The South Carolina Department of Revenue (Department) has issued a revenue ruling to provide guidance that separately stated fees charged by retailers, referred to as an inflation fee, convenience fee, or non-cash adjustment fee, are included in the gross proceeds of a sale or the sales price and, as such, are subject to sales and use tax.1
Fees included in “gross proceeds of sales” or “sales price”
As explained in the ruling, rising inflation has led some retailers to charge fees, characterized by the Department as inflation fees, to a customer’s invoice or receipt to mitigate inflation and cover increased operating costs. Retailers also are adding a separate fee to cover credit card processing costs, otherwise known as a convenience fee or non-cash adjustment fee. These fees may be imposed as a flat fee or based on a percentage of the sales price of the product. The Department indicated in the ruling that these separately stated fees are included in the gross proceeds of a sale or the sales price and thus are subject to sales and use tax.
To support its conclusion that inflation fees and similar fees are subject to sales and use tax, the Department cites the statute providing that “[a] sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every person engaged or continuing within this State in the business of selling tangible personal property at retail.” 2 Sales tax is levied on the “gross proceeds of sales,” which is defined as the “value proceeding or accruing from the sale, lease, or rental of tangible personal property.”3 Use tax is “imposed on the storage, use, or other consumption in this State of tangible personal property purchased at retail for storage, use, or other consumption in this State, at the rate of five percent of the sales price of the property, regardless of whether the retailer is or is not engaged in business in this State.”4 Use tax is levied upon the “sales price,” which is “the total amount for which tangible personal property is sold.”5 For purposes of both sales and use tax, the following expenses are not deductible: the cost of goods sold; the cost of materials, labor, or service; interest; losses; transportation; or federal excise taxes imposed on manufacturers or importers. Based on these statutes, the ruling explains that the measure of the sales and use tax is the sum of all consideration received from the sale of tangible personal property, without any deductions, unless specifically provided.
The ruling concludes that the inflation fees, convenience fees, non-cash adjustment fees, or similar type of fees charged by retailers as part of the retail sale of tangible personal property to a customer are included in the “gross proceeds of sales” or “sales price” subject to sales and use tax. However, these fees are not subject to sales and use tax if the retail sale of the tangible personal property is otherwise exempt from sales and use tax. Examples of nontaxable sales include sales to the federal government or nontaxable services (such as services provided by doctors, accountants or hair stylists).6
Transactions containing taxable and nontaxable items
To illustrate the computation of sales tax on these fees, the ruling provides examples of a restaurant that charges an “inflation fee” to offset rising costs and a retail thrift store that charges a “non-cash adjustment fee” to recover credit card processing charges. If an inflation fee or similar fee is imposed on the retail sale of multiple products that includes both exempt and taxable items, sales and use tax is only imposed on the portion of the fee related to the taxable items if the seller can reasonably prorate the fee based on its books and records. If the seller cannot reasonably allocate the fee between the taxable and nontaxable items, the entire fee is subject to sales and use tax.
As a result of the confluence of the pandemic, inflation, compensation increases and significant fees imposed by credit card companies on businesses, costs faced by many types of retailers have risen substantially in recent years. Faced with this threat to profitability (and in some cases, financial stability), businesses have responded to this environment with increases to the baseline cost of their products, as well as the addition of line item fees like inflation and convenience fees. While generally intended to be temporary measures to account for these increased costs, the need to remain competitive with similarly situated businesses may herald a new era in which such line items become more ubiquitous. As businesses continue to depend upon these fees to mitigate costs, the consideration of how to treat such items for sales tax purposes is likely to grow in importance in the future.
For South Carolina sales and use tax purposes, the ruling clarifies that if the transaction is taxable, the fee is considered part of the sales price and, thus, subject to sales and use tax. Retailers selling tangible personal property in South Carolina should ensure that their sales and use tax systems are charging sales and use tax on these fees. Also, retailers that sell taxable and nontaxable items in combined transactions should consider establishing a system allowing them to properly allocate the fees between the taxable and nontaxable items. South Carolina is the first state to issue guidance expressly addressing the sales tax treatment of inflation fees. It would not be surprising to see other states following a similar approach to imposing sales and use tax on this type of fee.
1 Revenue Ruling No. 22-10, South Carolina Department of Revenue, Oct. 20, 2022.
2 S.C. Code Ann. § 12-36-910(A).
3 S.C. Code Ann. § 12-36-90.
4 S.C. Code Ann. § 12-36-1310(A).
5 S.C. Code Ann. § 12-36-130.
6 S.C. Code Ann. § 12-36-2120(2); 117 S.C. Code Ann. Regs. 308.
Jamie C. Yesnowitz
Principal, SALT Services
National Tax Office Leader
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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