The topic of shipping and handling can be complicated when determining the taxability for sales tax purposes. The short answer is: the rules vary by state.
As an ecommerce seller in the US, you likely already collect sales tax from your customers for the products and services you sell. But you may question: What about shipping? Do you need to charge sales tax on shipping as well?
It’s crucial to learn how sales tax on shipping works to stay compliant in states where you have nexus. To help you navigate the complex system of sales tax on shipping, this in-depth guide is written just for you.
Shipping vs Handling: What’s The Difference?
Shipping vs Handling: What’s the difference between the two? Both activities involve managing taxable goods for delivery to consumers. However, there are clear distinctions between them.
Shipping involves explicit tasks, such as:
- Packaging items
- Transporting goods
- Creating shipping labels
- Selecting the shipping carrier
- Tracking shipments and updating the status
Handling services, on the other hand, include activities like:
- Inspecting products
- Securing package safety
- Sorting and organizing goods
- Coordinating with shipping carriers
- Assembling and labeling packages
When it comes to the taxability of these services, the rules are different in every state. In some states, shipping is taxable. Meanwhile, other states may exempt such services from sales tax.
On the contrary, handling services are also subject to varying sales tax rules by state, and their taxability can often depend on factors like whether they are separately stated on the invoice or bundled with the product cost.
Given the complexity, it’s easy to get lost between what is taxable and what is not. To stay compliant, learning the fundamental rules in every state is crucial. Read on through this guide to discover everything you need to know about sales tax on shipping.
Factors That Determine Shipping Taxability
There are important factors that play a role in identifying the taxability of shipping services. In general, there are 3 main aspects to consider, those are:
- Destination: The customer’s location determines if sales tax can be applied to shipping. Each state has different taxability laws and sales tax rates. When shipping to a state where such services are taxable, sales tax must be applied to the shipping cost.
- Product Taxability: Some products are taxable in one state, while some goods can be exempt in another. For example, you are shipping items to a state where shipping is taxable, but the delivered goods are tax-exempt. In that case, sales tax may not apply to the shipping cost.
- Mode of Transportation: Using your own vehicle for delivery or partnering with a third-party shipping carrier can influence the shipping taxability. Some states differentiate, often making delivery charges more likely to be taxable if the seller uses their fleet, especially if the shipping is not separately stated.Conversely, if a common carrier (such as USPS, FedEx, or UPS) is used and the shipping charge is separately stated, it may be exempt in certain states. Similar to the two factors above, the states have different rules for shipping taxability depending on the mode of transportation.
Understanding the intricacies of shipping taxabilities can be difficult at first. Thus, here’s a more in-depth explanation to fully grasp the differences between these essential factors.
1. Destination
As briefly explained above, some states may apply sales tax to shipping services, while some do not. For starters, most states use the destination of goods (i.e., the location of the buyer) to determine the taxability of the transaction.
On the other hand, some states base sales tax on the origin of the goods (location of the seller). However, all sales from remote sellers who are selling taxable goods from one state to another will always be destination-based.
With that said, here’s an example scenario for a sale that follows destination-based rules:
- You are a vendor from Colorado, where shipping is generally not subject to tax.
- You are selling goods to a customer in Arkansas, where shipping is typically subject to tax.
- The delivered goods are subject to tax in Arkansas. Therefore, your shipping service is still subject to Arkansas’s sales tax.
Now, let’s flip the situation.
- You are a vendor from Arkansas, where shipping is generally subject to tax.
- You are selling goods to a customer in Colorado, where shipping is typically not taxable if certain conditions are met.
- The delivered goods are taxable in Colorado. While shipping is taxable in your home state, the destination of the goods exempts your shipping service from sales tax in Colorado, provided the conditions for exemption are met.In that case, you only have to apply sales tax on the taxable goods.
These scenarios clarify that the destination of the goods is a defining factor of whether sales tax applies to the shipping service or not.
As complex as it already is, there are more rules involving the destination factor of determining the taxability of shipping.
Additional Restrictions
Specific conditions must be met for the sales tax exemption to take effect. This is crucial for cases where the destination influences the sales tax on shipping. Here’s an example.
- In Colorado, shipping charges should not be combined with the price of the taxable goods and must be stated separately. Additionally, for shipping to be exempt, the charges must be “separable from the purchase”. This means the customer must have the option to use an alternative transportation service, such as picking up the goods themselves.
- If these requirements are not met, then your shipping service becomes subject to sales tax in Colorado instead. It is also important to note that Colorado imposes a separate Retail Delivery Fee on all deliveries by motor vehicle to a location in Colorado that includes at least one item of taxable tangible personal property.This fee is distinct from sales tax on shipping and must be separately stated on the invoice.
To stay compliant with each state’s unique regulations, refer to our state-by-state table in the lower section as your guide.
2. Product Taxability
Just like the destination factor, product taxability can also complicate the sales tax on shipping. For a straightforward explanation, here’s another scenario:
- You are a vendor from Arkansas, where shipping is generally subject to tax.
- Your customer is also from Arkansas, but the purchased goods are exempt from the state’s sales tax. (Examples of tax-exempt goods in Arkansas are agricultural supplies, medical devices, feminine hygiene products, and more.)
- Though shipping is generally taxable in Arkansas, in this case, the purchased goods are exempt from sales tax. Therefore, the whole transaction (including shipping services) is excluded from sales tax.
In simpler terms, the product’s taxability may override the “destination” factor in determining sales tax on shipping services.
Each state has different rules regarding the taxation of specific products. If you’d like to know your state’s taxable and tax-exempt products, you can check our state-dedicated ultimate guides.
3. Mode of Transportation
The method used to transport goods is another important factor in determining shipping taxability.
Generally, this involves two main scenarios: (1) when the seller delivers the goods using their own vehicle or personnel, and (2) when a third-party common carrier is used.
It’s critical to remember that regardless of the mode of transportation, sales tax nexus is the foundational element determining if a seller is required to collect any sales tax (including on shipping) in a particular state.
Here are various circumstances you might encounter:
Scenario 1: Seller Delivers Goods (Using Own Vehicle/Personnel)
If you are a vendor who delivers taxable goods using your own vehicle or personnel to a customer in a state where you have a sales tax nexus:
- In many states, charges for delivery made by the seller’s own vehicles or employees are considered part of the overall sale of the taxable goods and are therefore typically subject to sales tax, even if separately stated. The logic often is that the delivery is an integral part of making the sale.
- If you do not have a sales tax nexus in your customer’s state, you are generally not required to collect sales tax on the transaction, including any delivery charges, regardless of who performs the delivery. The customer, in such cases, may be responsible for paying use tax directly to their state.
Scenario 2: Third-Party Common Carrier Delivers Goods (e.g., UPS, FedEx, USPS)
If you hire a third-party common carrier (like UPS, FedEx, or USPS) to deliver your taxable goods to a customer, and you, the retailer, have a sales tax nexus in the customer’s state:
The taxability of shipping charges by a third-party carrier varies significantly by state.
- If shipping charges are stated separately: Many states may exempt the common carrier’s shipping charges from sales tax.
- If the delivered goods are taxable: Shipping charges may still be subject to sales tax in other states, even if the charges are stated separately. As long as the delivered goods are not exempt from sales tax, then sales tax may still apply to shipping charges.
- If the shipping charges are combined with handling fees: The entire combined charge often becomes subject to sales tax. This applies even in states where separately stated shipping charges might be exempt. That’s because handling fees are typically subject to sales tax in most states.
- If you have a nexus in your customer’s state: Regardless of your carrier’s nexus, you, the retailer, are still the one responsible for collecting sales tax from your customers. Your obligation to collect sales tax on the shipping charges (if taxable in that state) arises from your nexus with the state and the state’s rules regarding shipping.
Scenario 3: Resale Certificates and Shipping (Typically in Drop-Shipping)
Resale Certificates are used by a purchaser (often a retailer) to buy goods for resale from a supplier without paying sales tax on that wholesale purchase. This is common in drop-shipping arrangements.
Example: You’re an online vendor (retailer) selling goods to a consumer. You don’t stock the goods, but instead, you purchase them from a third-party supplier. The third-party supplier is the one who ships them directly to your customer (drop-shipping).
- Your transaction with your supplier: When you, the retailer, purchase goods from your supplier for resale, you typically provide your supplier with a valid resale certificate. This means your supplier does not charge you sales tax on the cost of the goods or any shipping charges they assess to you for fulfilling that order.
- Your transaction with your customer: As the retailer, if you have a sales tax nexus in your customer’s state and the goods are taxable, you are responsible for collecting sales tax from your customer on the sales price of the goods.The applied sales tax potentially extends to the shipping charges you impose on your customer, depending on that state’s rules. The resale certificate you provided to your supplier does not exempt your customer from sales tax.
- NOTE: If both the retailer and supplier have no nexus in the state where the goods are delivered, then no sales tax needs to be collected. In this case, shipping charges should generally not be subject to sales tax.If you have no nexus in the state where the taxable goods are being delivered but your supplier does, the obligation of collecting and remitting sales tax on shipping services may shift to the supplier’s end. However, this still depends on the conditions set by the state involved in the transaction.
The bottom line: The rules of the states are absolute, no matter how convoluted they are. To save yourself from the headache, you can skip the stress and leave the rest to TaxHero instead.
When is Sales Tax Applicable on Shipping?
The previous sections discussed the main factors that influence the taxability of shipping services. Additionally, there are other situations to be aware of to determine when sales tax applies to shipping services.
To stay tax-compliant, here are some general guidelines to keep in mind:
- Taxable Items: As mentioned earlier, shipping taxable goods determines the taxability of shipping services. Always be wary of which goods are taxable in a state or not. This way, you can accurately calculate the applicable sales tax in your transactions.
- Non-Taxable Items: Most states typically exempt sales tax on tax-exempt products when they are sold and delivered within their state. For this, the tax-exempt item is generally expected to be shipped separately from taxable items or, if combined, the shipping portion attributable to the exempt items should also be exempt
- Combined Shipments: If taxable and tax-exempt goods are shipped together, the shipping tax should ideally be applied proportionally to the delivery cost of taxable goods. However, it’s important to note that some states may tax the entire shipping charge if any portion of the shipment contains taxable items.
- Separate Shipping Charges: Some states will exempt sales tax on shipping if the cost is charged separately from the price of the goods and/or if the buyer has the option to pick up the goods or arrange their transportation. This means you can’t combine the cost of goods with the shipping fee to be tax-exempt in some states.
- Freight and Handling: While shipping services are often exempt from sales tax in some states, handling services are typically taxable in most states. Knowing the difference between the two can save you from the trouble of determining your sales tax duties.
- Location of the Sale: Always pay attention to whether the state you operate in or sell to is a destination or an origin-based state. Remember, the location is a major factor in determining how sales tax is applied to shipping services.All remote interstate sales must follow the destination-based rule.
- For origin-based transactions: The taxability of shipping depends on the seller’s location. If their home-state taxes shipping or has specific requirements to be tax-exempt, the seller must meet those conditions.
These guidelines provide a starting point, but digging deeper into the specific sales tax regulations of the states where you operate is essential to ensure accurate compliance.
States Guide on Sales Tax on Shipping
Here is our comprehensive guide with a state-by-state breakdown of key details about sales tax on shipping.
|
Out-of-State Sales: Is Shipping Subject to Sales Tax?
Being an out-of-state seller makes identifying sales tax obligations more challenging. As previously mentioned, there’s a state-mandated law designed to regulate the taxation of sales from businesses with a sufficient economic presence. That rule is known as “nexus.”
A sales tax nexus is the main factor that determines if your business is subject to sales tax obligations. When your business triggers a nexus, you must also collect sales tax on shipping charges. This rule applies whether you’re an in-state or an out-of-state company.
However, to be specific, out-of-state sellers can establish an economic nexus when selling taxable goods in another state.
The criteria for creating an economic nexus vary per state. Despite that, you only need to take note of the following factors:
- In most states, the standard threshold is $100,000 in sales within the state.
- Many states have eliminated the 200-transaction threshold requirement, leaving only the sales threshold as their primary criterion.
- Always check the specific requirements for each state, as thresholds can vary. For example, some states like California have higher sales thresholds, like $500,000.
Once your business meets these thresholds, it becomes responsible for collecting and remitting sales tax in the state. This establishes the fact that shipping also becomes taxable for out-of-state sales as long as your business has a nexus and the state’s rules make shipping taxable for the given transaction.
But as previously discussed, the taxability of shipping varies depending on multiple factors. Simplify your experience by letting sales tax experts at TaxHero identify and manage your sales tax obligations!
Should you charge sales tax on your shipping fee?
Charging sales tax on shipping fees can be situational. In that case, here are common cases you might encounter and the relevant options you can consider:
- The shipping costs are separately stated and not included in the product’s total price: Some states may exempt the shipping service from sales tax under these conditions. Therefore, those states do not require charging sales tax.
- The shipping costs are stated or itemized separately on the invoice: By clarifying that the shipping is a separate charge set apart from the price of taxable goods, some states may allow a sales tax exemption on shipping. However, this is not universally true; some states impose taxes on shipping regardless of whether it is separately stated.
- Consider handling fees, not just shipping fees: In most cases, handling fees are subject to sales tax, while shipping may or may not be taxable, depending on the state. For this, the handling fee should have the sales tax applied to it if it is taxable in that state, and the shipping fee should have the sales tax applied to it only if it is taxable in that state.
- Free shipping sale: Sales tax may still be applied to “free shipping sales” if the shipping costs are integrated into the product price because the sales tax is calculated on the entire, higher product price. Therefore, it’s best to state shipping costs separately (if you’re truly not charging for them as part of the product price) to qualify for sales tax exemptions on shipping in some states.
- International Sales: If you’re selling goods outside of the US, then charging U.S. sales tax is typically not necessary, as cross-border sales are generally exempt from U.S. state sales tax. Instead, the customer in the destination country may be subject to import duties, Value Added Tax (VAT), or Goods and Services Tax (GST) as levied by their own country upon import. Sellers need to understand these international taxes and customs requirements to ensure a smooth delivery process.
Outside of these common scenarios, your business may still encounter more complex situations. To deal with those complicated cases with ease, you can ship off the sales tax burdens to TaxHero instead.
Why worry about sales tax when a sales tax expert can handle everything for you? Speak with our CEO, Lahari Neelapareddy, to learn how we can help simplify sales tax compliance for your business!