Are Freight and Delivery Charges Taxable in Illinois?
Understand when shipping charges are subject to Illinois sales tax. The taxability depends on the structure of the sale and how costs are presented to the customer.
Whether freight and delivery charges are subject to sales tax in Illinois depends on the transaction’s structure. The Illinois Department of Revenue (IDOR) establishes specific criteria based on the delivery’s relationship to the sale of tangible personal property. How these charges are presented on an invoice and the circumstances surrounding the delivery dictate their taxability, as the treatment can change based on how a sale is completed.
The General Rule for Freight Charges
The foundational rule is that freight and delivery charges are not subject to the Illinois Retailers’ Occupation Tax (ROT) if they meet two conditions. First, the charge for the delivery service must be stated separately on the invoice from the selling price of the goods. If the delivery cost is bundled into the item’s price, the exemption does not apply.
Second, the charge must be for the act of delivery itself, a service performed after the sale is otherwise complete. A common example is a customer paying a distinct fee for shipment via a third-party carrier like FedEx or UPS. When both conditions are met, the charge is not considered part of the “gross receipts” from the sale and is therefore not taxable.
When Freight and Delivery Charges Become Taxable
The non-taxable status of freight charges is conditional. If a seller advertises a product with “free shipping” but incorporates the delivery cost into the item’s total price, the entire amount becomes subject to the Retailers’ Occupation Tax. The IDOR views this as a single, bundled transaction for the sale of tangible personal property, with the seller’s gross receipts being the full amount paid.
A delivery charge also becomes taxable if it is an inseparable part of the transaction, meaning the buyer and seller agree that the sale is not complete until the item is delivered. This often occurs with items requiring special handling, where the seller’s responsibility extends to the point of delivery. For instance, if a contract for custom-made cabinetry specifies the sale is finalized only upon successful delivery by the seller’s team, the associated delivery fee is taxable.
When a seller uses their own vehicle to deliver goods, any mandatory delivery charge is considered part of the gross receipts and is taxable. If the seller offers the customer no option to pick up the goods themselves and avoid the delivery fee, the charge is intrinsically linked to the sale. This rule prevents sellers from artificially separating a portion of the product’s cost into a “delivery” fee to reduce their tax liability.
Taxability of Handling Charges
Handling charges are treated differently from freight or delivery costs. These charges, which cover preparing an item for shipment like packing and order processing, are considered services that are part of the sale. As such, handling charges are taxable in Illinois, even if they are separately stated on an invoice, because these activities occur before the sale is complete.
The distinction between shipping and handling is important when they are combined. If a seller lists a single, undifferentiated charge for “shipping and handling” (S&H), the entire amount becomes taxable. This is because the non-taxable shipping element is mixed with the taxable handling element. To avoid this, a seller must separately itemize the non-taxable shipping charge from the taxable handling charge on the customer’s invoice.
Invoicing and Documentation Requirements
Proper invoicing is essential for complying with Illinois’ rules on freight charges. A compliant invoice must clearly and separately list the price of the tangible personal property, the charge for any taxable handling, and the charge for non-taxable freight. For example, an invoice showing a “Total Delivered Price” of $1,100 would make the entire amount taxable, while a correct invoice would itemize it as: Product Price: $1,000, Handling Fee: $25, and Shipping Charge: $75, ensuring tax is only applied to the $1,025.
Beyond correct invoicing, maintaining thorough documentation is necessary to substantiate the charges to the IDOR during an audit. Businesses should keep records that prove a freight charge was for an actual, separate transportation service. The most effective evidence is a third-party bill of lading or an invoice from a common carrier like UPS or FedEx, which demonstrates the amount charged to the customer corresponds to a real shipping cost.