Sales tax hikes could affect your next big purchase

The General Assembly’s efforts to raise money for transportation may create headaches for businesses making transactions in coming weeks.

To create a steady revenue stream for the commonwealth’s roads and bridges, the legislature increased the state sales and use tax on most purchases by three-tenths of a percentage point, from 5 percent to 5.3 percent.

In addition, lawmakers bumped up sales taxes in Northern Virginia and Hampton Roads an additional seven-tenths of a percentage point, to a total of 6 percent, to provide more money for transportation projects in those chronically congested areas.
The new tax rates are due to go into effect on July 1.  (The sales tax rate for food purchased for home consumption will remain unchanged.)

The looming statewide sales tax increase and the different rates in Northern Virginia and Hampton may leave many people scratching their heads. How will they affect purchases made in the next few weeks?

Luckily, Kay Gotshall and Ryan Beethoven-Wilson, CPAs at Keiter, a Glen Allen-based accounting firm, have come up with an analysis that should help guide sellers and buyers.

First of all, they summarized the rules governing four buying scenarios:

 
1. Tangible personal property both paid for and delivered after July 1, 2013, will be subject to the higher tax rates, regardless of when it is ordered.
2. Tangible personal property delivered before July 1, but paid for after July 1 will not be subject to the higher tax rates.
3. Tangible personal property delivered after July 1, but paid for prior to July 1 will not be subject to the higher tax rates.
4. A sale or lease payment that may be delivered after July 1, but is paid for in full will not be subject to the higher tax rates.

The CPAs also note businesses may have long-term contracts for renting property or constructing tangible property that were signed before the effective date of the increased tax rates. “In those situations, the legislation provides for a refund of the additional tax if certain conditions are met,” they say.

Under those basic conditions, a contract needs to have been signed before April 3, 2013 (the date the legislation was signed into law), and the property must be delivered before Sept. 30, 2013.  (Other refund provisions also exist for long-term contracts involving real property or highway contracts that were signed before April 3.)

Then there is the matter of higher sales tax rates in Northern Virginia and Hampton Roads. What are the rules for purchases in those regions?

First of all, you need to know what localities these regions encompass.

Northern Virginia, in this case, includes Arlington, Fairfax, Loudoun and Prince William counties, and the cities of Alexandria, Fairfax, Falls Church, Manassas, and Manassas Park.

The Hampton Roads region, on the other hand, includes Gloucester, Isle of Wight, James City, Southampton, Surry and York counties and the cities of Chesapeake, Franklin, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach and Williamsburg.

Gotshall and Beethoven-Wilson summarize the sales tax rules for these regions:

 
1. Tangible personal property purchased at a seller’s place of business, if located in Northern Virginia or Hampton Roads, will be subject to the additional regional tax regardless of where the goods are ultimately delivered.
2. Tangible personal property purchased remotely (by telephone, Internet or mail) from an in-state dealer will be subject to the additional regional tax if that dealer fulfills the order from Northern Virginia or Hampton Roads regardless of where the goods are ultimately delivered.
3. Tangible personal property purchased remotely from an out-of-state dealer will be subject to the additional regional tax if the goods are delivered to the purchaser in Northern Virginia or Hampton Roads.  The sale is sourced to where the property is delivered.
4. Tangible personal property leased from an in-state lessor will be subject to the additional regional tax if the lessor’s place of business is located in Northern Virginia or Hampton Roads.

The CPAs note businesses can take a number of steps to comply with the law while minimizing the amount of sales tax involved.

For businesses making large sales in coming weeks, payment and delivery terms can be modified so that both do not occur after July 1, they say in their analysis.  “Prepayments and deferred payment contract terms are an effective way to take advantage of the lower tax rates prior to July 1.”

Companies with multiple locations in Virginia also can ensure that remote orders (made by Internet, telephone or mail) aren’t subject to the higher regional sales taxes.

“A way to do this is to make sure that remote orders … are fulfilled from locations outside of Northern Virginia or Hampton Roads,” the CPAs note.

They offer this example: If a customer in South Carolina calls in an order to a retailer in Virginia, the sale would not be subject to the 0.7 percent regional sales tax if the order is filled by a Richmond store.  However, if the same order is filled from a Virginia Beach store, the higher sales tax would apply.

“Additionally, businesses who make purchases from out-of-state dealers can ensure that they only take delivery and make use of the property at locations outside of Northern Virginia or Hampton Roads to ensure they aren’t charged the extra regional sales tax,” the CPAs say.

Business owners might, of course, have to travel a little further to pick up their packages, but the road trip will give them the chance to see how the commonwealth is putting their tax money to use.