As a result of the COVID pandemic, many small businesses have been whipsawed by significantly reduced capacity and cash flow along with increased sanitation and to-go container costs. To offset increased costs and decreased revenue, many state restaurants and bars have implemented a surcharge for COVID-19. However, many small businesses were not aware of the potential sales tax ramifications of doing so.
In most jurisdictions, surcharges that are required to be paid by the customer in connection with the sale of taxable items are also subject to sales tax. For example, in South Carolina, the Department of Revenue announced that a separately stated COVID-19 surcharge is subject to state sales tax because it is part of the sales price for taxable items. The New Jersey Department of Revenue, Nevada Department of Revenue, and the California Department of Tax and Fee Administration took similar positions. While this is no surprise to a state tax professional, who knows that such a surcharge is subject to tax in most places, it’s likely to catch anyone else off guard.
As if bars, restaurants, and similar small businesses are not already fighting an uphill battle to stay open during COVID, the failure to properly charge and collect state sales tax on COVID surcharges may lead to yet another problem on the horizon. Restaurants and bars are already highly audited industries, and a systemic failure to tax COVID or similar surcharges may result in states conducting even more audits, or at a minimum, routinely checking for compliance in this area during future audits.
One potential way to avoid future sales tax woes for businesses that have or are considering a COVID related surcharge is to make the fee optional. Generally, separately stated fees that are at the customer’s option are not taxable. Additionally, by making the extra charge optional, businesses can further customer relations by not driving away those that oppose the charge, while allowing the customers that elect to pay to feel good about their contribution to a small business during the pandemic.
Whatever you do, don’t let an effort to bolster your revenue in the short-term set you back in the long run due to unforeseen sales tax issues. There are plenty of creative sales tax planning opportunities that can generate extra revenue for your business without creating a sales tax nightmare.
At Sales Tax Helper, not only do we represent companies during state sales tax audits and appeals, but we also provide important consulting services for you or your client’s businesses to prevent the audit in the first place. Schedule a free consultation here.