Does Virginia sales tax apply to a credit card processing fee a seller charges a customer buying tangible personal property?

Plain-English summary

A dealer selling plumbing and heating supplies was audited and found to have not charged sales tax on a credit card processing fee it billed to customers who chose to pay by credit card, on top of the taxable price of the plumbing and heating supplies sold. The Department assessed tax on those fees, and the dealer appealed, arguing the fee itself shouldn't be taxable because it relates to how the customer chose to pay, not to the tangible goods sold.

The Tax Commissioner disagreed. Virginia's sales tax reaches the full "sales price" of tangible personal property, and the sales price statute (Va. Code § 58.1-602) defines that broadly to include the total amount charged for the property "including any services that are a part of the sale." Any charge connected to a taxable sale is itself taxable unless a specific exemption applies, and none applied here. The dealer also invoked the "true object test" -- the rule used to decide whether a mixed transaction is really for a service or for goods -- arguing the fee was really about processing a payment, not about the goods. The Department rejected that too: the true object of the overall transaction was still the retail sale of plumbing and heating supplies; the credit card fee was incidental to that sale, not something the customer was independently trying to buy. The Department also rejected the dealer's fallback argument that the fee was really an accounts-receivable charge rather than part of the sale, since it was only charged to customers who used credit. The assessment was upheld; because the dealer had already paid it in full, no further action was required.

What this means for you

Retailers who pass along credit card processing fees to customers

If you charge a separate line-item fee to customers who pay by credit card in connection with selling them tangible personal property, that fee is part of the taxable sales price in Virginia -- charge and remit sales tax on it just as you would on the underlying goods, unless a specific statutory exemption covers the whole transaction.

Accountants and bookkeepers reviewing point-of-sale tax setups

Don't assume a payment-processing surcharge falls outside the sales tax base just because it's tied to how the customer paid rather than what they bought, or because it's only charged to some customers. Under the true object test, a fee connected to an otherwise-taxable sale of goods is taxed along with the goods unless the fee independently qualifies for its own exemption.

Common questions

Q: Is a credit card surcharge taxable in Virginia if it's billed separately from the price of the goods?
A: Yes -- if it's charged in connection with a taxable sale of tangible personal property, it's part of the taxable sales price under Va. Code § 58.1-602, regardless of whether it's itemized separately.

Q: Does the "true object test" exempt a credit card fee because it relates to payment processing, not the goods themselves?
A: No -- the true object test looks at the purpose of the overall transaction. Since the customer's purpose was buying tangible goods, not purchasing a standalone payment-processing service, the fee stays taxable.

Q: What if the fee is only charged to customers who choose to pay by credit card?
A: That doesn't change the result. The fee is still made in connection with the retail sale, so it's part of the sales price regardless of which payment method triggered it.

Citations and references

• Va. Code § 58.1-603 (imposition of retail sales and use tax)
• Va. Code § 58.1-602 (definition of "sales price")
• 23 VAC 10-210-4040 (true object test for mixed goods/services transactions)

Subject

Sales Price: Transaction Fees - Credit Card Fees Charged in Connection With Tangible Personal Property Are Taxable

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-16

Original ruling text

February 21, 2023

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

Dear *:

This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the “Taxpayer”) for the periods August 2018 through July 2021. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a dealer that sells various plumbing and heating supplies, was audited for the period at issue. Under a first generation audit, the auditor determined that the Taxpayer did not charge sales tax on a credit card fee charged to its customer in connection with the sale of tangible personal property. The Department issued an assessment for the unpaid tax liability and applicable interest. The Taxpayer timely appealed, alleging the credit card fee is not subject to tax.

DETERMINATION

Virginia Code § 58.1-603 imposes the sales tax on, among other things, the gross sales price of certain taxable services and each item of tangible personal property sold at retail or distributed in Virginia. Virginia Code § 58.1-602 defines sales price to include “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale…” Accordingly, any charge in connection with the sale of tangible personal property is considered taxable, unless it is specifically exempt pursuant to another section of Chapter 6 of Title 58.1 of the Code of Virginia . In this case, there is no such exemption applicable to credit card fees.

The Taxpayer asserts the charges should be exempt pursuant to the true object test found in Title 23 of the Virginia Administrative Code 10-210-4040. According to this regulation, transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged based on whether the “true object” of the transaction is the provision of an exempt service or a taxable retail sale. The true object of the transaction, in this case, was the retail sale of tangible personal property because the credit card fee was clearly not the customer’s primary purpose for entering into the transaction.

Similarly, the Taxpayer argues that the fee is related to accounts receivable rather than the sale of tangible personal property because it is only charged to those customers who elect to pay via credit card. However, the charge is made in connection with the retail sale of tangible personal property and must be included in the taxable sales price of the transaction in accordance with Virginia Code § 58.1-602.

As such, the assessment is upheld and remains correct as issued. Because the Taxpayer has paid the assessment in full, no further action is required.

The Code of Virginia sections and regulation cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at , or via email at **.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4128-C