Are Freight Charges Taxable in Kansas?

The taxability of freight charges in Kansas depends on specific factors related to the underlying transaction. Businesses must understand these rules to ensure compliance and avoid potential penalties. This guide clarifies how sales tax applies to delivery fees within the state.

Understanding Kansas Sales Tax Basics

Kansas sales tax applies to the retail sale, rental, or lease of tangible personal property and certain enumerated services. The state sales tax rate is 6.5%, and local sales tax rates can add up to an additional 5%, making the combined rate vary between 6.5% and 10.6% depending on the location of the sale. Sales tax in Kansas is a destination-based tax, meaning the rate is determined by the location where the item is delivered to the customer.

Kansas law defines “delivery charges” as charges by the seller for the preparation and delivery of personal property or services to a location designated by the purchaser, encompassing transportation, shipping, postage, handling, crating, and packing.

Determining Taxability of Freight Charges

A significant change in Kansas sales tax law became effective July 1, 2023, impacting the taxability of delivery charges. As of this date, delivery charges that are separately stated on the invoice, bill of sale, or similar document provided to the purchaser are no longer included in the sales or selling price subject to Kansas sales tax. This means that if a delivery charge is clearly itemized, it is generally not taxable.

Conversely, if delivery charges are not separately stated on the invoice, they remain part of the sales or selling price and are therefore subject to sales tax. This applies even if the underlying tangible personal property or service being sold is taxable. For instance, if a retailer sells a taxable piece of furniture and includes the delivery cost within the total price without itemizing it, the entire amount, including the embedded delivery charge, would be subject to sales tax.

This change means that the taxability of the freight is now tied to how it is presented on the invoice, rather than solely on the taxability of the underlying goods. For example, if a business sells exempt tangible personal property, such as certain agricultural items or machinery used in manufacturing, the delivery charges for these items would also be exempt, regardless of separate stating, because the entire transaction is not subject to sales tax. Similarly, freight charges for services that are not subject to sales tax in Kansas would not be taxable. Freight charges for internal transfers between locations of the same business, where no sale has occurred, also remain non-taxable. Shipments of goods to a location outside Kansas, where the sale is not subject to Kansas sales tax, are also not subject to Kansas sales tax on the freight.

Practical Considerations for Freight Charges

Businesses should clearly state freight charges on invoices to ensure they are not subject to sales tax. While separate stating does not alter the taxability of the underlying product, it is a practice that can help businesses avoid collecting sales tax on delivery fees. Maintaining clear and transparent invoicing practices is beneficial for both the seller and the purchaser.

Proper documentation is also important to support the taxability or exemption of freight charges, particularly during audits. Businesses should retain sales invoices, bills of lading, and any applicable exemption certificates. This documentation provides evidence of how charges were itemized and why sales tax was or was not collected on delivery fees.

When a single shipment contains both taxable and non-taxable items, the handling of freight charges can become more complex. If the delivery charges are not separately stated, they would generally be considered taxable if the taxable goods are a substantial portion of the shipment. If the non-taxable portion is clearly distinct and significant, a proration of the delivery charge might be necessary to accurately determine the taxable amount.

The method of delivery, whether the seller uses their own vehicle or a third-party carrier, does not change the taxability rule for delivery charges in Kansas. The key factor is whether the delivery charge is separately stated on the customer’s invoice.