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Shift in tax rates to take effect

Come Monday morning, your $2 coffee that used to cost $2.10 with tax will now cost $2.11.

Your $3.40 gallon of gas, though, should cost about $3.34 soon after.

July 1 is the day new laws in Virginia take effect and the day tax rate changes in the transportation funding reform bill also kick in.

The transportation bill was, and still is, controversial. Gov. Bob McDonnell conceived it and pushed for it in the 2013 General Assembly session, his last as governor. He got House Speaker Bill Howell, R-Stafford, on board.

The idea was to finally fix the funding streams for Virginia’s roads. The gas tax was a flat tax, not a percentage one, so its purchasing power had diminished over time.

But finding a package of tax changes that could please 51 House members and 21 senators proved to be difficult. Many Republicans balked at what they viewed as an overall tax increase, while many Democrats insisted the bill needed to create even more revenue.

In the end, lawmakers reached a deal to raise the sales tax, shift the gas tax to a percentage, increase other taxes in Northern Virginia and Hampton Roads, and cross their fingers that Congress will approve a law to let states collect sales tax on online sales.

All together, the bill is expected to raise more than $3.4 billion over five years statewide, with additional revenue in Northern Virginia and Hampton Roads.

The changes will start being felt at 12:01 a.m. Monday, when the sales tax for most areas of the state increases from 5 percent to 5.3 percent. North of Stafford, in Northern Virginia localities, it’ll be 6 percent, as it will in Hampton Roads localities.

Meanwhile the 17.6 cents-per-gallon gas tax that has been levied since 1986 will vanish, replaced by a 3.5 percent sales tax on gas at the wholesale level. It’ll be passed on to consumers but the expectation, at least from the bill’s supporters, is that consumers will be paying a lower level of tax on gasoline, although not immediately.


Because the new 3.5 percent tax on gas will be levied at the wholesale level—meaning gas stations pay it when they buy the gas—consumers will be paying the old tax on old gas until the gas bought before 12:01 a.m. Monday runs out.

So if you’re gassing up Monday, you’re probably going to pay the old 17.5 cents per gallon rate.

“The law does not apply to retail. It applies to product pickup at the terminal,” said Virginia Petroleum, Convenience and Grocery Association president Michael O’Connor. “That product that’s in the ground Monday morning is going to be the 17.5 cent product.”

Selling off the gas bought under the old tax rate could take just a day or two for a busy interstate gas station, or as long as a week for a quiet country store that sells less gas, O’Connor said. He said the situation is confusing for gas station owners.

“It’s the most convoluted thing you’ve ever seen,” O’Connor said, adding that the tax change has prompted more calls and questions from gas station owners than he’s seen in his 13 years at VPCGA.

Still, within the next week, consumers should see somewhat lower gas prices. AAA Mid-Atlantic recently issued a press release predicting that the tax would drop from 17.5 cents a gallon to an effective 11.7 cents per gallon through the end of this year (the new percentage tax will be recalculated every six months).

The average price for a gallon of unleaded gas last week was about $3.40, and the tax change would put the average price around $3.34.

AAA cited figures from the VPCGA to arrive at that number, although O’Connor said the AAA numbers only apply to regions of the state outside Northern Virginia and Hampton Roads.

Drivers in Northern Virginia localities—including Spotsylvania, Stafford and Fredericksburg—already pay an extra 2.1 percent in gas tax for local roads, and the new law levies the additional 2.1 percent in Hampton Roads localities.

The tax on diesel fuel is also changing, and outside those two regions it will cost a couple of cents more per gallon.

O’Connor said his group and the Department of Motor Vehicles have been holding meetings with gas station owners to get them up to speed on the new tax changes.


Jodi Roth of the Virginia Retail Merchants Association said the state tax department has sent out charts, held webinars and been in frequent communication with retailers over the new changes to the sales tax.

She said it’s a burden for retailers to adapt to the new tax rate, just as it’s a burden for them to collect the sales tax on the state’s behalf.

Roth said it’s “a coin toss” as to whether the public will be aware of the increased tax when they start paying it Monday.

“There are citizens who don’t realize or don’t pay attention,” she said.

The Commonwealth Institute for Fiscal Analysis, which advocates policies benefiting low and moderate income Virginians, says the savings in the gas tax will be more than eaten up by the increased sales tax, and that it will hit lower-income people harder.

“Although these changes will allow Virginia to invest more resources in maintenance and expansion of the state’s roads, rails and bridges, it won’t ‘fill the pockets of Virginia motorists,’ as AAA claims,” the Institute said on its website. “Virginia lawmakers enacted a large tax increase this year and there’s no sense pretending it won’t cost Virginians.”

On a small purchase, an additional 0.03 percent in tax (or 1 percent in Northern Virginia and Hampton Roads) wouldn’t be very noticeable. But if you’re buying a car after Monday, you’ll see a difference.

The motor vehicle titling tax also is increasing, from 3 percent to 4.15 percent. On a $20,000 car, at the old rate you’d pay $600 in tax. At the new rate, it’ll be $830.

Drivers of alternative-fuel vehicles will also see an increased fee: $64 a year to make up for the fact that they use less gas.

And Northern Virginians will be paying additional grantor’s tax, and an increased transient occupancy tax on hotel rooms.

Chelyen Davis: 540/368-5028

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