Can You Charge Sales Tax on Shipping?

Determining whether sales tax applies to shipping charges is a complex issue for businesses in the United States. While sales tax typically applies to tangible personal property, its application to shipping and handling fees varies significantly. This can be particularly confusing for e-commerce businesses navigating diverse state regulations.

Sales Tax Fundamentals

Sales tax functions as a transaction tax, levied on the sale of goods and certain services to the end consumer. It is typically calculated as a percentage of the retail price and collected by the seller at the point of purchase. The seller then remits these collected funds to the appropriate government authority.

Sales tax nexus is the connection a business has to a state, obligating it to collect sales tax. This can be established through a physical presence, such as a retail store, warehouse, or employees. Economic nexus, established after a 2018 Supreme Court decision, also creates obligations for businesses meeting specific sales revenue or transaction thresholds, even without a physical presence.

Sales tax is primarily a state-level and sometimes local-level tax. Most states use a destination-based system, where the tax rate is determined by the buyer’s location. A smaller number of states employ an origin-based system, taxing sales based on the seller’s location. For remote interstate sales, destination-based rules generally apply.

Factors Determining Shipping Taxability

Several factors influence whether shipping charges are subject to sales tax. A primary factor is whether shipping is mandatory or optional for the customer. Some states exempt shipping charges if the customer can pick up the item or arrange their own third-party delivery.

The way shipping charges are presented on an invoice also plays a role. If shipping charges are itemized separately from the product price, they may be exempt from sales tax in some states. Conversely, if shipping costs are bundled into the overall price of the product, the entire charge is more likely to be taxable.

The taxability of the product often affects the taxability of its associated shipping charge. If the item is subject to sales tax, its shipping charge is often taxable. Conversely, if the item is exempt, its shipping charge is typically exempt. When a shipment contains both taxable and exempt items, some states require businesses to allocate the shipping cost proportionally to the taxable items.

Who provides the shipping service is another consideration. Charges for delivery by the seller’s own vehicle might be treated differently than charges for shipping through a common carrier like USPS, UPS, or FedEx. The nature of the charge also matters: “transportation” or “delivery” charges may be treated differently from “handling” charges, which cover packaging and preparation costs. Handling fees are often taxable as part of the sales price, even if separately stated.

State-Specific Rules for Shipping Charges

The rules for sales tax on shipping charges vary significantly across the United States. Some states generally tax shipping charges if the item is taxable, even if shipping is separately stated. This approach is seen in states such as:
Arkansas
Connecticut
Georgia
Hawaii
Indiana
Kentucky
Minnesota
Mississippi
Nebraska
New Jersey
New Mexico
North Carolina
North Dakota
Ohio
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Vermont
Washington
West Virginia
Wisconsin

For example, in Georgia, shipping, transportation, freight, or handling charges are part of the sales price and subject to sales tax if the underlying item is taxable. Florida also imposes sales tax on the total sales price of taxable tangible personal property, including delivery services that are part of the sale.

Other states generally do not tax common carrier shipping costs, provided the shipping charge is separately stated on the invoice. These include states like:
Alabama
Arizona
California
Colorado
Idaho
Iowa
Louisiana
Maine
Maryland
Massachusetts
Nevada
Oklahoma
Utah
Virginia
Wyoming

For instance, in California, shipping charges may be non-taxable if separately stated and if the customer has the option to arrange their own delivery or pick up the goods. Maryland also exempts separately stated shipping or delivery charges.

Some states have specific nuances or exceptions. Kentucky, for example, generally exempts separately stated shipping charges for taxable products delivered by common carriers, but taxes them if the seller personally makes the delivery. Maine exempts separately stated shipping charges for common carrier or U.S. mail delivery, but handling charges remain taxable. Some states, like Colorado, have introduced specific retail delivery fees that must be separately stated on the invoice.

If a shipment includes both taxable and exempt items, some states, like Arkansas, Minnesota, Nebraska, New York, North Carolina, and Rhode Island, may require proportional sales tax application to the taxable items’ delivery charge. Hawaii is an outlier, generally taxing shipping regardless of item taxability due to its general excise tax. Due to these variations, businesses must consult each state’s specific tax laws where they have a sales tax obligation.

Managing Sales Tax on Shipping

Businesses must first identify all states where they have sales tax nexus. This determination involves reviewing physical presence and economic activity thresholds, such as annual sales revenue or transaction counts. Consulting state tax department websites, tax advisors, or specialized sales tax software can help identify these obligations.

Once nexus is established, businesses need to research the specific shipping taxability rules. This involves understanding how factors like separate itemization, product taxability, and delivery method impact sales tax calculation. Accurate record-keeping is essential to demonstrate compliance during potential audits.

Invoicing and documentation practices should reflect the taxability rules. If a state exempts separately stated shipping charges, businesses should clearly itemize these on customer invoices. Conversely, if shipping is taxable, it should be included in the taxable sales price. Sales tax software and integrations with e-commerce platforms can automate the calculation and collection of sales tax on shipping. This is particularly beneficial given the diverse and complex state regulations.