Document Number
Tax Type
Retail Sales and Use Tax
Service Charge : Surcharges for Recouping Expenses
Administration: Penalty -Compliance (3rd Generation Audit), Amnesty; Interest
Date Issued

November 24, 2020

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

Dear *****:

This is in response to your letter submitted on behalf of *****  (the “Taxpayer”), in which you seek the correction of the retail sales and use tax assessment issued for the period November 2015 through September 2018. I apologize for the delay in responding to your letter.


The Taxpayer is primarily engaged in the sale and service of fire extinguishers. In a previous audit, the Taxpayer contested the taxability of service call fees. At that time, the Taxpayer believed the service call fees were taxed based on the term used. As a result of the Department’s recent audit, the Taxpayer was assessed sales tax on the service call fees. The Taxpayer is contesting the assessed tax based on a conversation with the prior auditor before written guidance was provided by the Department. This is a third generation audit and the Taxpayer also requests the waiver of the penalty and interest.


Prior Audit

In a prior letter, the Department determined the following:

As a result of the audit, the Taxpayer changed its billing from a ‘surcharge’ back to a “service call” fee. As addressed above, the charge to recoup the increased cost of gas, employee insurance, and employee travel time is subject to the tax. Therefore, changing the billing from a surcharge to a service call fee does not alter the application of the tax on such charges. The Taxpayer is expected to collect the sales tax on the charge to recoup such expenses regardless of whether the charge is billed as a surcharge or service call fee.

Based on the prior guidance from the Department, the Taxpayer should have followed the instructions as stated above and charged the sales tax on the service call fees. Therefore, I find no basis for adjusting the tax assessed on the charges in the current audit.

Compliance Penalty

Pursuant to Title 23 of the Virginia Administrative Code 10-210-2032 B, the application of penalty to audit deficiencies is mandatory and its application is generally based on the compliance ratios determined during the audit. For third and subsequent generation audits, the Taxpayer’s compliance ratio must meet or exceed 85% for sales tax and 85% for use tax. The Taxpayer’s sales tax compliance ratio is 97% and its use tax compliance ratio is 29%. Based on the use tax ratio, the compliance penalty was properly applied and there is no basis for waiver.

Amnesty Penalty

The 2017 General Assembly enacted legislation establishing a Tax Amnesty program, spanning a 60-75 day period that was administered by the Department. The Guidelines for the Virginia Tax Amnesty Program are addressed in Public Document 17-156 (9/5/2017). Taxpayers with delinquent returns for amnesty-eligible periods qualified for amnesty benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties. The amnesty-eligible periods for ongoing field audits is the month of April 2017 and prior. Accordingly, the amnesty penalty was properly applied and I do not find cause for waiver in this instance.


Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had use of the money that was properly due the Commonwealth. 

Based on this determination, the assessment is correct. A revised bill, with interest accrued to date will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within thirty days of the date of the bill. Please remit payment within 30 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia section, regulation, and public document cited are available on-line at in the Laws, Rules and Decisions section of the Department’s website. If you should have any questions regarding this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.



Craig M. Burns
Tax Commissioner


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Last Updated 01/25/2021 10:02