Virginia Sales Tax & Audit Guide
Straightforward Answers to Your Virginia Sales Tax Questions.
- Do I need to collect Virginia Sales tax?
- Should I be collecting or paying Virginia Use tax?
- What do I do if I should have been collecting but haven't?
- I received an audit notice. What should I do?
- Guidance on fighting a sales tax assessment in Virginia.
Who Needs to Collect Virginia Sales and Use Tax?
Like most states, to be subject to Virginia Sales tax collection and its rules, your business must:
1) Have nexus with Virginia, and
2) Sell or use something subject to Virginia sales tax.
How is Nexus Established in Virginia?
According to the Virginia Department of Revenue, any business with a physical presence in Virginia must be licensed for sales tax collection. The minimum thresholds listed below for remote sellers do not apply to businesses with a physical presence in Virginia.
A person who meets one of the following definitions for a vendor must license to collect and remit sales tax:
• If you are in the state of Virginia making sales of tangible personal property, admissions, or taxable services in Virginia.
• This definition encompasses those who open an online business in Virginia. If your online business provides taxable products or services, you must obtain a sales/use tax license and follow all the statutes that apply to a store-front business.
Any person located outside of Virginia who creates nexus by:
- Having an office, distribution house, sales house, warehouse, or any place of business in Virginia.
- Having people who solicit sales or advertise in Virginia.
- Have inventory or equipment in Virginia.
- Leasing equipment in Virginia
- Make deliveries into Virginia Using company vehicles.
Additionally, businesses that do not have a physical presence in Virginia can establish economic nexus by exceeding a certain annual sales threshold.
Economic Nexus (Wayfair Law) and Internet Sales in Virginia
- Gross revenue from sales of tangible personal property, admissions, or services delivered into Virginia that exceeds one hundred thousand dollars ($100,000.00); or
- Two hundred or more separate transactions for delivery into Virginia.
As of 2019, a remote seller must register and collect Virginia sales and use taxes on any and all sales made after the date one of the thresholds is first satisfied.
If all your Virginia sales are conducted via a marketplace facilitator's platform, you are a "marketplace seller" and do not need to register or collect Virginia sales tax. Instead, your marketplace facilitator is responsible for the tax on sales through the marketplace.
How is the $100,000 gross revenue threshold calculated?
If you are a marketplace facilitator or remote seller, and you sold or facilitated the sale of more than $100,000 in annual gross revenue or 200 or more transactions to Virginia customers during the previous or current calendar year, you must register to collect and pay Virginia sales tax.
If you made a combination of direct sales and sales through, or as, a facilitator, use your combined direct and facilitated sales to determine if you meet the threshold.
Which Sales are Subject to Virginia Sales Tax?
If you have nexus in Virginia, the next step is determining whether the products or services you sell are subject to Virginia Sales and use tax.
Unless an item is specifically exempt, sales and rentals of tangible personal property are subject to Virginia Sales tax.
The rules seem simple, but many details make applying West Virginia’s tax rules to your business challenging. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.
Common Exemptions from Virginia Sales and Use Tax:
Items exempt from Virginia Sales tax include:
- Purchases for Resale
- Gold, Silver, or Platinum Bullion or Coins
- Art Made by Prisoners
- Government Flags
- Food Stamps and WIC
- School Lunches and Textbooks
- Occasional Sales
- Gun Safes under $1500
The Virginia Department of Revenue has different rules and rates depending on the industry and the type of service. Find information about sales tax on specific types of services below.
Nontaxable Services include those provided by:
- Professional, Insurance, or Personal Services - Sales of inconsequential items for which no separate charge is made and that are a part of professional, insurance, or personal service transactions are not subject to sales tax.
- Separately charged repair services are not subject to sales tax - Services that provide internet access or related electronic communication services are not subject to sales tax.
- Installation and Repair - labor charges for installation, application, remodeling, or repairing a property, when separately stated, are not subject to sales tax.
- Transportation Charges - Separately stated transportation charges are not subject to sales tax.
- Clothing Alterations - Separately stated charges for alterations to clothing are not subject to sales tax.
- Gift Wrapping Performed by Nonprofits
- Computer Programs
- When separately stated, charges for labor and for services rendered to modify prewritten computer programs are not subject to tax.
- Custom computer programs are also not subject to sales tax.
- Extended Stay Lodgings - Hotel and motel rooms and similar accommodations provided to lodgers for more than 90 days are not subject to sales tax, as long as the place renting the space regularly offers accommodations to people.
- Maintenance Contracts - Maintenance contracts that include repair labor and repair or replacement parts are subject to sales tax at ½ the total charge for the contract.
Many people have questions about the taxability of software as a service (SaaS).
Many states already impose a tax on software as a service. As these options proliferate, states are moving to update their tax laws and, naturally, impose a tax.
To determine whether you need to collect tax on software sales, we highly recommend contacting one of our sales tax professionals to help you sort it out.
For now, we’ve summarized Virginia’s software tax rules here:
Customer software, defined in the Code of Virginia Sec. 58.1-602 as "a computer program which is specifically designed and developed only for one customer, is exempt from the tax. Combining two or more programs does not constitute a custom computer program.
Prewritten software is defined in the Code of Virginia Sec. 58.1-602 as "a computer program that is prepared, held or existing for general or repeated sale or lease.' and is subject to tax.
Shipping & Handling
Separately stated shipping charges on customer invoices are exempt from sales and use tax. Handling charges, however, are subject to sales and use tax. When shipping and handling charges are billed together as one, the entire amount is subject to sales and use tax.
While the general sales tax rules seem straightforward, applying those rules can get tricky when gray areas arise. The Virginia Department of Revenue provides some specific guidance for the following industries:
- Vending Machine Dealers
- Aircraft Sales
- Motor Vehicle Sales
- Peer-to-Peer Vehicle Sharing
Determining Local Sales Tax Rates in Virginia
The sales tax rate for most locations in Virginia is 5.3%. Several localities within Virginia impose an additional regional or local tax. Across Virginia, grocery items) and certain personal hygiene items are taxed at a reduced rate of 2.5%.
All vendors/sellers who are required to collect Virginia Sales tax and do business in a municipality that imposes a sales and use tax must also collect municipal sales taxes and remit the amount collected to the State Tax Department.
Local Sales and Use Tax Tables
Here you can access local Virginia Sales tax rates or see the chart below for the total tax rates of the most populated Virginia Cities.
*Exact tax rates vary. Occupancy fees and taxes are not included in this table.
I Should Have Collected Virginia Sales Tax, But I Didn't
Many of our competitors suggest Filing a Voluntary Disclosure Agreement in each state. This is a one-size-fits-all solution that isn't always the best. Our sales tax professionals will work with you to determine your business's best and most cost-effective solution.
If you determine your business has nexus, but you have not collected Virginia Sales tax, here are your options:
1. Register and pay back taxes, penalties, and interest, or
2. Complete a VDA to cut penalties (and, in some cases, reduce your tax liability and avoid interest).
Here is what you need to know about each option to make the best decision for your business:
Option 1: Register to Pay Back Taxes, Penalties, and Interest.
A VDA is not cost-effective if the past liabilities and penalties are minimal. Sometimes the best resolution for a business is to register with Virginia and pay back taxes, penalties, and interest.
Be wary of the tax professionals recommending a VDA in these cases. They want to make a buck rather than look out for your best interests.
When to consider registration and payment:
- If you established nexus less than 3 or 4 years ago.
- The sales tax penalty is LESS than the professional fees charged for the VDA.
- Your business does NOT have a sales tax collected issue.
Beware: Registering does not generally end past liabilities.
If you're unsure what your past liabilities are, contact us. Our state tax professionals work with you so you can make the right choice for your business.
Option 2: Voluntary Disclosure Agreement (VDA)
West Virginia’s lookback period is three years.
In many situations, voluntary disclosures are a valuable tool to reduce extended periods of past exposure.
The voluntary disclosure limits the lookback period to three years. So, if you should have collected sales tax over the past ten years but didn't, you may benefit from doing a VDA.
A VDA may be a good option for you if:
- You established nexus more than 3 or 4 years ago.
- You have a sales tax collected but not remitted issue.
- The sales tax penalty savings is MORE than the professional fees charged for the VDA.
What to Expect During an Audit
The typical audit process is shown in this flowchart. Detailed guidance for each West Virginia audit process stage follows in the sections below.
A Notice of Intent to Audit (Audit Questionnaire & Routine Audit Letter) --> All records, books, and documents are to be ready for presentation to the auditor on the commencement date of the audit-->Site Visit (sometimes) --> The length of an audit will vary, depending on the complexity of the business and the problems encountered --> Preliminary audit findings provided --> Resolve with auditor or assessment issued.
Virginia regularly audits businesses required to charge, collect, and remit various taxes in the state. Many audits begin with a call from a Virginia Department of Revenue sales tax auditor. Shortly after the call, your business will receive a Notification of Intent to Audit. This notification confirms that you were lucky enough to be chosen for a Virginia Sales tax audit.
Once the audit is complete, the auditor will send you the assessment and the amount.
It is good to start with getting a state and local tax professional involved to prepare for the audit.
I Received a Virginia Sales Tax Audit Notice. What Should I Do?
Businesses that receive a sales tax audit notice need to consider the following questions:
- If you don’t have sales tax audit experience, how can you trust that the state's auditor abides by the rules and follows proper procedures?
- How will you know when to provide documents or when to push back?
- Do you thoroughly understand your sales and use tax areas of exposure?
- Controlling the audit is paramount to limiting exposure and shaping the results. Are you confident in doing that on your own?
Unless you can confidently answer these questions, hiring a professional is most likely to be the best option.
Contact us to learn how our sales tax professionals can give you the peace of mind and confidence you’ll need during your audit.
Visit our resource pages for more information to help you make critical decisions during your Virginia Sales and use tax audit.
What to Expect from a Virginia Sales Tax Auditor
Here is a summary of the general audit process:
- The auditor will conduct pre-audit research.
- The auditor will often schedule and perform an entrance conference.
- The auditor will request records (many of which the auditor is not entitled to and does not need).
Once the auditor receives the necessary records, they will compare your Virginia sales and use tax returns to your federal income tax returns or bank statements to determine whether you reported all applicable or gross sales on your Virginia Sales tax return(s).
NOTE: A slight error in how the tax was charged on even a single type of transaction can add up to a significant sales tax liability.
Once the auditor is confident all sales are accounted for, they will:
- Review your exempt and out-of-state sales.
- Conduct a use tax audit – the auditor will request accounts documents to ensure you adequately paid use tax on applicable purchases.
Common areas audited include:
- Advertising Expense
- Auto & Truck Expense
- Repair and Maintenance
- Office Expense
- Miscellaneous Expense
After reviewing all information, the auditor will prepare a proposed audit report which shows preliminary findings, and a preliminary amount due or refund. The proposed audit report is the basis for discussion between you and the auditor; it is not a final determination. It may be estimated in cases where requested information has not been provided.
If a business buys an item online without paying use tax, the business is still obligated to remit the tax to West Virginia. Believing otherwise often leads to shocking results for the unsuspecting taxpayer during an audit. Here is more information on Virginia Use Tax.
If you have questions about your situation, contact us to discuss it with one of our tax professionals.
After the Audit – Understand and Defend Your Businesses Rights
The auditor will produce an audit report with corresponding work papers to support the Virginia Sales and use tax assessment.
It is advisable to have a sales tax professional present during this meeting. This is your first opportunity to see the auditor's findings. You'll want to push back on areas where they have overstepped their bounds or misapplied West Virginia's sales tax laws.
It's best to hold off on agreeing to the sales tax assessment until a sales tax professional has reviewed it for issues that should be challenged.
Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel weren't well versed in the sales tax laws that, if challenged, could have reduced their sales tax liability.
In the following sections, we'll cover the process of challenging a Virginia Sales tax audit assessment.
Contesting Audit Findings After the Audit
Virginia Sales Tax Audit Protest Process Flow Chart
Notice of Assessment Issued --> 90 days --> File an appeal with the Tax Commissioner-->Tax Commissioner’s final decision-->45 days --> File for reconsideration on the date of final determination.
NOTE: If the deadlines are missed, it is implausible that you will be able to have the case reopened.
You will receive a Notice of Assessment or audit report from the Tax Commissioner. It's essential to review and understand its implications carefully.
The audit report:
- Details of the auditor's findings
- Describes any proposed audit adjustments
- Shows the amount of tax, interest, and penalty due
If you disagree with the assessment, you may request an informal conference with the auditor.
If you and the auditor cannot agree, the Department will issue a final notice of field audit determination. It is final unless you appeal it.
Audit Closing Conference
The taxpayer has a short period to contest the findings with the auditor. Any issues with the results are handled as follows:
1. Issues related to exemptions, proof of tax paid, and calculations are worth addressing with the auditor.
2. Legal interpretations of sales tax law are often not resolvable at this stage.
If you cannot resolve this with the auditor, the next step is to appeal/protest the issue.
Protest Rights and Audit Finding Confirmation
You have the right to file an appeal with the Tax Commissioner if you believe the assessment is incorrect. A completed appeal must be filed within 90 days of the assessment date. This 90-day limitation period is strictly enforced.
The Tax Commissioner will issue a determination letter in response to your administrative appeal. The determination will be based on the issues raised in your appeal.
If you have received a Certificate of Assessment and haven't talked to someone experienced in Virginia State tax, now is the time. Do it before these deadlines pass.
Settling a Virginia Sales Tax Liability
After any critical notices are issued, settling your Virginia Sales tax case with the Virginia Department of Revenue is possible by filing a Virginia Offer in Compromise. The business must meet specific criteria to qualify, but you can get better results negotiating here than with the auditor. However, knowing a fair settlement from an unreasonable settlement will be challenging without experience and knowledge of Virginia Tax laws.
DO NOT attempt to negotiate a settlement without an experienced Virginia State and local tax lawyer or other professional.
Contest a Virginia Jeopardy Assessment
Virginia may issue a Notice of Jeopardy Determination in certain situations.
The jeopardy assessment gives the Virginia Department of Revenue the right to try to collect immediately.
Due to the jeopardy nature, the taxpayer only has a very short time to contest the assessment and must place a security deposit to fight the issue.
If you cannot resolve your case with the Tax Commissioner, you still have a chance to fight your Virginia sales tax assessment in the Circuit Court. You can appeal to the circuit court within three years from the date of assessment or one year from the date of the Tax Commissioner's determination, whichever is later.
We don't generally recommend it, but you always have the option to skip the agency protest process and file it in district court. Since neither party wants to spend the time and resources on the uncertainty of the tax court, challenging the assessment can effectively maximize your settlement potential.
Although not required, it is strongly encouraged to have an attorney or sales tax professional handle your case at this phase, as not developing the case record can cost your business as the case proceeds.
Our team has handled hundreds of administrative court cases. It can help your company receive the resolution you are entitled to. Get in touch with us today.
Other Virginia Sales Tax Resources
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