Are alterations taxable? It depends on how states define “alteration” – Wacky Tax Wednesday

One day many years ago, the man who would become my husband presented me with a jacket emblazoned with the logo of his company. I was thrilled. It wasn’t because I liked the jacket or logo, though I did. I took it as token of his commitment.

That about sums up my thoughts on logos, until today, when I discovered that improperly taxing (i.e., not taxing) charges to add customized logos to clothing can result in a negative audit finding.

A retailer in Virginia was found liable for sales tax on fees charged to add customized logos to merchandise (logo setup fees). Convinced the fees were nontaxable because they were for alterations to clothing, the retailer requested a correction from the Virginia Tax Commission.

Virginia Code § 58.1-609.5 4 does provide an exemption for “[s]eparately stated charges for alterations to apparel, clothing and garments.” Furthermore, as the retailer pointed out, Virginia law doesn’t define “alteration” or “alter.”

So, to prove its point, the retailer pointed to the definition of “alteration” in Webster’s Dictionary: “(1) The act of altering or making different” and “(2) The state of being altered; a change made in a form or nature of a thing; changed condition.” Using these definitions, it argued, an alteration includes adding a logo to cloth.

In responding, the Tax Commissioner referred to Webster’s II New Riverside University Dictionary’s definition of “alter”: “To adjust (a garment) for a better fit.” It pointed out that this definition is “specific to clothing and garments.”

Relying on “the rule of strict construction for sales and use tax exemptions,” the Tax Commissioner determined 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.”

Furthermore, according to the retailer’s website, the logo setup fee is a one-time cost to digitize a logo design for a new customer. It covers the cost of preparing a logo design and setting up embroidery machinery, not the cost of sewing logos onto clothing.

And so, the Virginia Tax Commissioner upheld the auditor’s finding that logo setup fees are taxable. For additional details, see Ruling 19-115.

It’s smart to avoid chances when dealing with sales tax. When in doubt about the taxability of a good or service, consult with a trusted tax advisor. Or go ahead and automate sales tax collection so you can focus on other aspects of your business.