Virginia may broaden sales tax base, change rates, add retail delivery fee

• Virginia could expand sales tax to digital codes, digital personal property, and digital services. It may also tax a variety of other services, including admissions, recreation charges, nonmedical personal services, and residential cleaning and home repair.
• Virginia could change sales tax rates. HB 900 would lower the base state rate but increase sales tax in certain jurisdictions. SB 638 would keep the base sales tax rate the same but increase sales tax in some parts of the commonwealth.
• Virginia could establish state and/or local retail delivery fees. HB 900 would apply a 20-cent retail delivery fee to any retail delivery made in the Northern Virginia Transportation District. SB 638 would establish a 50-cent statewide retail delivery fee plus an additional 25-cent fee for deliveries in the Northern Virginia Transportation District.

Under House Bill 900, the following digital products and services would be subject to Virginia state and local sales and use tax.
 

• Digital codes: Codes that permit an end user to obtain digital personal property and/or a digital subscription service at a later date.
• Digital personal property: Digital audio and audiovisual products, reading materials, software, and other data or applications delivered electronically to an end user for continual access (without the buyer having to pay additional subscription or usage fees).
• Digital services: Computer-related, data storage, digital subscription, software application, and website hosting and design services.

The following services would become subject to Virginia sales and use tax under HB 900.
 

• Admissions to events or places of amusement or entertainment
• Companion animal care, including grooming, boarding, walking, training, and feeding (excluding veterinary medical services)
• Delivery or shipping services, including wrapping and packing (charges for gift wrapping services performed by a nonprofit organization and separately stated transportation charges would remain exempt)
• Digital subscription services
• Dry cleaning and laundry services; garment and shoe repairs and alterations
• Nonmedical personal services or counseling, including but not limited to hair, nail, and skin care; beauty, exercise, relaxation, tanning, and weight control services; and piercing, tattooing, and other cosmetic body modifications
• Recreation, fitness, or sports facilities charges, including membership fees and dues
• Repairs or alterations to tangible personal property
• Residential home repair or maintenance, landscaping services, and cleaning services paid for directly by a resident or homeowner
• Storage of tangible personal property
• Travel, event, and aesthetic planning services separately billed from the sale of products
• Vehicle and engine cleaning, maintenance, painting, remodeling, and repair
   

The bill states that taxable service includes any transaction for digital services where the purchaser or consumer of the service is a business (aka, B2B sales), but it does not include any service that’s otherwise exempt.
 

HB 900 also establishes certain taxable services exemptions. Virginia sales and use tax would not apply to the following.
 

• Professional services, including education or training, legal, financial, accounting and tax preparation, real estate, engineering, architectural, or insurance services
• Charges for applying, installing, remodeling, or repairing sold or rented property are exempt when performed by a person who receives no more than $2,500 per year for performing such services
• Services that provide internet access service as defined in § 58.1-647
• Residential cleaning, home repair or maintenance, or landscaping services that are purchased by a homeowners association or similar entity or by a landlord for the benefit of the tenant
   

Senate Bill 638 doesn’t substantially broaden Virginia’s sales tax base like HB 900. However, it does seek to establish a 10% commercial parking tax in any city or county that’s a member of the Northern Virginia Transportation Commission. This would not be eligible for Virginia’s timely filing discount.

Bundled transactions

HB 900 also seeks to change how sales tax applies to bundled transactions. Currently, Virginia generally uses the true object test: The entire transaction is taxable if the true object of the transaction is taxable, and not taxable if the true object is exempt.
 

Under the bill, the charge for a bundled transaction containing both taxable and exempt items is taxable “unless the dealer is able to reasonably identify the nontaxable portion from its books and records kept in the regular course of business.”
 

Similarly, bundled transactions containing property or services that are subject to different tax rates must be taxed at the highest tax rate “unless the dealer is able to reasonably identify the portion of such transaction that is subject to the lower tax rate from its books and records kept in the regular course of business.”

Both bills introduce Virginia sales tax rate changes.
 

Virginia's base state sales rate would drop from 4.3% to 4% under HB 900. But the bill also imposes additional state sales and use taxes in "transportation districts with unique needs" as follows:
 

• Members of the Northern Virginia Transportation Commission: 0.385%
• Jurisdictions “embraced by the Northern Virginia Transportation Authority” that are not members of the Northern Virginia Transportation Commission: 0.615%
• Members of the Potomac and Rappahannock Transportation Commission: 0.2%
   

SB 638 would not lower the base state sales tax rate. However, it would apply an additional 0.2% state sales and use tax in any city or county that’s a member of the Northern Virginia Transportation Commission or the Potomac and Rappahannock Transportation Commission.
 

Both bills exempt food purchased for human consumption and essential personal hygiene products from the additional sales and use taxes. Both exclude the additional taxes from Virginia’s timely filing discount.

HB 900 and Senate Bill 638 each seek to impose retail delivery fees starting July 1, 2027, but in different ways.
 

Under HB 900, a 20-cent retail delivery fee would apply to any retail delivery made in any county or city that’s a member of the Northern Virginia Transportation Commission. SB 638 would apply a statewide 50-cent retail delivery fee plus an additional 25-cent fee for retail deliveries made in any county or city that’s a member of the Northern Virginia Transportation Commission.
 

None of these retail delivery fees would apply to deliveries of food for human consumption or essential personal hygiene products — which are exempt from Virginia sales tax — or qualify for Virginia’s timely filing discount.

Virginia SB 638 would tax transportation network companies like Lyft and Uber as follows.
 

• A 4.3% tax on gross proceeds derived from fares charged by transportation network companies from any county or city located in the commonwealth
• An additional 1.9% tax on fares originating in any city or county that’s a member of the Northern Virginia Transportation Commission
   

The transportation network companies tax would not be eligible for Virginia’s timely filing discount.

Both HB 900 and SB 638 establish an additional regional highway use fee on any alternative fuel vehicle, electric motor vehicle, or fuel-efficient vehicle registered in the commonwealth. The rate for each vehicle is 29.34% of the amount of the highway use fee assessed under § 46.2-772
 

Instead, owners of alternative fuel vehicles, electric motor vehicles, or fuel-efficient vehicles could opt to participate in a voluntary regional mileage-based user fee program. Rather than paying the 29.34% highway use fee, they’d pay a fee based on their mileage pursuant to § 46.2-773.

If Virginia lawmakers implement any of the tax changes described above, which is not guaranteed, tax compliance could become more burdensome for many businesses than it already is.
 

Avalara helps businesses of all sizes and industries streamline tax compliance. Check out the Total Economic Impact™ study conducted by Forrester Consulting and commissioned by Avalara to see the benefits of our tax automation and compliance software solutions.