Is it Legal to Charge Tax on Shipping & Handling?
If your business isn't collecting the appropriate sales tax on shipping and handling charges, you may run afoul of state and local sales tax laws. Many states have specific rules about how to bill the purchaser, for example, whether handling and shipping – or related terms such as "delivery," "freight" or "postage" – are included in the total cost or if they are itemized together or separately. Most importantly, your customer's location may matter far more than your own.
Sales and Shipping Tax is Location Specific
Many states and local governments require you to charge taxes on sales at your physical location, as well as on telephone, online or mail-order sales to residents of states where your business has a "nexus" – a physical presence, such as a retail storefront. This is important to keep in mind when expanding to a new state, even if your own state does not require sales taxes or if your state regulates shipping and handling taxes differently from your customer's state.
Clarify Your State's Regulations
Check the state tax laws to determine if any sales taxes should be collected on shipping and handling charges and under what circumstances. Differences occur based on if these charges are stated separately or if you use a common carrier or make deliveries yourself. Many states exempt specific goods, typically including gift cards and coupons as well as some – but not all – foods. Also, tax charges may not be required of certain exempt organizations.
Regulations for States Without Sales Tax
Five states (Alaska, Delaware, Montana, New Hampshire and Oregon) do not implement any sales tax, so shipping and handling will likewise not be taxable. Additionally, Hawaii utilizes a general excise tax or GET which is a tax on business income from retail sales rather than a sales tax to the consumer. However, any costs associated with shipping, handling or personal delivery are always taxable, whether they are listed as a separate charge or not.
When Shipping Taxes Apply
The majority of states (Arkansas, Connecticut, Georgia, Illinois, Kansas, Kentucky, Michigan, Mississippi, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West Virginia and Wisconsin) require that sales tax be calculated on the cost of the merchandise plus the cost of shipping. In other words, your bill to customers in these states should be itemized, and sales tax should be calculated from the total.
Separately Stated Shipping or Handling
In some states (Alabama, Arizona, Colorado, Idaho, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Nevada, Virginia and Wyoming), separately stated shipping and/or handling costs are considered non-taxable. Therefore, when calculating the appropriate sales tax for customers from these states, listing the shipping cost as a separate charge will eliminate the need to charge tax on this additional amount. Be careful however, as states such as Nevada and Virginia do tax separately listed handling charges, such as special packaging or a fuel surcharge.
States Where Exceptions Abound
A few states (California, Illinois and Minnesota) have fairly complicated sales tax regulations that take into account a variety of situations, delivery methods, or delivery options available to the consumer. For example, sellers can offer pick up of items to consumers or allow them to arrange for their own shipment of goods, which results in no additional tax on delivery charges. Similarly, if a business uses a "common carrier" (such as UPS, FedEx, the Postal Service or DHL), they do not need to calculate shipping into the sales tax.
As the amount of online sales continue to increase, sales tax regulations are frequently changing as state governments seek to maintain their tax revenue opportunities. Be sure to stay on top of laws in any of the states where you sell or purchase products, including the nuances of wording in specific regulations.
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Writer Bio
James Lee Phillips has been a writer since 1994, specializing in technology and intellectual property issues. He holds a Bachelor of Science in communications and philosophy from SUNY Fredonia.