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

Charles Maniace
May 19, 2020

This blog was last updated on 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.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Charles Maniace

Chuck is Vice President –Regulatory Analysis & Design at Sovos, a global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, he leads a team of attorneys and tax professionals that provide the tax and regulatory content that keeps Sovos customers continually compliant. Over his 20-year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC, Bloomberg and more. Chuck has also been named to the Accounting Today list of Top 100 Most Influential People four times.
Share this post

North America Sales & Use Tax
February 6, 2025
The Tariff and Sales Tax Mishmash – Untying the Mess

This blog was last updated on February 6, 2025 Talk of tariffs dominates the current news cycle with some commentators suggesting that tariffs will spell disaster for our economy while others say the exact opposite. We’ve seen the stock market sometimes fluctuate as tariffs are announced but later suspended, leaving us to wonder whether an […]

retailer dtc wine shipping
North America ShipCompliant
February 6, 2025
Retailer DtC Wine Shipping: The Time Has Come

This blog was last updated on February 6, 2025 By Tom Wark, Executive Director, National Association of Wine Retailers We are often reminded by the media and those in the wine industry—as well as by wine enthusiasts—that the three-tier system of alcohol distribution in most states hinders consumer access to the expansive number of wines […]

Montana 1099-DA
North America Tax Information Reporting
February 5, 2025
State Filing Alert: Montana’s New 1099-DA Requirements for Crypto Brokers

This blog was last updated on February 5, 2025 Reporting digital asset transactions on Form 1099-DA just got a little more complicated. For 2025 transactions, crypto brokers that file Form 1099-DA with the IRS will be required to file the 1099-DA with the State of Montana. This makes Montana the first state to introduce a […]

North America ShipCompliant
January 23, 2025
DtC Wine Shipping in 2024: A Year-in-Review

This blog was last updated on January 28, 2025 The direct-to-consumer (DtC) wine shipping channel faced a storm of challenges in 2024, navigating some of the toughest market conditions in over a decade. As inflation tightened wallets and consumer behaviors shifted, the industry recorded its steepest declines in shipment volume and value since the inception […]

Form 1099-DA Crypto Transactions
North America Tax Information Reporting
January 21, 2025
What is Form 1099-DA and How Does it Impact Crypto Transactions?

This blog was last updated on January 24, 2025 The IRS has released Form 1099-DA and its accompanying instructions for filing for TY 2025. Form 1099-DA is the newest IRS information return, designed for reporting digital asset proceeds from broker transactions and is required to be filed by brokers managing digital assets such as NFTs […]