Is it standard for a business to charge sales tax on a penalty fee?

December 14, 2015 8:39 AM

I recently had to pay a heavy early termination fee from a gym membership in New Jersey of $99.99. I noticed they charged my card $106.99. When I called the gym they said that the $7.00 is for New Jersey sales tax. I was wondering if this is legal for the business (not sure if this differs by state). More specifically - is it standard for a business to charge sales tax on a penalty fee that relates to a service?
posted by adamhenson to Law & Government (4 answers total)

Gym membership fees are definitely taxable in NJ. My guess is that, legally speaking, this penalty is just another membership fee.
posted by jon1270 at 9:00 AM on December 14, 2015

I would assume it's standard where those fees are taxable. Businesses charge tax when they're required to, not as they choose to do.
posted by humboldt32 at 10:03 AM on December 14, 2015

Best answer: New Jersey Tax Publication LR: 2010-2-SUT states 'Since there is no “sale” of tangible personal property, digital property or enumerated services ... sales and use tax is not due on a charge for a negotiated payment for compensation for lost business and profits." Whether you can use this to talk them into giving you your $7 back is another question. If it really matters to you, you could contact the Division of Taxation.

My personal guess is that their billing software adds 7% to everything, whether it really needs it or not. If this is the case, their accounting software probably forwards the money to the state. So I doubt they're taking the money and keeping it for themselves, which would be illegal. So you might want to just consider the money a gift to the good state of New Jersey, because it's going to be very difficult to get back.
posted by ubiquity at 10:24 AM on December 14, 2015 [5 favorites]

We're quite often charged tax inappropriately; businesses don't always charge taxes correctly on weird transactions (and this is very occasionally deliberate, as a cash grab). I would argue with them if you think it's worth 7$.
posted by jeather at 10:27 AM on December 14, 2015 [1 favorite]