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New Jersey Clarifies Taxation of COVID-19 Surcharges

Posted on July 28, 2020

The New Jersey Division of Taxation has issued guidance clarifying the taxation of fees charged by businesses to cover increased expenses from the COVID-19 pandemic.

According to the July 24 notice, “Some businesses have begun to include a surcharge for COVID-19 precaution and prevention costs (e.g., COVID-19 Fee, Coronavirus Fee, PPE Fee, Sanitation Fee, Cleaning Fee, etc.) on customers’ invoices.”

Whether the charges are subject to sales tax depends on “whether the service provided or the product sold by a business is taxable," the division says. "A separately stated surcharge, regardless of what it is called, to cover the cost of COVID-19 precautions is an expense that a seller incurs in order to perform a service or sell a product." 

Pointing to the state tax code's statutory definition of sales price, the guidance notes that because the surcharge is "part of the sales price, the taxability of a COVID-19 precautions surcharge depends on the taxability of the service provided or the product sold. Thus, if a service or product a business is offering is not subject to Sales Tax, then the COVID-19-related surcharge is also not subject to tax. If the transaction is for a service or product that is subject to Sales Tax, then the COVID-19-related surcharge is subject to tax."

Sales price is defined as "the measure subject to sales tax and means the total amount of consideration, including cash, credit, property, and services, for which personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise," without any deduction taken for a seller's cost of property sold, the cost of materials used, labor or service costs, interest or losses, transportation costs, taxes imposed on a seller, or any other seller expense, according to the guidance. 

The guidance provides three examples to demonstrate when the surcharge would be subject to tax. A fee added to a restaurant customer's bill for meals and beverages to cover the cost of personal protective equipment and sanitation supplies used by employees would be taxable, but a similar fee on a bill for haircut and color services at a salon or a bill for services performed at a dentist's office would not be subject to tax, according to the guidance.

Norman Lobins of Deloitte Tax LLP told Tax Notes July 27 it is good to see the division “quickly and responsibly address some of the new charging and billing practices that are taking place.”

“While the guidance is focused on sales to the consumer, it also indirectly states that the provider should not necessarily be claiming a resell exemption,” he added.

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