As an online seller, when you think of “shipping issues,” your first thought probably has something to do with finding the lowest rate or fastest route from your warehouse to your customer. But another shipping issue many sellers don’t consider is whether or not the shipping fees you charge your customers are taxable.
This post will explain when shipping is taxable, when it isn’t, and how to handle shipping taxability in your online business.
Shipping Taxability 101
As an online seller, you’re likely already aware that, in the US, you are required to collect sales tax from buyers in states where you have sales tax nexus. And, as an online seller, chances are you ship all, or at least most, of your products to your customers. But did you know that many states consider shipping charges to be taxable, too?
Depending on a state’s sales tax laws, the price you charge to actually ship a product to your customer may be subject to sales tax, just like the price of the item. Here’s a list of states where shipping is taxable.
In practical application, this means that if you are required to collect sales tax on a product, you are often required to collect sales tax on shipping charges, too. Let’s look at some examples.
Example transaction where shipping is taxable:
Jane sells a $100 lamp and charges $10 in shipping fees to a buyer in a state where shipping is taxable. The sales tax rate is 5%. In this case, Jane is required to charge the 5% sales tax rate on $110 (the price of the lamp plus the shipping fee.) She’d charge a total of $115.50 to her buyer.
Example transaction where shipping is not taxable:
In this case, Jane sells the same $100 lamp and charges $10 in shipping fees to a buyer in a state where shipping is NOT taxable. The sales tax rate is, again, 5%. In this case, Jane is only required to charge the 5% sales tax rate on the $100 price of the lamp, but not on the $10 shipping fee. So, to this buyer, she would charge only $115.00.
Seems simple enough, right? Well, there are a few caveats we should warn you about.
Exceptions to the Shipping Taxability Rules
State laws were written before eCommerce – You can read what each state’s tax laws say about sales tax on shipping charges here. But you might notice that some of these laws don’t seem to make a lot of sense from the point of view of an eCommerce seller. That’s because many state sales tax laws were written before eCommerce became as prevalent as it is today. Fortunately, most states have re-interpreted their laws to apply to online sales, and you can generally find guidance either by visiting a state’s website or by giving your state’s taxing authority a call.
You are delivering products in your own vehicle – Most of the state sales tax laws referred to above are specific to sellers who use a “common carrier” to deliver products. A common carrier is a service like FedEx, UPS or the USPS which anybody can use to ship products. Many states have different laws for sellers who deliver products in their own trucks or other delivery vehicles, so double check with your state’s taxing authority if this sounds like your situation.
Where shipping is not taxable, delivery charges must be separately stated – Another important thing to note is that most states who do not require sellers to charge sales tax on shipping fees require that those fees be separately stated on the invoice. To curtail any problems with taxing authorities, just be sure that you always state the cost of shipping separately from the price of the item.
Sometimes shipping and handling is taxable – In at least two states, Virginia and Maryland, shipping is not taxable, but handling is. And if those two charges are combined into one “shipping & handling” charge, then the entire charge is taxable. Confusing, right?
Be careful how you treat mixed taxability shipments – In some states, items like clothing, groceries and medicine are not taxable. And in general, if an item is not taxable, then the shipping charge to ship that item is not taxable either. However, you may run into a situation where a buyer has bought a mix of taxable and non-taxable items from you. In most cases, you can simply either weigh or value the items, and only charge sales tax on the shipping charges for the taxable items. But you always want to double check with the state, because sometimes their laws on how to tax mixed taxability shipments differ.
I hope this blog post has helped you determine when (and when not) to collect sales tax on shipping charges. For a whole lot more about sales tax, check out our Sales Tax 101 for Online Sellers guide.
TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
About the Author
Jennifer Dunn is the Chief of Content at TaxJar, the leading sales tax compliance software for online sellers. Try a 30-day free trial of TaxJar and put a lid on sales tax!