Virginia: Easy Return Labels and Logo Setup Fees Subject to Sales Tax

The Virginia Tax Commissioner recently ruled that easy return labels and logo setup fees associated with sales of products to Virginia customers were subject to Commonwealth’s sales and use tax. The taxpayer, a retailer of clothing and other products sold online, was assessed sales tax on charges billed to customers for easy return labels and logo setup fees.  In a petition seeking reconsideration of the Department’s original conclusions, the taxpayer argued that the charges for the easy return labels were not taxable because the products being returned to the retailer were being shipped out-of-Virginia for use or consumption. Under Virginia law, an exemption from retail sales and use tax applies to the delivery of tangible personal property for use or consumption outside Virginia. The regulations that interpreted generally provided examples addressing sales for delivery to a purchaser outside of Virginia. The Commissioner noted that in the transactions at issue the taxpayer was the retailer, not the purchaser or reseller, and when products were returned to the retailer’s inventory to be resold, they were not being “used” in any way that would subject them to retail sales and use tax. Rather, the taxability of the easy return label charges arose from their direct connection to the sales of the returned merchandise (tangible personal property) that were originally made to Virginia customers. Therefore, the Commissioner concluded that the return labels were taxable because they were associated with sales of taxable tangible personal property.

The taxpayer also asserted that its logo setup fees should be treated as exempt separately stated charges for alterations to apparel.  The Commissioner disagreed, defining “alter” to mean adjusting a garment for a better fit. The merchandise logo charges were not for adjustments to clothing to ensure a better fit, therefore the Commissioner concluded the exemption did not apply. Although the taxpayer argued that the fees were akin to  embroidery services that the Commissioner had determined were not taxable in previous rulings, the Commissioner noted that this was the case when embroiderers charge for their services, in this instance, the services were provided in connection with sales of tangible personal property and thus became part of the taxable sales price. For more information on Policy Document No. 21-74 please contact Jeremy Jester.