REPRINTED WITH PERMISSION FROM TAXCONNEX.
It’s one of the most important aspects of an online business – and one of the wackiest when trying to determine whether sales tax applies or not. What is it? Shipping.
Actually, in terms of sales tax, it’s “shipping,” “shipping and handling” and “delivery” – three animals treated with confusing differences as you try to meet sales tax obligations in many different states and jurisdictions.
Here’s an overview.
A real (and virtual) issue
Shipping is a growing part of doing business. Recent surveys have shown that package deliveries year-over-year have skyrocketed, fueled in no small part of course by pandemic lockdowns. Year over year from 2019 to 2020, package deliveries jumped 147% in the spring, 130% in the summer and 101% over the fall and holidays. In the winter, e-commerce jumped 96% year-to-year from 2020 to 2021.
Rules vary widely from state to state for the physical delivery of goods. Many states say that when the contents of a shipment are taxable, so is the shipping cost; similarly, when items in a shipment are exempt from sales tax, so is the cost of shipping.
But as most things in sales tax, this isn’t always the case, it depends on the situation and jurisdiction.
The United States is a galaxy of shipping, handling and delivery rules when it comes to sales tax. Ready?
All shipping incurs sales tax in Kansas, for instance, and ditto (generally) in the District of Columbia. Shipping does not incur sales tax in Missouri. Shipping is not taxed in Nevada, but handling is.
When only some of the contents of a shipment are taxable, the shipping charges must be pro-rated in Minnesota, New Jersey, North Carolina, North Dakota, Ohio, Rhode Island, South Dakota, Vermont, Washington and Wisconsin (where a “reasonable allocation” is required).
But even a portion of taxable items renders a whole shipment’s shipping cost subject to sales tax in Kentucky, New Mexico, New York and Pennsylvania.
Taxability can also depend on how the bill/invoice is presented. Stating the shipping cost separately on the invoice affects its taxability in Alabama, Arizona, Illinois, Iowa, Maryland, Oklahoma, Utah, Virginia and Wyoming.
Special conditions can apply even if shipping is stated separately. In Maine, shipment must also be directly to the purchaser and the shipment has to be by common or contract carrier or the U.S. mail. In Florida, the purchaser must also have the option of picking the item up or arranging for third-party transportation services on its own. When shipping to a retailer, sales tax is incurred in Idaho no matter where “shipping” appears on an invoice.
In Kentucky, stating shipping separately avoids sales tax unless the seller makes the delivery. And in Massachusetts, delivery must occur after the purchase to be exempt from sales tax.
Some states also depend on multiple conditions. In Maine, for instance, charges for delivery by the seller in their own vehicle are generally included in the taxable sales price if the products being delivered are taxable. In Maryland, the shipping charge becomes taxable when it’s combined with handling. Give a buyer in Louisiana the option to contract separately for shipping and the cost becomes tax-exempt. Origin and destination sourcing figure big in South Carolina.
And even if you think you’ve got a grip on how a state taxes shipping, watch for local rules in such strong home-rule states as Colorado and Louisiana.
Believe it or not, this is just a simple overview and these rules change frequently. Before you put that shipping, handling or delivery charge and the total sales tax on your invoice, do your homework on the state you’re shipping to.
If you’re worried about how shipping might impact your sales tax obligations, TaxConnex is an outsourced sales tax service provider who can take sales tax off your plate – get in touch to learn how we can help!
REPRINTED WITH PERMISSION FROM TAXCONNEX.
Written by Robert Dumas
Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2011 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.
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