Many service businesses are adding surcharges to customers’ bills as a way to make up for lost income during the current economic financial crisis. Business owners are going out of their way to enhance safety measures and make customers feel comfortable in their establishments—but it comes with a cost.
Between hand sanitizers, upgraded HVAC systems, UV light technology, and other PPE gear, the increased expenses to protect both patrons and staff have strained finances. This strain has prompted a wave of rising costs and higher fees in businesses such as restaurants, dentist offices, and hair salons, among others. And while this micro-fee may add up to much-needed revenue and help keep some businesses afloat, business owners need to be aware of the tax consequences associated with the additional surcharge.
What business owners may not know is that the surcharge could be subject to sales tax. This implication greatly depends on your tax jurisdiction and items or services being sold. For example, Massachusetts has a sales tax rate of 6.5% on most tangible items, but there are some exemptions, such as clothing (under $175), grocery food, medical devices, etc. New Hampshire, on the other hand, does not charge sales tax and would be excused from taxing a COVID-19-related surcharge.
What does this mean for your business? If you’re including a mandatory surcharge on the buyer’s receipt, you must calculate it as part of the total purchase price for items subject to sales tax. Since the fee is not optional, like gratuity, it’s considered part of the customer’s total purchase. Even if the fee is listed as separate line item on the receipt, there’s no getting around paying sales tax on it; or consequently, you may end up triggering an audit. Business owners do not have to collect tax on the surcharge, however, if the service or item is not subject to sales tax or falls within a sales tax exempt jurisdiction.
Be sure to educate your staff and update your point-of-sale terminal to reflect the correct tax rates on the surcharge before generating customer receipts, as a number of stores sell items that are both taxed as well as not taxed. For example, a haircut is not subject to sales tax in Massachusetts, but the shampoo you buy to compliment your new ‘do would be taxed.
While both state and federal tax authorities are providing integral relief to small businesses, they’re also keeping their eyes peeled for those misusing tax relief measures or evading proper tax law protocol. Don’t forget, they need to generate additional income to offset their pandemic financial hardships as well.
So, a word to the [tax] wise: Don’t fall victim to a sales tax audit and create more challenges for yourself than this year has already offered up. The additional revenue generated from the surcharge could end up going into someone else’s pocket if tax compliance takes a back seat in your business.
Be sure to dot your ‘i’s and cross your ‘t’s and ask for help when you need it. Contact me at stu@erocktax.com if you would like additional guidance on sales tax compliance for your business.
Like what you have read? Please share with friends.
About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.