Are Freight and Delivery Charges Taxable in Iowa?

In Iowa, the taxability of freight and delivery charges depends on how they are presented on an invoice. For businesses shipping products to customers in Iowa, understanding these rules is important for correct tax collection.

The General Rule for Taxing Freight Charges

Delivery charges are not subject to sales tax as long as they are separately itemized on the invoice or in the sales contract. If a delivery charge is combined with the price of the item into a single charge, the entire amount is taxable if the goods sold are taxable. These rules apply to “outbound freight,” which are the costs to transport a product to the customer.

It is also important to distinguish these delivery charges from “inbound freight.” Inbound freight refers to the cost a retailer incurs to acquire a product from their supplier. If a retailer passes these specific costs on to the customer, they are considered part of the product’s total sales price and are subject to tax if the item is taxable.

If a delivery charge is separately stated on the invoice, the entire charge is exempt from sales tax. This rule applies even if the shipment contains a mix of taxable and non-taxable goods, and there is no need to allocate the charge.

What Constitutes “Delivery Charges”?

Iowa law defines “delivery charges” broadly. The term encompasses charges by the seller for preparation and delivery to a location designated by the purchaser. This includes, but is not limited to, transportation, shipping, postage, handling, crating, and packing.

The method of delivery does not affect the taxability. Whether the seller uses their own vehicles, the U.S. Postal Service, or a common carrier like UPS or FedEx, the rules remain the same. The determining factor is always whether the delivery charge is separately stated on the invoice.

Invoicing Requirements

To ensure delivery charges are not taxed, they must be clearly and separately stated on the invoice or sales contract. This means the charge for delivery must be listed as a distinct line item, separate from the price of the goods being sold. Simply mentioning that delivery is included in the total price is not sufficient.

For example, an invoice that lists “Widget – $100” and “Shipping – $10” would result in only the $100 being subject to sales tax. However, an invoice that lists “Widget with shipping – $110” would mean the entire $110 is taxable.

This requirement is strict. If the charge is not separately stated at the time of the sale, it cannot be separated later to claim a refund for tax paid on delivery. The invoice provided to the customer at the point of sale is the controlling document.

Iowa Code section 423.2 provides the legal basis for this treatment of delivery charges. Iowa Administrative Code rule 701—219.11 further clarifies the application of this rule, emphasizing the need for the charge to be itemized.

Special Scenarios

Handling Charges

Sometimes, a seller will list a “handling” or “shipping and handling” charge. If this charge is stated separately from the price of the goods, it is treated the same as a pure delivery charge and is not taxable. The term “handling” is considered part of the broader category of delivery charges.

Drop Shipments

In a drop shipment transaction, a retailer takes an order from a customer but has a third-party supplier ship the product directly to the customer. The taxability of the shipping charge from the supplier to the end customer depends on who pays for it and how it is invoiced. If the retailer bills the customer for shipping as a separate line item, that charge is not taxable.

If the supplier ships the product and bills the retailer for shipping, that cost is considered inbound freight for the retailer. If the retailer then passes that cost on to the customer as part of the product’s price, it becomes taxable.

Free Shipping

When a seller offers “free shipping,” the cost of delivery is simply included in the sales price of the item. Since there is no separately stated delivery charge, the entire sales price is subject to tax if the item is taxable. The seller cannot later back out the shipping costs to reduce the taxable amount.

Third-Party Billing

If a customer arranges for delivery directly with a third-party carrier and pays that carrier directly, the transaction is between the customer and the carrier. The seller is not involved in the delivery charge, so there are no sales tax implications for the seller on that charge. The seller only collects tax on the price of the goods sold.