Does a Virginia hotel have to charge sales tax on a separately stated credit card surcharge and on cancellation fees for rooms and events?

Plain-English summary

A hotel asked the Virginia Tax Commissioner two questions about fees it charges its group, banquet, and catering customers:

1. If it adds a separately itemized credit card fee (a surcharge to offset what the card companies charge it) to a bill for rooms and events, is that fee subject to Virginia sales tax?
2. Is a cancellation fee — charged when a group or a transient guest cancels a booking or backs out of a contract — subject to sales tax?

Question 1 — the credit card surcharge is taxable. Virginia's sales tax reaches the total amount charged for a taxable sale, "including any services that are a part of the sale" (§ 58.1-602). When a transaction mixes property and services, Virginia looks at the "true object" of the deal (23 VAC 10-210-4040). Here the true object of the room bookings is taxable accommodations, and the true object of the banquet and catering is the taxable sale of food. Because the credit card fee rides along with those taxable sales, it is taxed too. (The Commissioner contrasted an earlier ruling where a fee to activate a prepaid credit card was not taxable, because there the true object was the card's future purchasing power, not any taxable item.)

Question 2 — a cancellation fee is usually not taxable, but check the contract. A fee for canceling a transient reservation is generally not taxable, because the guest is never charged for the room and never has the right to occupy it — so the fee is not an "additional room charge." But if the customer's event contract obligates them to pay for the rooms, food, and beverages they reserved even after canceling, then the "cancellation fee" is really a charge for those unused rooms and meals, and it is taxable. The Commissioner told this hotel — which had been collecting tax on all its cancellations — to look at what each contract actually says: no tax if the contract doesn't make the customer liable for it, tax if it does.

What this means for you

Hotels, resorts, and event venues

If you add a credit card surcharge to a bill that already includes taxable rooms, catered food, or banquet charges, add the sales tax to the surcharge too — Virginia treats it as part of the taxable sale, not as a separate exempt "service." On cancellations, don't assume every cancellation fee is taxable (or that none are). The deciding factor is your contract: a true "we're keeping your deposit as a penalty" fee for a transient no-show is generally not taxable, but a contract clause that bills the customer for the reserved rooms and meals of a canceled event produces a taxable charge.

Any business adding a card surcharge or "convenience fee"

The lesson generalizes past hotels: a separately stated credit card or processing fee is taxed the same way as the thing you're selling. Tack it onto a taxable sale and it's taxable; tack it onto an exempt sale and it isn't. Stating it on its own line does not make it a separate, non-taxable service.

Accountants and tax professionals

This ruling is a clean application of the true object doctrine (23 VAC 10-210-4040) to ancillary fees, and a reminder that § 58.1-602's "sales price" sweeps in charges connected to the sale. For hotel clients, flag cancellation-fee handling as contract-specific — over-collecting tax on non-taxable cancellation penalties is a real and common error worth auditing.

Common questions

Q: We add a credit card fee to offset processing costs. Do we charge sales tax on it?
A: On a taxable sale (rooms, catered food, banquets), yes. Virginia taxes the total charged for a taxable sale including services that are part of it, and the "true object" here is taxable, so the surcharge is taxable too.

Q: Does listing the credit card fee on a separate line make it non-taxable?
A: No. Separately stating it does not turn it into an exempt service. It follows the tax treatment of the underlying sale.

Q: Is a hotel cancellation fee taxable?
A: Usually not — if a guest cancels a reservation and never occupies a room, the fee isn't an additional room charge, so it isn't taxable. It becomes taxable when the customer's contract obligates them to pay for the reserved rooms, food, or beverages of a canceled event.

Q: We've been collecting tax on all our cancellation fees. Is that a problem?
A: It may be. The Commissioner told this hotel to review its contracts and stop collecting tax on cancellations where the contract doesn't make the customer liable for the tax. Only collect where the contract requires payment for the reserved rooms and meals.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-603 — imposition of the retail sales tax on the gross sales price of taxable services and tangible personal property sold at retail
• Va. Code § 58.1-602 — "sales price" is the total amount for which property or services are sold, including services that are a part of the sale
• 23 VAC 10-210-730 A — the tax applies to the charge for rooms and accommodations furnished to transients by a hotel
• 23 VAC 10-210-730 C — additional charges made in connection with the rental of a room are part of the taxable room charge
• 23 VAC 10-210-4040 — the "true object" test for mixed property/service transactions

Prior public documents the Commissioner relied on (described here rather than linked): a 2023 ruling holding a credit card fee taxable because the true object of the purchase was taxable property; a 2005 ruling holding a prepaid credit card's activation/reload fee not taxable because the true object was purchasing power; two rulings (1998 and 2010) treating banquet and catering charges as taxable food sales; a 2010 ruling that a cancellation fee is not an additional room charge because the guest has no right of possession; and a 2014 ruling that a cancellation fee is taxable when the contract obligates the customer to pay for the rooms, food, and beverages of a canceled event.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-24

Original ruling text

May 11, 2026

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will respond to your letter submitted on behalf of * (the “Taxpayer”) seeking a ruling as to the applicability of the Virginia retail sales and use tax to credit card fees and hotel cancellations.

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

FACTS

The Taxpayer, a hotel, is in the process of implementing a separately itemized credit card fee for group events, banquets, and catering services in order to offset the credit card fees charged by credit card companies. In addition, the Taxpayer remits sales tax for groups and transients that either cancel their bookings or deviate from the contracted amounts. The Taxpayer asks several questions about the taxability of credit card and cancellation fees.

RULING

Question 1

Are credit card fees subject to Virginia sales and use tax?

The Taxpayer is in the process of implementing a credit card fee for group events, banquets, and catering for customers that pay by credit card. The fee, separately stated on an invoice, would be based on the total bill including room rentals, food and beverage sales, service charges, ancillary revenue, and applicable taxes.

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 or service is considered taxable, unless it is specifically exempt pursuant to another section of Chapter 6 of Title 58.1 of the Code of Virginia . Title 23 of the Virginia Administrative Code (VAC) 10-210-730 A provides that “[t]he tax applies to the sale or charge for any room or rooms, lodgings or accommodations furnished to transients by any hotel, motel, inn …or other similar place.”

Title 23 VAC 10-210-4040 provides that transactions involving both the sale of tangible personal property and the provision of services are generally 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. In Public Document (P.D.) 23-16 (2/21/2023), the Department ruled that a credit card fee is subject to tax because the true object of the purchase of supplies using a credit card is the purchase of taxable tangible personal property, not the credit card fee.

Conversely, in P.D. 05-11 (2/4/2005), the Department ruled the true object of the purchase of a prepaid credit card, along with an activation or reloading fee, is the potential purchase power of the card and not the tangible credit card. Under those circumstances, the purchase price and activation or reloading fees are not subject to tax.

In this case, the true object of the room rental transactions is the provision of taxable accommodations. The true object of the banquet and catering services is the taxable charge for the sale of food. See P.D. 98-31 (2/20/1998) and P.D. 10-200 (8/31/2010). As such, the credit card fee the Taxpayer intends to impose with the sale of accommodations and events would be subject to tax.

Question 2

Are cancellation fees incurred by group event customers and transient guests subject to Virginia sales and use tax?

The Taxpayer states that it has been collecting and remitting sales tax on customers that cancel bookings or deviate from the terms of an event contract. The Taxpayer has also been remitting tax on fees for canceled transient reservations.

Title 23 VAC 10-210-730 C provides that “[a]ny additional charges made in connection with the rental of a room or other lodging or accommodations are deemed to be a part of the charge for the room and are subject to the tax.” Cancellation fees are not considered to be an additional room charge because the customer is not charged for the room and has no right of possession. See P.D. 10-3 (1/13/2010). Thus, in general, the fee for canceling transient reservations would not be subject to the tax.

However, there are situations in which such fee is subject to tax. In P.D. 14-140 (8/12/2014), for example, the Department ruled that a cancellation fee is taxable when a consumer is contractually obligated to pay a fee for all or a portion of the price of rooms, food, and beverages for a cancelled event. The Department reasoned that, under the terms of the contract, the cancelation fee for the event was a charge for unused rooms and meals and not an unrelated cancellation fee or penalty.

As such, the Taxpayer will need to review the terms of its contract with its customers. If the contract does not hold customers liable for sales tax upon cancellation, then no sales tax should be collected. If the contract requires payment of sales tax in the event of cancellation, then sales tax should be collected and remitted.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR/5222.B

Related Documents

98-31

05-11

10-200

10-3

14-140

23-16