Be Wary of the Tax Implications of the COVID-19 Surcharge

Charles Maniace
May 19, 2020

As businesses begin to re-open as lockdown orders and advisories are lifted, accounting for the increased cost of doing business is top of mind. The reality is that supply chain costs are generally higher, safety and sanitation expenses are significant, and, in many cases, governmental orders are requiring businesses to operate at substantially decreased occupancy. For the near term, turning a profit may represent a serious challenge. At the same time, direct price increases (whether temporary or permanent) reflecting the new reality may serve to alienate a customer base experiencing the highest unemployment rate since the Great Depression.

What should businesses do?

One strategy some companies have been trying is the “COVID-19” surcharge. The surcharge is often positioned as a temporary levy imposed by the business to cover the additional expense of operating in the current environment. Because the charge is specifically identified as being related to COVID, the hope is customers will be more understanding of this short-term measure brought about by circumstances beyond anyone’s control than they would be of a general price increase.

So far, public reaction to the surcharge has been mixed. While some view it as a small price to pay on our long road back to normalcy, others view the levy as a wholly inappropriate money grab at a time when customers can least afford it. If one thing is clear from experience so far, companies do well to overtly and conspicuously inform their customers that the fee is being imposed. The greater the surprise, the more vitriolic the reaction.

This idea is not new. Back in 2007-2008 when gas prices were at an all-time high, many businesses experimented with the idea of a “fuel surcharge” to cover the extra costs associated with transportation. While almost every seller of tangible goods has costs associated with fuel somewhere in their supply chain, fuel surcharges were common among companies who provided door-to-door delivery of their inventory.

While state and local governments have not had an opportunity to opine on the tax treatment of a COVID-19 surcharge, guidance regarding the treatment of its close cousin, the fuel surcharge is highly informative. Most jurisdictions will hold that if the underlying item being sold is subject to sales tax, then any applicable COVID surcharge, even if separately stated on the invoice, would likewise be subject to tax.

Most states have a provision in their sales tax law or rules defining “sales price” as the total amount of consideration paid for a product or service, including all elements of the cost of property sold. In short, this means that sellers cannot separately break out elements of “cost of goods sold” on the customer invoice and expect a different tax treatment.

What this also means is that if the underlying item is exempt from tax (e.g. grocery food, personal services) then the COVID surcharge will likely be tax exempt. If the charge is subject to additional special point-of-sale taxes separate and distinct from sales taxes (e.g. local restaurant meals taxes) the question becomes a bit murkier. For example, meals tax is largely the province of local governments and counties and cities often provide less detailed guidance surrounding the proper interpretation of their tax ordinances.

Don’t be caught in the audit cross hairs. As reported in an earlier blog, increased enforcement is a likely component of any effort to shore up massive budget shortfalls caused by the COVID pandemic. Taking the time now to ensure that you continue to correctly account for sales tax is critical to keeping your company safe.

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Author

Charles Maniace

Charles Maniace is Vice President – Regulatory Analysis & Design at Sovos. An attorney by trade, Chuck leads a team of attorneys responsible for all the tax and regulatory content that keeps Sovos clients continually compliant. Over his 14 year career in tax and regulatory automation, he has given talks and presentations on a variety of topics including The Taxation of High Tech Transactions, The Taxation of Remote Commerce, The Regulatory Implications of Brexit, The Rise of E-Audits, Form 1042-S Best Practices and Penalty Abatement Practices for Information Returns. Chuck is a member of the Massachusetts Bar and holds a B.S. in Business Economics from Bentley College, a J.D. from Boston University School of Law, and an LL.M in Taxation from Boston University School of Law.
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