Virginia Sales and Use Tax Explained: Rates, Nexus, Returns

Sales and Use Tax Basics in Virginia

Sales Tax

The sales tax in Virginia applies to the sale, lease, or rental of tangible personal property (tangible item) used in the state, as well as on accommodations and certain taxable services, unless a specific exemption applies.

Use Tax

In Virginia, the user tax, also called the consumer use tax, applies to tangible items used, consumed, or stored in the state when Virginia sales or use taxes were not paid at purchase. The use tax is calculated based on the total purchase price, including any associated services and any amounts credited by the seller.

Virginia Sales and Use Tax Rates

The tax rate depends on the locality where the transaction occurs or where the goods are received, and it can also vary by the type of item sold, rented, or leased. For example, in James City County and York County, the sales tax rate is 7%, in Northampton County and Danville, it is 6.3%, and in Central Virginia, Hampton Roads, and Northern Virginia, 6%. Even though the statewide tax rate is 4.3%, in most locations the applicable rate is 5.3%.

Notably, Virginia also has a reduced 1% statewide Grocery Tax. The Grocery Tax applies to sales of food for home consumption and certain essential personal hygiene products. Other sales and use taxes, such as the Vending Machine Sales Tax of 6.3-7% depending on location, or a USD 0.50 Tire Recycling Fee per tire sold, may apply. Also, Virginia imposes a 10% Digital Media Fee, a 5% Communications Sales Tax on certain telecommunications services, an Aircraft Sales and Use Tax, Cigarette and Tobacco Taxes, and a Disposable Plastic Bag Tax. 

Tax-Exempt Transactions

The Virginia Department of Taxation provides a detailed list of sales tax exemptions divided into several categories, including government and commodities, services, agricultural, media-related, non-profit organizations, commercial and industrial, medical, and safety exemptions. For each of these exempt taxable persons, specific conditions must be met. Nonetheless, the most common exemption is a purchase for resale. 

Nexus Rules in Virginia

For a taxable person, whether an individual or a business, to become liable for sales or use tax purposes, it must establish a nexus, meaning a significant connection with the Virginia taxing jurisdiction. The most common ways to establish a significant presence in Virginia are through a physical, economic, or marketplace nexus. 

Physical Nexus

Having an office or place of business, employees or contractors in the state, inventory or goods stored in a warehouse, owning personal property, or leasing property is enough for a taxable person to establish a physical nexus in Virginia, which requires the business to collect and remit sales tax on all taxable sales there.

Economic Nexus

Under Virginia economic nexus rules, individuals or businesses without a physical presence in the state, also known as remote sellers, who make over USD 100,000 in annual gross retail sales or conduct 200 or more transactions with Virginia customers must register, collect, and remit taxes to the Department of Taxation.

Marketplace Nexus

Marketplace nexus rules apply to the marketplace facilitators, requiring them to register to collect and remit Virginia sales tax once they sold or facilitated over USD 100,000 in annual gross sales or 200 or more transactions to Virginia customers in the current or previous year.

Taxable Goods and Services in Virginia

The sales and use tax generally applies to the sale, lease, or rental of tangible personal property, unless specifically exempt, and to accommodations. For services, the situation is the opposite: services are typically tax-exempt, except for those strictly defined as taxable.

The services that are subject to Virginia sales tax are those provided in connection with the sale of a tangible item, involving fabricating tangible items regardless of who provides the materials, relating to preparing or serving meals or other tangible items for payment, and rentaling rooms, lodgings, or accommodations to transients for less than 90 continuous days at hotels, motels, inns, camps, or similar places. 

For certain services, specific rules apply. For example, maintenance contracts that provide for repair labor and repair or replacement parts are subject to sales tax, but only on 50%  the total charge for the contract.

Bundled Transactions and the True Object Test

A bundled transaction refers to a retail sale of two or more distinct and identifiable items, either products or services, sold for a single non-itemized price. Whether such transactions are taxable or not is determined by the true object test.

For example, transactions that include both the sale of tangible items and services may be either taxed or exempt on the total charge, even if the costs for the items and services are listed separately. Therefore, it is necessary to determine the true object of the transaction. If the main purpose is to obtain a service and the item provided is incidental, the transaction may be exempt. In contrast, if the main purpose is to obtain the tangible item, the entire charge, including services, is taxable.

In bundled transactions that include communications services subject to Virginia’s communications sales tax and other non-taxable services, the portion related to non-taxable services is still subject to tax unless the provider can reasonably identify it using regular business records maintained in the normal course of business.

E-Commerce Framework

Any seller or dealer without a physical presence in the state who, in the current or previous year, earns over USD 100,000 in retail sales or conducts 200 or more separate sales is considered a remote seller responsible for collecting and remitting sales tax on sales to consumers in Virginia. Notably, any software provider acting on behalf of such a seller is also treated as a remote seller under the same conditions. 

Marketplace Rules

Marketplace rules for remote sellers include two scenarios. The first one is where the remote seller sells through both a marketplace facilitator and another channel, like your own website. In such cases, these sellers must register to collect Virginia sales tax if their direct sales to Virginia customers exceed USD 100,000 or 200 transactions annually. The responsibility to file a return applies only to non-marketplace sales, whereas a marketplace facilitator handles tax for sales made through their platform.

The second scenario is when the remote seller explicitly sells through a marketplace facilitator. In those situations, the marketplace seller does not need to register, as the facilitator collects and remits sales tax.

Digital Goods and Services

Even though Virginia imposes a 5% Communications Tax, digital goods and services are generally not subject to sales and use tax.  More specifically, while wireless and satellite telephone services, cable television, satellite television, and satellite radio are subject to the Communications tax, IT services, such as electronic publishing and web hosting, internet access, and related incidental services such as email or instant messaging, digital products delivered digitally like software, downloaded music, ringtones, and reading materials are tax-exempt.

Digital Marketplace

Businesses that have agreements with marketplace sellers to help them sell their products through online or digital marketplaces are considered marketplace facilitators if they meet certain criteria. Firstly, they must provide a way for buyers and sellers to connect by transmitting offers or acceptances, operating the marketplace infrastructure or technology, or providing virtual currency used for purchases. 

Additionally, businesses must take part in activities such as processing payments, storing or fulfilling orders, listing products, setting prices, branding sales as their own, or handling customer service and returns. However, businesses that only process payments or solely advertise goods for sale without engaging in any facilitation activities are not considered marketplace facilitators.

Digital Platform Operator

Businesses that meet the criteria for marketplace facilitators become subject to sales tax rules and requirements once their own or facilitated sales to Virginia customers in the previous or current calendar year exceed USD 100,000 in annual gross revenue or the 200-transaction threshold. From the moment of registration, facilitators are responsible for collecting and remitting sales tax on all Virginia sales made on behalf of marketplace sellers, unless a waiver applies.

The waiver may apply in cases where marketplace sellers are already registered for collecting Virginia sales tax, or if a specific seller has sufficient nexus to register on their own, and requiring the facilitator to collect the tax would create an undue burden for either party.

Filing and Payment Requirements in Virginia

The frequency of tax returns and payments in Virginia depends on the taxable person's tax liability and is either monthly or quarterly. The filing frequency is assigned to the taxable persons by the Virginia Department of Taxation. Monthly returns must be filed by the 20th of the month following the reporting period, while quarterly returns must be filed on April 20, July 20, October 20, and January 20. Zero returns are required when no tax is due.

Penalties for Non-Compliance with Sales and Use Tax Requirements

Late filing or payment results in a penalty of 6% per month, up to a maximum of 30%, with a minimum penalty of USD 10. While penalties may be waived if the failure was due to good cause and accepted by the Tax Commissioner, filing a false or fraudulent return, or wilfully failing to file a tax return with the intent to defraud, may result in a penalty of 50% of the correct tax assessed.

Interest also accrues on unpaid tax at the federal underpayment rate plus 2% until the balance is paid. Notably, remote sellers or marketplace facilitators are not liable for incorrect tax collected, including penalties or interest, if the error resulted from reasonable reliance on information provided by the state governing bodies.