Sales and Use Tax Treatment of Delivery Charges
Since the U.S. Supreme Court overturned its 1992 ruling that physical presence in a state was required before a state could impose sales or use tax collection obligations on a seller1, states have taken steps to require remote sellers to collect and remit sales tax. Remote sellers have scrambled to register in all the states where the sellers accept orders from out-of-state customers and ship into those states.
After registration, the next step sellers must take is to determine what charges are taxable in each state especially when it comes to delivery or transportation charges. Sellers must determine which states tax delivery charges, when the charges are taxable, and how much of the charge is taxable.
Member States of the Streamlined Sales and Use Tax Agreement2
The fundamental purpose of the Streamlined Sales and Use Tax Agreement (SSUTA) is to “simplify and modernize sales and use tax administration in the member states in order to substantially reduce the burden of tax compliance.” (Section 102) A couple of the ways that SSUTA attempts to reduce the burden of tax compliance is bringing uniformity to the state and local tax bases and major tax base definitions.
Section 302 of SSUTA requires the tax base for local jurisdictions be identical to the state tax base. Therefore, sellers can be assured that if delivery charges are exempt from state taxation in a SSUTA member state the charges are exempt for local taxation also.
SSUTA provides administrative and product definitions which are common to all the members states. Two of the administrative definitions contained in SSUTA are definitions of “sales price” and “delivery charges.” Member states are required to adopt these definitions in the administration of each state’s sales and/or use tax codes. The term “sales price” is defined (in part) as:
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 for the following:
A. The seller’s cost of the property sold;
B. The cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller, and any other expense of the seller;
C. Charges by the seller for any services necessary to complete the sale, other than delivery and installation charges;
D. Delivery charges;
E. Installation charges; and
F. Credit for any trade-in, as determined by state law.
Appendix C “Library of Definitions” Part I
The definition goes on to provide that a “state may exclude from ‘sales price’ the amounts received for charges included in paragraphs (C) through (F) above, if they are separately stated on the invoice, billing, or similar document given to the purchaser.” Therefore, delivery charges are included in the sales price (which is subject to tax) unless it is separately stated on the invoice or billing provided to the purchaser.
SSUTA defines “delivery charges” (in part) as:
charges by the seller of personal property or services for preparation and delivery to a location designated by the purchaser of personal property or services including, but not limited to, transportation, shipping, postage, handling, crating, and packing.
Member states may exempt all delivery charges from the sales price or choose to exempt one or more of the following components:
- Handling, crating, packing, preparation for mailing or delivery, and similar charges; or
- Transportation, shipping, postage, and similar charges
Appendix C “Library of Definitions” Part I
The definition reiterates the requirement that unless a seller separately states the delivery charges on the invoice to the purchaser, those non-separately stated charges will not qualify for the exclusion from sales price. The definition further instructs member states to allocate the delivery charge if the shipment includes exempt property and taxable property in one of two methods:
- A percentage based on the total sales prices of the taxable property compared to the total sales prices of all property in the shipment; or
- A percentage based on the total weight of the taxable property compared to the total weight of all property in the shipment.
Only the percentage of the delivery charge allocated to the shipment of taxable property is subject to tax.
Each state that is a member of SSUTA is required to publish a Taxability Matrix which includes its treatment of delivery charges. The state is required to notify the public whether delivery charges are included or excluded from the sales price when separately state on the customer’s invoice.
Sellers can rely on the fact that all member states tax delivery charges when not separately stated on the customer’s invoice and may visit each state’s taxability matrix to determine if separately stated delivery charges (as defined under SSUTA) are excluded from the sales price. The taxability matrix of each member state can be accessed at http://sst.streamlinedsalestax.org/otm/.
Non-Member States of the Streamlined Sales and Use Tax Agreement
The uniformity that exists among the member states is missing from the states that are not members of SSUTA. Sellers are required to investigate the rules of each state to determine what actions are included within the definition of “delivery charges” and if (and when) the charges are subject to sales or use tax.
In New Mexico and Texas, delivery charges billed by the seller for shipment of taxable sales are taxable whether stated separately or included in the sales price. However, charges billed by a third party carrier directly to the purchaser are not part of the sales price of the item. See NM Taxation and Revenue Department Rule 220.127.116.11 and TX Comptroller of Public Accounts Rule 3.303.
In some states, like Florida, Illinois, Colorado and Missouri, delivery charges are taxable regardless of whether the charges are separately stated or included in the sales price. However, if the delivery charges are optional, these states treat the charges, if separately stated, as nontaxable charges. Missouri Department of Revenue Regulation 10-103.600 provides the following examples of the application of tax to delivery charges:
- A person purchases a compact disc (CD) through a mail order club. The seller charges a set amount for shipping and handling the CD. Because the buyer is required to pay the shipping and handling charge, the entire amount charged, including the shipping and handling, is subject to tax.
- A family purchases furniture from an out-of-state seller. The seller gives the buyer a choice of shipping the furniture or the buyer may arrange for the furniture to be delivered to their home. Because the shipping is optional, it is not subject to tax.
Several states make a distinction between “shipping” and “handling” charges. In Maryland and Virginia, lump sum amounts billed for shipping and handling are taxable. The transportation charges if separately stated are tax exempt. Handling charges are considered a taxable item. If the exempt the transportation charge is combined with the handling charge the “separately stated” requirement is not met.
Sellers must also be wary of states like Colorado and Louisiana where local jurisdiction rules may differ from state administration of sales and use taxes. In these states, the local jurisdictions may tax delivery charges different than the state. For example, in Colorado, the city of Pueblo West levies tax on delivery charges even if the charges are separately stated. While Centennial, Colorado follows the state rules that treat separately stated “optional” delivery charges as exempt.
The State of California has its own specific treatment of delivery charges for sale and use tax purposes. Generally, delivery charges for shipment of taxable items to the purchaser by common carrier are not taxable when separately stated. In general, delivery charges for items delivered in the seller’s own vehicles are taxable.
However, the delivery charge must not exceed the actual cost for delivery to the customer by common carrier. The charge is taxable if the seller fails to maintain records of the actual cost of the delivery. Any charges in excess of the actual delivery charge are considered taxable. Handling charges are also taxable. The California Department of Tax and Fee Administration Publication 100 (Shipping and Delivery Charges) provides an easy to follow chart that explains the department’s treatment on the taxability of delivery related charges. The chart may be found at https://www.cdtfa.ca.gov/formspubs/pub100/#applying.
Sellers Be Aware
Multi-state sellers are now subject to sales and use tax collection responsibilities in virtually every state that they delivery their products. Now more than ever sellers must not assume that state laws regarding the taxability of delivery charges are the same across the county. Even the member states of SSUTA are not the same. The rules are the same for SSUTA states but care must be taken to determine how each state applies those rules. The non-SSUTA states differ greatly in what charges are taxable and when those charges are taxable.
Sellers should consult with their tax practitioner before setting the tax rules in their systems for delivery charges in the states where the seller delivers. Failure to do so can lead to trouble when a state sales tax auditor knocks on the door.
1 South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)
2 There are 23 full members states (Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming) and one associate member state (Tennessee).