.

Sale of Food and Non-Food Products

The Taxpayer requests guidance regarding the application of the tax on delivery charges when purchases of food and non-food products are made by its customers in the same transaction.

The Virginia Retail Sales and Use Tax Act imposes a sales tax on the sale of tangible personal property. The Act also imposes a sales tax, at a reduced rate, on the sale of food products. While there is a difference in the food and non-food sales tax rates, the application of the tax on delivery charges remains the same, as considered in Va. Code § 58.1-609.5 3, when food and non-food products are sold in the same transaction. Accordingly, the delivery charge will not be subject to the tax when food and non-food items are sold in the same transaction, provided that the delivery charge is separately stated on the customer's invoice or receipt.

This response is based on the facts provided in your letter and in a subsequent phone call with the Department's analyst, as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6271682899.P