Virginia’s New Sales Tax Rates: What Rate Applies?

August 21, 2013

Virginia’s increased sales tax rates took effect on July 1, 2013, and complying with the new rates will not be as easy as hard coding a new rate into your sales tax compliance system.  Not only will the general rate increase from 5% to 5.3% (this rate includes the local 1% tax), an additional 0.7% tax will apply for all sales sourced to the Northern Virginia or Hampton Roads regions (resulting in a 6% total tax rate for sales in these regions).

Determining how to properly source a sale within or outside the Northern Virginia and Hampton Roads regions will be a concern for businesses that have a sales and use tax collection obligation in Virginia.  Typically, when a multi-state business makes an interstate sale, the tax that applies is based on the destination state.  Thus, if a customer in Virginia orders a product from a retailer in Maryland and the product is shipped to Virginia, Virginia sales or use tax applies to sale.  The same rule must apply for an intrastate sale within Virginia – right?  Wrong.

The local sales tax rate that applies in Virginia is based on the place of business of the dealer collecting the tax, without regard to the city or county of use by the purchaser or delivery to the purchaser.  For example, a customer located in Roanoke (which is not in the Northern Virginia or Hampton Roads region) orders a product over the phone from a dealer located in the City of Fairfax (which is located in the Northern Virginia region).  The product will be delivered to the customer in Roanoke.  The sale should be sourced to the City of Fairfax and the dealer should collect 6% sales tax on the purchase, which includes the 0.7% regional rate.  This rule will apply regardless of when title to the property passes to the customer, so even if title does not pass until the delivery is made, the rate is still based on the seller’s location.

However if a business owes use tax on a purchase, the location of use will still dictate the rate that applies.  For example, a construction company located in the City of Fairfax purchases materials from an out-of-state vendor that is not required to collect sales or use tax on the sale.  The contractor uses the materials for a construction job in Winchester, Virginia.  The construction company would owe use tax at the 5.3% rate because Winchester is not located in either of the regions where the 0.7% regional tax applies.

We can only hope that the added stress from determining the correct sales tax rate in Virginia will be balanced out by reduced traffic in the state, which was the primary motivation for the increased rates.

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