Why easy return labels aren’t so easy on sales tax compliance – Wacky Tax Wednesday

One reason I’m not much into online shopping is because of the returns process. The thought of hauling something I purchased down to the post office rankles me, as does paying for the privilege of sending it back. No thanks.

Understanding this about me and others, retailers have taken pains to take the pain out of returns. And I have to say, some companies have successfully wooed me. It’s not so terrible to slap a prepaid return label on the same bag or box and drop it off at the post office counter, especially if I can skip the line.

Unfortunately, prepaid return labels can be a hassle for the retailer if sales tax isn’t handled properly.

Not for the first time, a clothing retailer in Virginia has been found liable for uncollected tax on charges billed to customers for easy return labels, as well as shipping and handling.

The first time the retailer contested the charges, it pointed to the fact that Virginia law provides an exception for separately stated transportation charges.

In response, the Virginia Department of Taxation explained that although transportation and delivery charges are generally exempt when delivery is “from the seller to the purchaser,” the exemption provided under 23VAC10-210-6000 doesn’t apply to charges for delivery “from a manufacturer to a retailer’s place of business relative to purchases for resale.” The department interprets this to mean delivery charges from a purchaser to a seller are taxable, although the administrative code doesn’t make that entirely clear.

It went on to explain that although the retailer considered the charge for the easy return label to be separate from the charge for the merchandise, the department found the easy return label charges to be similar to restocking fees, “which are considered to be part of the taxable sales price of the merchandise that is returned.”

The second time the retailer contested the charges, it argued easy return labels should be exempt because the “returns represent delivery of tangible personal property for use or consumption outside Virginia.” It also disputed the department’s earlier comparison of easy return labels to restocking fees.

The department concedes that Virginia Code § 58.1-609.10 4 provides an exemption for: “Delivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth.” However, it finds this exemption irrelevant: “The taxability of the easy return label charges arises from their direct connection to the sales of the returned merchandise from sales that were originally made to Virginia customers. The Department’s position that the charges are taxable was not based on any out-of-state use that may occur after the merchandise is returned.”

As for comparing easy return labels to taxable restocking fees, the department explained it wasn’t asserting the charges for easy return labels were restocking fees, merely that they should be treated similarly “because like restocking fees, the easy return label charges are tied to the sale of tangible personal property and should be included in the sales price of tangible personal property that was sold and subsequently returned.”

The Virginia Department of Taxation is finished with this issue: The taxpayer is liable for the unpaid sales tax on easy return labels. Was that so hard?

Return policies can impact affect your bottom line, perhaps now more than ever. A survey of more than 1,000 U.S. consumers last spring found that 40% of consumers had held back on buying items online since the pandemic due to returns frustrations.

67% of shoppers typically check a retailer’s returns pages before making an online purchase, suggesting return policies can be a deciding factor on whether a purchase is made. So, it’s worth creating a positive return experience for your customers. That includes getting the sales tax on returns right.

Learn more about returns and other issues facing ecommerce sellers.