Are Freight & Delivery Charges Taxable in Michigan?

The taxability of freight and delivery charges in Michigan can be a complex area. These charges, which cover the transportation of goods, are not always subject to sales or use tax. Understanding the specific conditions under which these charges become taxable or remain exempt is important for compliance with state tax laws. This article clarifies the general rules and specific scenarios that determine the tax treatment of freight and delivery charges under Michigan sales and use tax regulations.

Defining Freight Charges

Freight charges, in the context of Michigan sales and use tax, refer to fees for moving tangible personal property from one location to another. These charges encompass various costs, including transportation, shipping, handling, postage, crating, and packing. The Michigan Department of Treasury uses terms like “delivery charges” and “shipping charges” interchangeably.

These charges are distinct from the actual price of the goods being sold. While often part of a sales transaction, freight charges specifically relate to the logistical effort of transferring possession. The tax treatment hinges on when these costs are incurred relative to the completion of the sale and how they are presented to the customer.

Taxable Freight Scenarios

Freight charges are generally subject to Michigan sales or use tax when they are considered part of the “sales price” or “purchase price” of the tangible personal property. The Michigan General Sales Tax Act defines “sales price” broadly to include the total consideration for tangible personal property, encompassing costs like materials, labor, interest, and transportation costs incurred by the seller. Similarly, the Use Tax Act includes delivery charges incurred before the transfer of ownership in the “purchase price.”

One common taxable scenario arises when freight charges are not separately stated on the invoice, meaning they are included in the overall price of the goods. In such cases, the entire charge, including the embedded freight cost, is subject to tax. Additionally, if the seller is responsible for the delivery of the goods before the sale is considered complete, such as under “FOB destination” terms, any associated delivery charges are typically taxable. This applies even if the delivery charge is itemized, provided the transfer of ownership has not yet occurred.

Effective April 26, 2023, delivery and installation charges remain taxable if they are associated with the sale of electricity, natural gas, or artificial gas by a utility. Furthermore, if the charges for preparing and transporting taxable tangible personal property are incurred by the seller before the transfer of ownership to the purchaser, they are subject to sales or use tax. This rule applies regardless of whether these charges are billed separately or who ultimately pays them.

Non-Taxable Freight Scenarios

Conversely, freight charges can be exempt from Michigan sales or use tax under specific conditions, primarily when they relate to transportation occurring after the sale of tangible personal property is complete. For these charges to be non-taxable, they must typically be separately stated on the invoice, and the seller must maintain records that clearly distinguish these transactions.

If the sale of the tangible personal property is completed prior to delivery, and the freight charge is clearly a separate cost for post-sale transportation, it can be non-taxable. For example, if goods are sold “FOB shipping point,” ownership transfers when the goods leave the seller’s location, and subsequent separately stated delivery charges are generally exempt.

Another scenario where freight is not taxable is when the buyer directly arranges and pays a third-party carrier for the transportation. In this instance, the buyer is contracting for a service directly, and the seller is not involved in the transaction that incurs the freight cost. Additionally, freight charges for the delivery of non-taxable goods, such as items specifically exempt from sales tax, or for services (as services are generally not subject to sales tax in Michigan), are typically not taxable. If a shipment contains both taxable and exempt property, the seller can allocate the delivery charge for tax purposes using methods like a fraction based on the total sales prices or total weights of the taxable property.

Invoicing Requirements

Accurate and clear invoicing is crucial for determining the taxability of freight and delivery charges in Michigan. To ensure that freight charges are treated as non-taxable, they must be itemized distinctly from the price of the goods on the invoice or bill of sale. This separate statement is a fundamental condition for excluding these charges from the sales or use tax base.

Simply including a generic “shipping and handling” line item may not be sufficient if it does not clearly delineate the actual transportation cost. The invoice should explicitly show the freight or delivery charge as a distinct amount. Sellers are also required to maintain their books and records in a manner that separately shows the transactions used to determine the sales or use tax. This documentation is essential for demonstrating compliance during tax audits and for distinguishing between taxable and non-taxable components of a sale.