Document Number
Tax Type
Retail Sales and Use Tax
Services in Connection with Sales of Tangible Personal Property : Shipping and handling
Date Issued


October 4, 2019

Re:  § 58.1-1821 Application:  Retail Sales and Use Tax

Dear *****:

This will reply to your letter in which you seek correction of the retail sales and use tax assessments issued to***** (the “Taxpayer”) for the period June 2012 through May 2015. I apologize for the delay in responding to your appeal.


The Taxpayer is a retailer of clothing and other products that are sold online, through catalogs and in retail stores. The Taxpayer was audited by the Department and assessed sales taxes on untaxed charges billed to customers for easy return labels, shipping and handling, and logo setup fees. The Taxpayer contests the assessment of sales taxes on these untaxed charges. The Taxpayer also contends that the auditor was in error by not accepting a customer’s resale exemption certificate and assessing an untaxed sale made to that customer.


Virginia Code § 58.1-205 deems any assessment of a tax by the Department of Taxation to be prima facie correct. This statute places the burden of proof on the taxpayer assessed with a tax to show that an assessment is erroneous. With respect to sales and use tax exemptions, the courts have ruled that exemptions from the retail sales and use tax are strictly construed against the taxpayer claiming the exemption. If a tax statute is subject to two constructions, one which grants an exemption and one which does not grant the exemption, the construction denying the exemption is adopted by the courts. See Commonwealth v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973).

Easy Return Labels

Customers may return merchandise purchased from the Taxpayer by using one of several methods. One such method is the use of an “easy return label.”  The easy return label is shipped with the merchandise purchased by the customer. The customer affixes the easy return label to the package containing the merchandise to be returned. The label lists the Taxpayer’s address to which the merchandise is returned and contains the prepaid postage for returning the package. The customer then places the package in the United States mail for delivery to the Taxpayer.

The Taxpayer charges its customers a flat fee for the use of the easy return label and states that the fee represents the postage cost to ship the returned merchandise. When a customer returns merchandise using an easy return label, the Taxpayer credits the customer’s account for the sales price of the returned merchandise and for the sales tax collected on the sale. A separate charge is then billed to the customer for the easy return label fee. The customer is not billed sales tax on the fee for the easy return label.

The Taxpayer contends that the assessment of the tax on the easy return label charges is erroneous because the charges represent the postage costs for customers to ship the returned merchandise. Virginia Code § 58.1-609.5 3 provides an exemption from the tax for “[t]ransportation charges separately stated.”  The exemption is interpreted in Title 23 of the Virginia Administrative Code (VAC) 10-210-6000. Subsection B of the regulation defines transportation and delivery charges to mean “charges for delivery from the seller to the purchaser, commonly known as ‘transportation-out’, and include postage or common carrier charges. Transportation and delivery charges do not include charges from a manufacturer to a retailer’s place of business relative to purchases for resale, nor do they include handling charges.”  

Although the easy return label charges may be for the Taxpayer’s postage costs to deliver merchandise returned by customers, the delivery occurs from the purchaser to the seller. The Department’s interpretation of the transportation and delivery exemption in Title 23 VAC 10-210-6000 requires that the delivery of goods occur from the seller to the purchaser. Based on the regulation and the rule of strict construction of exemptions, the easy return label fees do not qualify for the exemption in Virginia Code § 58.1-609.5 3. 

The Taxpayer further states that the return label charges are billed as separate transactions from the sales transactions for the merchandise. When a customer returns merchandise, a full credit is given for the sales price of the merchandise and the sales tax paid. The customer is then billed a separate charge for the easy return label. As such, the Taxpayer maintains the easy return label charges are not made in connection with the sale of the returned merchandise.

The auditor treated the charges for easy return labels as part of the sales price of the returned merchandise and assessed the sales tax on the charges. This treatment is similar to the Department’s treatment of restocking fees, which are considered to be part of the taxable sales price of the merchandise that is returned. Virginia Code § 58.1-619 provides, in part, that:

In the event purchases are returned to the dealer by the purchaser or consumer after the tax imposed by this chapter has been collected or charged to the account of the purchaser, the dealer shall be entitled to reimbursement of the amount of tax so collected or charged by him, in the manner prescribed by the Tax Commissioner. The amount of tax so reimbursed to the dealer shall not, however, include the tax paid upon any cash retained by the dealer after such return of merchandise. 

Public Document (P.D.) 96-215 (8/30/96) discusses a taxpayer that contested the Department’s assessment of sales tax on restocking fees billed in connection with sales of software. The taxpayer indicated that it would begin refunding the entire purchase price, including the tax, to customers that returned its software products. The taxpayer would then issue customers a separate charge for the restocking fee, which would not be subject to the sales tax. The Tax Commissioner responded that the separately billed restocking fees were still subject to the tax because the charges were tied to the sale of tangible personal property. The charges were still includable in the sales price of the tangible personal property that was sold and subsequently returned. 

In the instant case, the easy return label charges are directly connected to the sale of the returned merchandise. The charges are billed only in instances where a sale of tangible personal property occurs. The easy return label charges are linked to the return of the merchandise sold to the customer. While the easy return label charges in this case may represent postage costs rather than restocking fees, the charges do not qualify for a statutory exemption. As such, the easy return label charges are for a taxable service and become part of the taxable sales price of the returned merchandise. Consistent with the policy discussed in P.D. 96-215, the contested charges are subject to the tax.

Because this was a new issue in the Taxpayer’s audit, the auditor prorated the easy return label charges. It was estimated that 43% of each charge was the amount of the postage cost to return the merchandise. The auditor treated this percentage of the charges as exempt. Thus, each taxable exception in the audit is listed at 57% of the total charge. Based on this determination, however, the entire charge for the easy return labels is subject to the sales tax.  

Merchandise Logo Charges

The Taxpayer offers customers the option of having customized logos embroidered on the clothing sold by the Taxpayer. The Taxpayer charges a setup fee to have logos added to clothing items. The untaxed logo setup charges were assessed in the audit. The Taxpayer maintains that the setup fees are alterations to clothing and that such charges are exempt from the tax.

Virginia Code § 58.1-609.5 4 provides an exemption for “[s]eparately stated charges for alterations to apparel, clothing and garments.”  The Taxpayer notes that the terms “alteration” and “alter” are not defined in the Code of Virginia. Instead, the Taxpayer relies on the definitions of the term alteration in Webster’s Dictionary, which are:  “(1) The act of altering or making different” and “(2) The state of being altered; a change made in form or nature of a thing; changed condition.”  Based on these definitions, the Taxpayer asserts that the embroidering or attachment of a logo to an article of clothing is an alteration and the charges are exempt from the tax.

The Webster’s definition of alteration cited by the Taxpayer is broad in scope and makes no mention of the term alteration as it relates to clothing or garments. In Webster’s II New Riverside University Dictionary, the term alter is defined as “[t]o adjust (a garment) for a better fit.”  This definition is specific to clothing and garments. The attachment or the embroidery of logos on clothing and garments is not part of the definition. The definition specifically provides that the term alter refers to the fit of clothing and garments only. Based on the rule of strict construction for sales and use tax exemptions, I find that the embroidering or attachment of logos to clothing or garments is not an alteration for purposes of the exemption set out in Virginia Code § 58.1-609.5 4.

A review of the audit report reveals that the disputed charges are logo setup fees. The Taxpayer’s website indicates that logo setup fees are one-time costs to digitize a logo design for new customers. The setup fee is not similar to a charge for alterations to clothing or garments. Rather, the charge is billed to prepare the logo design and the embroidery machinery for the task of embroidering or otherwise attaching the logos to the clothing. As there is no statutory exemption for the setup fees, the fees become part of the taxable sales price of the clothing or garments to which the logos are applied.

P.D. 05-127 (8/2/05), which is cited in the Taxpayer’s appeal, further supports the conclusion that the attachment of logos to items of clothing does not qualify as exempt alterations. P.D. 05-127 discusses a specialty advertising business that embroiders, silkscreens or otherwise adds specialty advertising to products that it sells. The business contested a sales tax assessment on separately stated charges for embroidering, silkscreening and similar services that were provided with the sale of its products. The Tax Commissioner ruled that the services were made in connection with sales of tangible personal property and became part of the taxable sales price of the products. It is important to note the determination concludes that there was no exemption available for the contested embroidery, silkscreening and other services. This confirms that the Department’s policy at the time P.D. 05-127 was issued did not recognize that the alterations exemption applied to embroidering and silkscreening services for clothing. 

Based on this determination, the logo setup fees are not exempt alterations to clothing. In addition, the Taxpayer’s per item fees to add logos and embroidery to clothing and garments do not qualify for the alterations exemption. Both the setup fees and per item fees are subject to the tax when the services are provided with the sale of clothing and garments. There is no basis to adjust the audit with respect to this issue.

Resale Exemption Certificate

The Taxpayer states that the auditor disallowed a resale exemption certificate in the audit of its sales because the customer’s Virginia registration number was invalid. The Taxpayer accepted the Form ST-10 exemption certificate at the time of the sale. The exemption certificate was deemed unacceptable because the Virginia registration number listed on the form began with a “35” prefix. This prefix is used exclusively for Virginia corporate income tax accounts. The Taxpayer cites P.D. 16-104 (5/25/16) as support for removing the sale from the audit.

Title 23 VAC 10-210-280 A states, in part, that:

All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

P.D. 16-104 addresses an identical situation in which a completed resale exemption certificate was not allowed in an audit because the registration number on the certificate began with a 35 prefix. The Tax Commissioner concluded that the Form ST-10 was accepted by the seller in good faith. Although the registration number began with a 35 prefix, the certificate was otherwise valid on its face. The seller had no way to be aware that Virginia sales tax registration numbers must begin with a “10” prefix.

Based on the cited authorities, I tentatively agree that the Form ST-10 described by the Taxpayer is acceptable. The Taxpayer, however, has not provided a copy of the Form ST-10 in question for the Department’s review. In addition, the name of the customer that issued the exemption certificate cannot be located in the audit report’s list of sales exceptions. As such, the Department must verify that the Form ST-10 for the Taxpayer’s customer is valid. A copy of the exemption certificate should be furnished to the Department for review and the customer should be identified in the exceptions list of the audit report. The Taxpayer should provide this information to the Department within 30 days from the date of this letter. The audit will be adjusted based on the Department’s review of the information provided. 
Shipping and Handling Charges

The Taxpayer contests the assessment of the sales tax on shipping and handling charges that were billed to customers. The Taxpayer states that the use of the term shipping and handling on customer invoices was not accurate. The contested charges are for shipping costs only and there are no handling costs included in the charges. The Taxpayer claims the assessment on shipping and handling charges is a new audit issue and requests relief based on various public documents in which the Department has agreed to adjust or remove combined shipping and handling charges in first audits. 

Virginia Code § 58.1-609.5 3 provides an exemption from the sales and use tax for “[t]ransportation charges separately stated.”  Based on the statute and the Department’s longstanding policy, lump sum amounts billed for shipping and handling are taxable. The statute requires that transportation charges be separately stated. A combined shipping and handling charge consists of an exempt component (shipping) and a taxable component (handling), so this requirement is not met. The Taxpayer, however, is correct that the Department, in certain cases, has agreed to provide relief to taxpayers for assessments of the tax on combined shipping and handling charges.

In P.D. 96-119 (6/4/96), a taxpayer provided vendor documentation that segregated the shipping and handling charges assessed in the Department’s audit. The Tax Commissioner agreed to remove the shipping portion of the assessed charges based on the documentation that was furnished. In P.D. 11-126 (7/6/11), a taxpayer was given the opportunity to provide documentation to support its contention that shipping and handling charges invoiced to customers were only for shipping. This decision was made based on the fact that it was the taxpayer’s first audit.

In the public documents cited and in numerous others, combined shipping and handling charges are deemed to be taxable in full. In the Taxpayer’s audit, the auditor recognized that the shipping and handling charges were a first-time audit issue. For this reason, the auditor assessed 57% of the shipping and handling charges in the audit. The 43% reduction in the shipping and handling charges was intended to account for the shipping component of the charges, which would have been exempt if separately stated. Despite the auditor’s concession in the audit and in accordance with the Department’s past treatment of this issue, I will allow the Taxpayer to provide documentation that proves the full amount of the shipping and handling charges are for shipping only. For future compliance purposes, the Taxpayer should charge the Virginia sales and use tax on any charges labeled as shipping and handling.


The audit assessments with respect to the easy return label and logo setup issues are correct. The audit will be referred to the audit staff, who will contact the Taxpayer to schedule a mutually agreeable time to review the shipping and handling documentation and the Form ST-10 for the contested sales transaction. The Taxpayer should also identify in the audit report the customer that issued the Form ST-10. I will allow the Taxpayer 30 days from the date of contact by a member of the Department’s audit staff to furnish the requested information. The audit and the assessments will be adjusted based on the review of the information provided by the Taxpayer.

The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line at in the Laws, Rules and Decisions section of the Department’s website. If you have any questions concerning this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.



Craig M. Burns
Tax Commissioner


Related Documents
Rulings of the Tax Commissioner

Last Updated 01/16/2020 08:35