Are Freight Charges Taxable in Indiana?

In Indiana, sales tax applies to the retail sale of tangible personal property. The taxability of freight charges depends on various factors, including how they are presented, the nature of the goods being shipped, and the origin and destination of the shipment.

General Principles of Freight Taxability

In Indiana, “delivery charges” are broadly defined to include transportation, shipping, crating, handling, and packing. These charges are generally considered part of the “gross retail income” from a sale of tangible personal property. This means that if the item being sold is subject to Indiana sales tax, the associated delivery charges are typically also taxable.

The default position is that freight charges incurred by the seller, regardless of the shipping terms, are included in the taxable sales price. This applies even if the seller passes on their cost of transportation to the buyer. The Indiana sales tax rate is 7% statewide, with no additional local sales tax rates.

Exemptions from Freight Tax

While freight charges are often taxable, several specific exemptions exist under Indiana law. A key exemption applies when delivery charges are separately stated on the invoice and the delivery is made by specific carriers. These charges are not subject to sales tax if they are separately stated and provided by a common carrier, contract carrier, or the U.S. Postal Service.

Postage charges, when separately stated on an invoice, are not considered gross retail income and are exempt from sales tax. This exemption applies to charges for mail or parcel delivery through the United States mail.

Freight charges for items sold for resale are generally not subject to sales tax, as the underlying sale is also exempt. Similarly, if the tangible personal property itself is exempt from sales tax—such as qualifying manufacturing equipment or agricultural exemptions—the delivery charges related to that exempt item are also exempt. If a shipment contains both taxable and exempt items, the delivery charge must be proportionally allocated, with tax applied only to the portion attributable to taxable goods. Freight related to services that are not taxable in Indiana is also generally exempt.

Distinguishing Interstate and Intrastate Shipments

The distinction between interstate and intrastate shipments significantly impacts the taxability of freight charges in Indiana. Sales where the tangible personal property is shipped from a location within Indiana to a destination outside of Indiana are typically not subject to Indiana sales tax.

Conversely, sales that originate and conclude within Indiana (intrastate shipments) are subject to Indiana’s sales tax rules, including those pertaining to freight charges. For example, if a product is sold and shipped from one Indiana city to another Indiana city, the transaction, including its delivery charges, would follow Indiana’s sales tax regulations. This application of sales tax is based on the destination principle, where the sales tax rate is determined by the ship-to address.

Therefore, businesses must accurately identify the origin and destination of each shipment. A sale of tangible personal property delivered to an out-of-state location is generally considered an interstate commerce transaction and falls outside the scope of Indiana’s sales tax. However, if the buyer takes possession of the goods within Indiana, even if they intend to transport them out of state, it may be deemed an intrastate sale and subject to Indiana sales tax.

Compliance and Record Keeping

Businesses must maintain accurate records to ensure compliance with Indiana’s sales tax rules regarding freight. This includes detailed invoicing that clearly separates freight charges when applicable, especially to qualify for certain exemptions. Invoices, bills of lading, shipping records, and other relevant source documents are important for verifying the tax treatment of delivery charges.

Understanding the specific shipping methods employed is also crucial. For instance, the taxability of freight charges can differ based on whether a business uses its own vehicles for delivery versus utilizing a third-party common carrier or the U.S. Postal Service. Proper documentation helps businesses demonstrate to the Indiana Department of Revenue that they have correctly applied sales tax to freight charges or that an exemption was validly claimed.

Regular review of invoicing practices and shipping arrangements can help prevent errors. Businesses should ensure that their internal systems correctly capture and categorize delivery charges based on the nature of the sale and the shipping method. Maintaining these records is part of the broader requirement for taxpayers to keep sufficient books and records to determine their tax liability.