Changes Coming to Virginia’s Sales and Use Tax

04.30.2013

The recent transportation bill signed into law by Governor McDonnell (H.B. 2313) imposed several significant changes to Virginia’s sales and use tax system to partially fund the cost of the transportation improvements and structure provided in the bill.  In summary, the bill:

• Eliminates the $0.175 per gallon tax on motor fuels, and replaces it with a percentage-based tax of 3.5% for gasoline and 6% for diesel fuel
• Provides for a refund of an amount equal to a 2.5% tax paid on diesel fuel for passenger cars, pickup or panel trucks, and trucks having a gross vehicle weight rating of 10,000 pounds or less
• Imposes a $64 annual registration fee on hybrid electric motor vehicles, alternative fuel vehicles, and electric motor vehicles (current law imposes a $50 fee on electric motor vehicles only)
• Amends the tax on the sale of motor vehicles, which is currently 3% but will increased to 4.15% over four years

The bill also raises and changes the state sales and use tax, imposing three changes to Virginia’s sales and use tax system:

• Increases the general state sales and use tax rate from 4% to 4.3%
• Requires collection of sales/use tax from remote sellers
• Imposes a 0.7% tax in certain “Planning Districts”

Increased State Sales Tax

Beginning July 1, 2013, Virginia’s state sales tax rate will increase from 4% to 4.3%.

Required Collection from Remote Sellers

The bill establishes procedures for the collection of the state sales and use tax from retail dealers located outside Virginia for sales made into the Commonwealth, contingent upon the federal government passing legislation authorizing such collection. A bill authorizing states to collect sales and use tax on remote sellers (S. 743, the Marketplace Fairness Act) is currently making its way through Congress.  In the event that such revenues are collected, a portion of the revenues will be allocated to localities for education, a portion will be allocated to localities with a stipulation that some of the funds be used by the locality for transportation needs, and a portion of the revenues will be deposited in the Transportation Trust Fund.  If the federal government does not pass legislation authorizing states to collect sales taxes from remote sellers by January 1, 2015, then the motor fuels tax imposed on gasoline will be raised from 3.5% to 5.1% (the motor fuels tax on diesel fuel will remain at 6%, but the diesel fuel refund for passenger cars, pickup or panel trucks, and trucks weighing less than 10,000 pounds will be in an amount equal to a 0.9% tax paid).  If the federal government passes such legislation after January 1, 2015, the rate of tax on gasoline will revert to 3.5%.

New Planning District 0.7% Surtax

There will also be an additional 0.7% sales tax imposed in each county and city located within any “Planning District” meeting certain criteria. Planning Districts are regions created by the Virginia Department of Housing and Community Development to encourage and facilitate cooperation between local and state government on issues such as transportation, economic infrastructure development, and resource management.

The 0.7% sales tax increase applies to any Planning District that meets the following criteria as of January 1, 2013:

• A population of 1.5 million or more, as shown in the most recent U.S. Census
• Not less than 1.2 million motor vehicles registered in the district
• Total transit ridership of not less than 15 million riders per year across all systems

Currently, just the Northern Virginia and Hampton Roads Planning Districts meet these criteria.  The 0.70% state sales and use tax rate increase in Planning Districts is in addition to (not in lieu of) the statewide 0.3% state sales and use tax rate increase.

Other tax changes in the bill include:

The bill imposes additional state taxes and a fee in Planning Districts meeting certain population, motor vehicle registration, and transit ridership criteria. The additional taxes and fees are a 2.1% tax on wholesale distributors of motor fuels, a 2.0% transient occupancy tax, and a fee on grantors of real property equal to $0.15 per $100 of the value of the real property sold by such persons. The transient occupancy tax and grantor's fee currently would apply only in the Northern Virginia Planning District, and the tax on wholesale distributors of motor fuels currently would apply only in the Hampton Roads Planning District (under current law, the same tax on wholesale distributors is imposed in the Northern Virginia Planning District). 

David Lionberger is a partner in Hirschler Fleischer's business section,. His practice focuses on taxation and business planning, tax credit transactions, trusts and estates, and mergers and acquisitions. David’s clients include family and closely-held growth and middle market companies as well as regional and multinational businesses. For more information, contact David at 804.771.9543 or dlionberger@hf-law.com.